Late last month, barely reported by the media amid all the general political static, something really amazing happened. House Ways and Means Chairman Kevin Brady released a truly great tax reform plan.Meanwhile, last week:
Trump visited with House Republicans in what leaders billed as a chance for rank-and-file members to get to know him better before the upcoming congressional recess. Trump was greeted by applause from more than 200 House GOP members at the standing-room-only gathering, according to GOP aides, and was introduced at the event by TV personality Larry Kudlow.
It is significant that Trump selected the iconic supply side Reagan insider Kudlow for his warm up act. It is significant that good, good, good vibrations were noted by Speaker Ryan (R-WI): “I thought he did a great job engaging with our members, and I think our members appreciated it.” The lines of communication appear open.
Speaker Ryan’s hand-picked chairman of the House Ways and Means Committee, Rep. Kevin Brady (R-TX), managed to achieve the impossible as head of Ryan’s House task force on tax reform. Recent well-intended efforts at tax reform left many pessimistic. Nothing of the magnitude of the last big prosperity-with-equity tax reform, in 1986, seemed possible. Brady showed them how.
Brady rendered a big, high potency, high integrity tax reform plan that is shrewdly designed to vault America back into the lead of world economic competitiveness. It is structured to supercharge economic growth, increasing growth over baseline by 9.1% over ten years. It would lower rates, broaden the tax base and provide tax cuts to taxpayers across-the-board. It would dramatically simplify tax preparation for about 95% of Americans. And it would do all that without being a deficit monger.
So what’s in the Ryan/Brady reform plan? According to the Tax Foundation it “would lead to 9.1% higher GDP over the long term, 7.7% higher wages, and an additional 1.7 million full-time equivalent jobs.” The plan “Consolidates the current seven tax brackets into three, with rates of 12%, 25%, and 33%.” More fully it:
- Increases the standard deduction from $6,300 to $12,000 for singles, from $12,600 to $24,000 for married couples filing jointly, and from $9,300 to $18,000 for heads of household.
- Eliminates the personal exemption and creates a $500 non-refundable credit for dependents who are not children.
- Increases the Child Tax Credit to $1,500 per child, limits the refundability of the credit to $1,000, and raises the phaseout threshold for the Child Tax Credit for married households from $110,000 to $150,000.
- Eliminates all itemized deductions besides the mortgage interest deduction and the charitable contribution deduction.
- Eliminates the individual alternative minimum tax.
- Reduces the corporate income tax rate from 35% to 20%.
- Eliminates the corporate alternative minimum tax.
- Taxes income derived from pass-through businesses at a maximum rate of 25%.
- Allows the cost of capital investment to be fully and immediately deductible.
- Eliminates the deductibility of net interest expenses on future loans.
- Restricts the deduction for net operating losses to 90% of net taxable income and allows net operating losses to be carried forward indefinitely, and increased by a factor reflecting inflation and the real return to capital. Does not allow net operating losses to be carried back.
- Eliminates the domestic production activities deduction (section 199) and all other business credits, except for the research and development credit.
- Creates a fully territorial tax system, exempting from U.S. tax 100% of dividends from foreign subsidiaries.
- Enacts a deemed repatriation of currently deferred foreign profits, at a tax rate of 8.75% for cash and cash-equivalent profits and 3.5% on other profits.
- Modifies all business income taxes to be border-adjustable, disallowing the deduction for purchases from nonresidents and exempting export profits and foreign-derived profits from taxation.
On a static basis, the House Republican tax plan would increase the after-tax incomes of taxpayers in every income group. … On a dynamic basis, all taxpayers would see an increase in after-tax income of at least 8.4 percent. …
The House Republican tax plan would reform both the individual income tax and convert the corporate income tax into a destination-based cash flow tax. This plan would significantly reduce the cost of capital and reduce the marginal tax rate on labor. These changes in the incentives to work and invest would greatly increase the U.S. economy’s size in the long run, boost wages, and result in more full-time equivalent jobs. On a static basis, the plan would reduce federal revenue by $2.4 trillion, most of the revenue loss being from one-time transitional costs. However, due to the larger economy and the significantly broader tax base, the plan would reduce revenue by $191 billion over the next decade.
In short, the Ryan/Brady reform plan would “greatly increase the U.S. economy’s size in the long run, boost wages, and result in more full-time equivalent jobs” with a trivial increase to the deficit and with a high degree of economic justice.
As noted by Bloomberg News and The Washington Post, the supply siders, led by Kudlow, have given Trump the most enthusiastic embrace of anyone in the Republican Party establishment. The Ryan/Brady reform plan accomplishes at least two big things: growing America’s economy by an extra 9.1% over ten years while restoring America’s trade advantages in a powerful and constructive way. Politically it credibly addresses the key voter concern to restore America’s equitable prosperity and could build a strong bridge between the House and the White House.