-
Tuesday, October 10, 2017

ANALYSIS/OPINION:

President Trump’s team has proposed tax relief for ordinary Americans and businesses that would boost growth and create jobs. Unfortunately, the recent stock market surge indicates expectations may exceed the gains tax savings could actually provide.

The basic problem is tax cuts can’t go far enough, owing to legitimate worries about budget deficits. Entitlements are on track to exceed 100 percent of federal revenue within a decade. The Republican majority in Congress refuses to tackle those, putting the borrowing capacity of the U.S. Treasury near its limit.


Deficit hawks want to limit federal revenue losses from tax cuts to about $150 billion a year — approximately divided between corporate and personal tax relief, including ending the estate tax, which garners about $17 billion a year.

Simplifying the tax codes comes down to eliminating cherished deductions, like those for state and local taxes or domestic manufacturing to pay for lower rates overall. Keeping the exercise revenue-neutral would create about as many losers as winners. For example, eliminating state and local taxes would benefit individuals in low-tax states like Florida and Texas but raise taxes paid by those in New York and California.

To make tax simplification politically palatable, the overall revenue take must be reduced to lower rates more dramatically or the losers will apply pressure on Congress to kill the reforms. Spreading around $150 billion in additional rate reductions — less $17 billion to ax the death tax — is not nearly enough.

For example, the deduction for medical expenses exceeding 10 percent of income is likely to be eliminated, and the elderly suffering from Alzheimer’s and other expensive to treat chronic illnesses could face hefty tax increases.

On the business side, cutting the federal tax rate from 35 percent to 20 percent appears like a big tax reduction and for many it will be, but eliminating or curtailing interest deductions and special benefits for manufacturers will likely leave many credit-dependent businesses competing with Chinese imports more disadvantaged than before.

Overall, what matters are the actual taxes paid, and slicing $75 billion off the annual federal corporate taxes would reduce the effective rate by about only one-fifth. Studies by European Union and other tax experts indicate that would still leave U.S. effective tax rates significantly higher than those in other industrialized countries.

Significant incentives would remain for pharmaceutical companies and other businesses earning substantial patent income to flee to Ireland by changing the nationality of their corporate registration via so-called tax inversions. In fact, by moving to a territorial system — namely, taxing the profits earned by U.S. companies on the basis of where those are earned — a significant tax avoidance business could emerge from simply moving research-and-development activities to locations like Ireland and domiciling patent ownership there if companies can get enough scientists to move.

For many companies, the tax plan would still make more attractive locating production and jobs in the United States, and that should boost growth a few tenths of a percentage point. However, given the above mentioned negatives, Treasury Secretary Steven Mnuchin’s claim that the tax cuts would pay for themselves with more private investment and stronger growth is straight out of “Alice in Wonderland.”

The same goes for tax simplification. He proposes to apply a special 25 percent personal rate to limited liability companies (LLC) — for example, architectural and construction firms organized as LLCs that put up shopping malls and apartment buildings — but not for independent architects and engineers who do smaller projects by subcontracting with various specialty companies.

The same goes for the large real estate holding companies with multiple LLCs for individual properties but not the home-based real estate investor with 10 units, or the individual who loses his job and creates employment for himself and vendors by setting up a home-based consultancy.

Somehow, it would seem big LLCs such as JP Morgan Securities or Koch Industries create jobs, but many smaller businesses are parasites to be taxed — excessively.

And for the latter, the Internal Revenue Service compliance and enforcement apparatus will add a new level of complexity and harassment.

All of this can be accommodated in the inevitable negotiations and compromising that will follow the administration’s initial proposals, but realism must prevail.

Only so much tax relief — and simplification — can be squeezed out of $150 billion a year.

• Peter Morici is an economist and business professor at the University of Maryland, and a national columnist.


Copyright © 2017 The Washington Times, LLC.