We do not yet know if the sweeping tax bill proposed by Republican Party leaders will even make it to a vote in Congress, let alone reach President Trump’s desk, but it would be unwise to dismiss the entire package out of hand. There are at least two good ideas in the bill; the question is whether they will be used in service of something better for society than another massive tax cut for high-income households.
A centerpiece of the plan is the reduction of the U.S. corporate tax rate from 35 percent to 20 percent. As America’s editors have stated in the past, a corporate tax cut may be a good trade-off for other reforms that minimize tax avoidance and remove incentives for corporations to park profits in countries with lower tax rates—though the Obama administration’s proposal to cut the rate to 28 percent may still be more prudent than the more drastic cut being proposed by Republicans. President Trump has been incorrect in asserting that the United States is “one of the highest-taxed nations in the world,” but that claim is true when limited to corporate, rather than individual, taxation. (Only Chad and the United Arab Emirates have higher taxes on corporate profits.) However, a corporate tax cut should be accompanied by other provisions in the bill that discourage American companies from shifting assets overseas; these include a global minimum tax of 10 percent on the subsidiaries of American companies anywhere in the world and a one-time, low repatriation tax of 12 percent on liquid assets brought back to the United States. A lower corporate tax rate makes sense only if it leads to U.S. corporations investing more in their home country.
A corporate tax cut should be accompanied by other provisions that discourage American companies from shifting assets overseas.
Another good idea is to cap deductions for home mortgage payments; under the GOP tax plan, new homeowners would be able to deduct interest payments made only on their first $500,000 worth of loans. This is a reasonable fix. There are good reasons to encourage homeownership in the interest of family stability and healthy communities, but the tax code should not inadvertently encourage the construction and purchasing of ever-bigger and ever-more-expensive homes. And the 37 percent of U.S. households who rent rather than own (the highest level since 1965 and climbing), and are unable or unwilling to take on mortgage debt, should not be expected to subsidize the most affluent homeowners. The fact that a cap on the deduction would affect high-income (and Democratic) states more than others is not a reason to preserve this inequity.
However, any revenue gains from these two changes should not simply finance changes to the tax code included in the Republican plan that mostly benefit top earners—including the phase-out of the estate tax and lower taxes on income from “pass-through” entities like real estate partnerships and hedge funds. Fairness demands that at least some of any new revenue from capping the deduction for home mortgages go to rental assistance programs and incentives for the construction of affordable housing, given that the number of apartments deemed affordable for very low-income families dropped by more than 60 percent across the United State between 2010 and 2016. A boost in the Earned Income Tax Credit would be another appropriate use of any revenue gain from capping the mortgage deduction.
The fact that a cap on the home mortgage deduction would affect high-income (and Democratic) states more than others is not a reason to preserve this inequity.
The Tax Cuts and Jobs Act, as it is called by House Republicans, has the potential to dramatically reshape the U.S. economy and the way we fund government. We applaud the willingness of Republicans to make long-needed adjustments to the tax code—though this bill also includes unwise changes such as the elimination of the adoption tax credit. We also fear that their good ideas will only rouse intractable, and justified, opposition if they are seen as financing a windfall for the wealthiest.