Plenty to like about GOP tax plan — with one big caveat

Corporate tax reform is long overdue in the U.S. Our high rates are a burden not only on businesses but on our workers and our economy as a whole. To that extent, the new tax reform outline from the “Big Six” proposes far more drastic changes to business taxes than individual taxes.

The plan to cut the corporate tax rate to 20 percent is a move in the right direction for fixing the corporate tax code. It brings our headline corporate tax rate in line with the rest of the developed world, which should boost investment and wage growth in the U.S.

{mosads}Moreover, the reform proposes to shift the U.S. to a territorial tax system, so that U.S. multinationals don’t have an incentive to store cash overseas and are not penalized for bringing profits back to the U.S. Finally, it allows companies full expensing of investments for five years (while limiting interest deductibility), which should boost investment in the short run.

While the cut in the corporate rate is being viewed as a giveaway to the wealthy, research suggests that the real winners might be working class families in America, as American businesses expand and grow their productive investments in the U.S.

While I am optimistic about the long-run effects of moving toward a more competitive corporate tax code, it behooves us to proceed with caution. The biggest concern with the plan is its potential to add significantly to deficits and the federal debt.

According to initial rough estimates from the Committee for a Responsible Federal Budget, while the tax cuts will cost over $5.8 trillion, the base-broadening measures will recover much less than that, resulting in $2.2 trillion in net tax cuts.

If the plan adds to the federal debt in the short run, this has the potential to become a drag on economic growth in the long-run.

Aside from the potential for corporate tax reform to boost middle-class wages, what other provisions would help? On the individual side, it is unlikely that the plan will be of much help to the lowest-income workers, most of whom already pay no federal income tax.

Doubling the standard deduction while removing the personal exemption will help a few more people avoid facing any taxation or lower their tax bill. On the other hand, because the plan gives no details on tax brackets, it is likely that some people who faced the 10-percent tax bracket will now face the marginally higher rate of 12 percent.

The lack of detail in the plan may be particularly relevant for single parents or those who file under the head of household status. While the plan deliberately omits any mention of this particular category of taxpayers, if this filing status is revoked (as President Trump’s campaign proposal would have), these families would face substantial tax hikes.

For those who itemize, which is only about 30 percent of taxpayers, the largest impact will be on their ability to take deductions for tax-favored expenditures like medical expenses or state and local taxes. They will still be able to claim the deductions for mortgage interest and charitable contributions, which are not going away.

But the elimination of the other deductions might hit high income households that rely on itemized deductions to reduce their tax bills. If the state and local tax deductions are repealed, then individuals in high-tax states like New York, New Jersey and Connecticut would face higher tax rates.

The tax increase on high-income households from the loss of the state and local tax deduction would likely largely offset the reduced statutory tax rates, so the net impact on these households is probably negligible. But without a more detailed tax proposal, it is difficult to determine precisely how this affects high-income households and those in high-tax states.

The child tax credit would also be expanded with the explicit purpose of boosting after-tax incomes for families with children. This is a good step that puts money back into the pockets of working families.

However, this does not help low-income families because the expansion of the credit is non-refundable, and with nearly 40 percent of families paying no federal income tax, the expansion of the credit would do nothing for them.

Overall, the tax plan has no obvious losers and potentially many winners, with the obvious caveat that we need to be cautious about the impact on the country’s fiscal stability as we move forward with this approach.

Rather than adding to the deficit, we need to consider other sources of revenue that would not be a drag on growth but would help cover the costs of this plan. A carbon tax maybe? 

Aparna Mathur (@aparnamath) is a resident scholar in economic policy studies at the American Enterprise Institute.