Editorial: Trump tax outline hits the right targets
President Donald Trump’s tax outline offers hope for the comprehensive reform the nation needs to accelerate job creation and boost the discretionary incomes of families. It also raises a real concern: Will it generate enough growth to offset the lower tax rates without exploding deficit spending?
Trump and his economic team are putting their full faith in the Laffer Curve, the theory that there is a sweet spot where lower taxes actually generate more revenue because of the economic activity they spur.
The challenge as they fill in the details of the proposal is to get that balance just right. With the nation about to cross the $20 trillion national debt mark, the days of living off the credit card have to end.
In general, Trump is touching the right pillars with his proposal. If properly executed, it will make the tax code simpler for individuals and less punishing for businesses. That’s the recipe for a growth surge.
Simplicity is the key. Trump would take the current seven tax brackets and reduce them to three: 10 percent, 25 percent and 35 percent. The top rate falls five percentage points from today’s level, and that will raise howls that it is a giveaway to the wealthy.
But dollars freed for private investment are more efficient at creating jobs and development than are dollars consumed by taxes. As the details are formed, additional incentives should be built in to encourage investment in job-creating activities.
The standard deduction will double to $24,000, so fewer filers would have the need to itemize. Taxpayers could easily fill out their own forms.
While the rates will fall, individual filers will also lose most of their deductions, which in the end could make this part of the package closer to revenue neutral. As offered, only mortgage interest and charitable contributions will be deductible.
Fewer deductions mean fewer opportunities to game the system, so compliance rates should increase.
Capitol gains taxes would drop slightly to 20 percent with the elimination of the 3.8 percent Obamacare tax. The 15 percent rate previously in place might do more to lure investment capitol. The estate or so-called death tax would die, bringing an important piece of fairness to the code.
The most impactful element is the reform of corporate taxes.
At 35 percent, U.S. business taxes are the highest among industrial nations. Trump’s plan would make them among the lowest, at 15 percent. Those worried about the deficit are pushing for a 20 percent rate, which would still vastly improve America’s competitiveness in the global economy.
A one-time tax break — the rate wasn’t disclosed — would be given to businesses who bring overseas earnings back home for investment.
An estimated $2.5 trillion is held by U.S. corporations in overseas accounts to avoid double taxation. Repatriating that money would lead to a huge surge in tax revenue.
In the future, the U.S. would move to a system that taxed companies on profits in the country in which they are earned.
The policy would have the double benefit of generating new revenue and removing the incentive for American companies to move their headquarters overseas.
Tax reform has been on the top of the to-do list for both Republicans and Democrats for at least a decade.
This outline gives them something to work with, while offering enough flexibility in filling in the blanks to produce a final version that works for everyone.