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Commentary By Brian Riedl

MI Responds: Senate Tax Reform Vote

Economics, Economics Tax & Budget, Tax & Budget

The Senate has finally passed landmark tax reform legislation. Despite reports to the contrary, the Senate bill provides broad-based tax cuts across all incomes. The typical middle-income family would receive an $850 annual tax cut. The bill would make the tax code even more progressive. The bottom 80 percent of families currently pay 33 percent of all combined federal taxes, yet would get 37 percent of the tax cuts. By contrast, the top one percent currently pays 27 percent of all federal taxes, but would get just 18 percent of the tax cuts. The result would be wealthy families paying a larger portion of the federal tax burden.

Now the real work begins. A conference committee must fix the House and Senate legislative flaws and build a workable final product. The top priority must be to strengthen and protect the corporate tax reforms that constitute the most pro-growth portion of these bills. Specifically, it is vital to retain the proposed 20 percent corporate tax rate, full business investment expensing, and territorial taxation reforms. The base erosion standards and recently-raised international “toll charge,” are an acceptable price to protect this corporate tax modernization.

“A conference committee must fix the House and Senate legislative flaws and build a workable final product.”

On the individual side, lawmakers should protect the $2,000 child tax credit expansion and maintain low tax rates without the House’s 46% “bubble” tax rate. The Senate’s failure to repeal the AMT and estate tax must give way to the House’s terminations – even if they require new offsets, such as repealing the step-up basis tax loophole that allows heirs to escape capital gains taxes on their inheritances.

The Senate’s pass-through business deduction has reportedly grown to 23%, with an expansion of eligible income. This larger deduction creates additional incentives to game the system and reclassify income, so the design of anti-abuse guardrails is even more important.

Congress continues to work within the $1.5 trillion cap provided in the budget resolution, with a Byrd Rule requirement for deficit-neutrality after 2027. Still, lawmakers should strive to maximize tax policy permanence, even if it means moderating certain reforms. Incorporating economic growth revenues should drive the ten-year cost down to roughly $1 trillion ($1.5 trillion assuming expiring policies are extended). While this cost is a legitimate issue to further address in conference, context is also necessary. Tax reform will raise the ten-year deficit from $10 trillion to $11.5 trillion while also modernizing the corporate tax code and aiding families. Future deficits will be overwhelmingly driven by Social Security and Medicare’s $82 trillion deficit over the next 30 years. Lawmakers who wish to maintain a low tax burden must address these long-term costs.

With a Congressional majority now on the record voting for tax reform, a successful conference committee compromise is likely assured. The vital question is whether the conference committee can protect the best of the House and Senate reforms.

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Brian M. Riedl is a senior fellow at the Manhattan Institute. Previously, he worked for six years as chief economist to Senator Rob Portman (R-OH) and as staff director of the Senate Finance Subcommittee on Fiscal Responsibility and Economic Growth. Follow him on Twitter here