At the end of next year, most of the provisions of the Tax Cuts and Jobs Act of 2017 are set to expire. If nothing is done, taxes will go up. Both presidential contenders say they won’t let this happen and have promised to extend many or most of the law’s changes.
Realistically, voters will not be getting a serious discussion of the matter — much less any legislation — during an election year. Yet the longer action is delayed, the harder the problem will become. Whoever wins in November, the approaching deadline should be a moment to weigh the options for putting public finances back on track.
Crucially, even if the tax increases kick back in on schedule (as the standard projections for public borrowing assume), public debt will stay on track to rise dangerously over the next decade. Canceling some or all of them would only worsen this alarming trend. To avoid a severe fiscal crunch, the country needs less public spending and more revenue than currently legislated, not less.
Fully extending the Tax Cuts and Jobs Act would cost about $4.5 trillion over 10 years. Letting it expire altogether would be better than extending it in full, but the best course is to keep its smartest parts (which can be retained without loss of revenue) and supplement them with other reforms. For example, the law raised the standard income-tax deduction, narrowed the scope of various exemptions and expanded the child tax credit. These changes greatly simplified the code for most taxpayers and, thanks to the child tax credit, provided additional relief where it was most needed. In combination, they’re roughly revenue-neutral. They can be prudently extended.
Unfortunately, the same does not apply to the lower rates that the law delivered to almost all workers. Small rate reductions applied to a very broad base surrender a great deal of revenue. Recent talk of confining higher rates, once they reset, to households making more than $400,000 a year would cost in the neighborhood of $2 trillion over the coming decade. This provision should be allowed to expire, returning rates to those prevailing in 2016. At the same time, the law’s cap on the deduction for state and local taxes should be retained and ideally lowered. Returning this part of the code to its pre-act status, as many big-city Democrats wish, would deliver a regressive and unaffordable tax cut.
One of the most important parts of the law is not in fact scheduled to expire: A cut in the corporate tax rate, to 21% from 35%, will stay in place unless Congress chooses to change it. Experts differ on how much, if at all, the lower rate boosted investment, which was the idea — but almost nobody doubts that the change reduced revenue, and there are better ways to spur investment in any case.
A lower overall corporate rate delivers a windfall to past investment. A smarter approach would be to focus the incentive on additional outlays, in part by allowing more generous expensing of new investments. Combining this with a higher corporate rate — 25%, say, roughly in line with other rich economies — could deliver both extra revenue and a stronger inducement to accumulate capital.
Options for further reform are limitless. An ambitious overhaul of the kind last undertaken some 40 years ago would be best. Ideally, it would simplify the code, broaden the base through new consumption and carbon taxes, and close egregious loopholes that let the rich pay less than they should. Combined with better discipline on spending — and above all a willingness to reform entitlements — such an effort might rise to the challenge.
As things stand, this is nowhere in sight. The new consensus on simply ignoring America’s fiscal mess is a grave threat to prosperity. At the very least, the debate over the Tax Cuts and Jobs Act is a chance to recognize the problem.
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