Comments on Today’s Joint Statement on Tax Reform

Today, Republican leadership from the House, Senate, and White House released a statement that outlined their principles for tax reform. The statement provided few specific policy details, but emphasized principles that reform should follow. Many of these principles, probably by design, reflect some of the proposals already outlined in both Trump’s tax proposal and the House GOP plan, which contain policies that would help improve the tax code.

The Three Broad Principles in the Statement

The statement outlined three broad principles or goals for tax reform:

• Simpler, fairer, and lower taxes for families,
• Reduced and reformed taxes for businesses, and
• Permanence

The principles reflect many of the policies that both the House GOP and the administration have included in previous plans. For instance, both the House GOP and administration plans have put forth policies to simplify the tax code. The House GOP’s plan, for example, would greatly increase the standard deduction and eliminate most itemized deductions. Both the administration and the House GOP also put forth ideas to reform the corporate income tax by reducing the statutory tax rate, broadening the base, and moving away from a worldwide tax system.

It is encouraging that the joint statement on tax reform reiterated the need to enact tax reform that is permanent, since temporary tax cuts would do little to encourage growth. Given that budget reconciliation rules prohibit legislation that adds to the deficit beyond a 10-year window, lawmakers will need to consider proposals and base broadeners that offset rate cuts and other proposed tax reductions.

No More Border Adjustment

One policy mentioned in the statement was border adjustment. This policy would have included imports in the business tax base while exempting exports, converting the federal income tax into a destination-based tax. The statement indicated that Republican lawmakers will no longer be pursuing this policy.

Removing the border adjustment isn’t necessarily detrimental to the growth prospects of tax reform. The border adjustment is trade neutral and would not distort economic activity. However, without the border adjustment, there are two major issues that policymakers will need to address.

First, revenue. Without the $1.3 trillion the border adjustment would raise, lawmakers will either need to find additional revenue raisers or spending cuts to offset the cost of a lower corporate income tax rate, or pursue rate cuts that are much less ambitious.

Second, preventing base erosion. The border adjustment accomplished an important goal: it prevented base erosion due to corporations shifting profits overseas. Without the border adjustment, lawmakers will need to carefully consider how to design a territorial tax system that eliminates many of the perverse incentives in our current system, but also prevents base erosion.

“Unprecedented” Expensing

The other policy mentioned by name was expensing. In the statement, lawmakers promise to enact “unprecedented capital expensing.” One could interpret this as a move away from the House GOP’s idea to allow companies to fully expense capital investments. If the GOP end up backing away from this proposal, it would mean that they should probably expect less substantial economic growth from their tax reform plan. Full expensing is probably the single-most pro-growth proposal that could be enacted as part of tax reform. However, this statement may also mean that lawmakers may look at other ways to improve cost recovery besides immediate expensing of capital investment.

Today’s statement outlined many laudable goals for tax reform. Tax reform should make the code simpler, reform business taxation in the United States, and be permanent. A reform that accomplished these goals would reduce the burden of the tax code on Americans and grow the economy.