The Senate-passed tax bill is a policy triumph that will provide a shot of performance enhancing drugs into the veins of the economy. It’s not perfect, but the combined effect of cutting business tax rates, eliminating the state and local tax deduction, and repealing the ObamaCare individual mandate tax, means we are at the precipice of the biggest conservative policy victory since the Reagan years.
If Republicans were wise, the House would vote immediately to approve the Senate bill, and get it to President Trump’s desk for immediate signature before anything can go wrong. Think ObamaCare repeal fiasco.
But since they are insisting on a conference, there are still a number of ways to further improve the bill, grow the economy even faster, and counteract some of the liberal complaints against it.
Some of these reforms were in the original campaign tax plan that Larry Kudlow and I helped draft for then-candidate Donald Trump.
Here they are:
1.) No stealth capital gains tax hike.
The Senate bill changes the rules for capital gains taxation. It requires shareholders to sell their oldest shares in a company before their newest purchased shares. The older the share, the larger the taxable capital gain.
This accounting change might make sense except that the gains on long term stocks are not adjusted for inflation. So on many sales of long-held stock, as much as half of the reported and taxable “gain” is due only to the compounding effect of inflation.
So the Senate rules will require millions of Americans to pay additional tax on phantom gains. That is patently unfair and will discourage the very long term investment that the economy needs now.
Worse, under the Senate bill, there is an exception for mutual funds and other institutional funds. Companies like Fidelity and Vanguard would be exempt from the tax, but not the little guy who wants to buy and sell stock on his own. Unfair. Kill it.
2.) Repeal the corporate state and local deduction.
Big companies such as Boeing, Apple and Microsoft get to continue to deduct their state and local taxes. Small businesses don’t. This is absurd and only shows the continued power of K Street swamp lobbyists. This tax deduction requires companies and families in low tax states to subsidize companies in high tax states. No business or individual should be given this sweetheart favor. Get rid of the corporate SALT deduction and states like New Jersey, Iowa and Pennsylvania will be forced to cut their corporate tax rates to stay competitive. It’s a win-win for everyone.
3.) Cut the highest income tax rate.
The money raised by eliminating the state and local tax deduction for corporations should be used to pay for a reduction in the highest income tax rate. This will provide relief for people living in high tax states such as New York, Connecticut, and California (who lose the state and local deduction) and will allow small businesses to get a bigger tax cut as well. As Arthur Laffer and Steve Forbes always remind us, the highest income tax rate is the one that does the most harm.
4.) Close the George Soros Loophole
George Soros just recently gave $18 billion to his family foundation and the money went in tax free. This is possibly the biggest tax dodge in American history. Millionaires and billionaires who give money tax-free to private foundations — Gates, Buffett, Zuckerberg, and the rest — should pay capital gains tax on these assets, then give it to the foundation. This will raise hundreds of billions of dollars for the government over time and can then lead to a lower capital gains tax for everyone.
5.) Eliminate the death tax and tax capital gains at death.
The original Trump tax plan called for elimination of the unfair death tax. But it also called for the end of the “step up basis at death” on capital gains. Right now when a rich person dies, he or she can pass on the assets without paying capital gains tax on the appreciated assets. And that build-up in wealth is never taxed directly. This takes liquidity out of the capital markets because older Americans avoid the capital gains tax by dying with the stock or other financial assets in their possession.
Now it looks like Congress will keep the high death tax rate in the Senate bill and merely increase the exemption level.
Trump’s plan was better for family businesses and for the overall economy and fairer to everyone. Eliminate the death tax — which is above 40 percent — and tax these assets at the much lower capital gains rate of 23.8 percent.
These are small tweaks to the tax bill that will make a big difference for growth and fairness. But above else, Congress, stop dithering, and get going to deliver this pro-growth tax bill before Christmas.
• Stephen Moore is an economic consultant with Freedom Works and a CNN senior economic analyst.
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