With Apologies to Joe Biden, This Tax Cut Is a Big F***ing Deal
WHY YOU SHOULD CARE
Because the world is about to change.
The author is the founder and president of Americans for Tax Reform.
Republicans and Democrats disagree on the merits of the Tax Cuts and Jobs Act, versions of which have now passed both the House and Senate. But both parties concur that the tax reform/tax cut legislation is, in former Vice President Joe Biden’s famous phrasing when Democrats passed Obamacare: “A big f***ing deal.”
The bill upsets the decades-long status quo on international tax competition, curtails the multibillion-dollar tax subsidy for high-tax states and cities, opens Alaska to more oil exploration and ends the mandate forcing Americans to buy government-approved health insurance or pay a tax — meaning Obamacare would become voluntary. Any one of these earthshaking measures on its own would have been viewed as too controversial to pass in recent years.
When Congress focuses on welfare reform in April, the GOP will be able to further reform or repeal Obamacare without facing the assertion that millions would lose insurance.
The House and Senate have reportedly struck a deal to merge their bills, meaning this will almost certainly be passed and signed into law before Christmas. The corporate income tax is reduced from 35 percent to 21 percent, according to press reports. The Tax Reform Act of 1986 cut the corporate income tax from 46 percent to 34 percent, and back then America briefly had one of the lowest corporate income tax rates in the developed world. But today the European average business tax rate is 18 percent. China is at 25 percent.
The GOP plan also moves the United States from its present “worldwide” tax system to a territorial tax system. Now the Internal Revenue Service taxes the earnings of American companies both here and abroad. Other nations only tax business income earned in-country. Earnings abroad are allowed to flow back into the home country without tax or penalty.
Lowering the U.S. rate to a competitive 21 percent and moving to a territorial tax system ends the tax incentive for American companies to move abroad voluntarily through inversion or involuntarily by being purchased. In 1986, 218 of the world’s 500 biggest-earning companies were based in the U.S. As of last year, that number had dwindled to 128.
With a 21 percent rate, much of the estimated $3 trillion in American corporate earnings now held overseas would flow back to the U.S. The bill moves America from last place to close to first place in tax competition, both for attracting new investment and for lower product costs.
But wait, there’s more. Just under half of Americans work for corporations, while more than half work for “pass-through” entities for which tax is paid through the personal income tax, not the corporate rate. And since the 1986 tax reform that lowered the top rate to 28 percent, the effective top personal rate has been jacked up to 32.2 percent (George H.W. Bush), 40.8 percent (Bill Clinton), back down to 35 percent (George W. Bush) and up to 44.6 percent (Barack Obama).
This tax reform begins the process of reducing the tax on business income (as opposed to wages) for pass-throughs. Why is this a big deal? Well, as of 2014 there were some 28 million pass-throughs that together employed 73 million Americans. There is a heated debate on how best to reduce pass-through business income, but we are now on a path to move that to 20 percent to match the corporate level.
So roughly 30 million entrepreneurs — aka voters — will be following tax policy much more closely in the future. In the past, hiking the personal tax rate was viewed as messing with rich individuals. For ever after, this rate will be seen as a second business tax that could be reduced. And who bets against an engaged and enraged 30 million businessmen and women who before saw no hope of being disentangled from the politics of envy and Robin Hood rhetoric?
Reducing the deductibility of state and local taxes, by imposing a $10,000 cap, attacks a subsidy for higher taxes. Just as people are more likely to give $100 to charity if they can deduct 40 percent from their taxable income, so too are taxpayers less outraged by income and property tax hikes that cost $60 rather than $100 thanks to the deduction. Future state and local tax cuts will be worth more as well. We’re already seeing the impact, as the state senate leader of New Jersey backed off a planned “millionaires’ tax.” Expect thousands more similar examples across the nation year after year.
Ending the Obamacare tax — now standing at about $700 for an individual and $2,085 for a family of four — will allow Americans to refuse the kind offer of Obamacare without paying a tax. And who does that tax hurt? Of the 6.6 million households that paid it in 2015, 79 percent earned less than $50,000.
This changes the world in two ways. First, if it isn’t mandatory, Obamacare may (its defenders say “will”) wither away. Second, the nonpartisan Congressional Budget Office projects that 13 million Americans will “lose” their health insurance as they choose to avoid Obamacare and Medicaid. Thus, when Congress focuses on welfare reform in April, the GOP will be able to further reform or repeal Obamacare without facing the assertion that millions would lose insurance. The GOP would be able to promote a plan designed to get more Americans insured.
Before Christmas, the world changes. You can place your bets now on whether the result mimics 1984’s 49-state landslide for President Ronald Reagan that followed his tax cut taking effect in January 1983, or the 1994 and 2010 Democratic losses in Congress that followed Clinton’s and Obama’s tax increases.