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The Good and Bad of the Tax Plan — CEO Daily, Monday, 6th November

November 6, 2017, 12:38 PM UTC

Good morning.

The tax plan unveiled by House Republicans last week prompted a weekend’s worth of partisan brawling, generating more heat than light. But if you are looking for the rare piece of smart and balanced analysis, I’d suggest this piece by Adam Looney of the Brookings Institution. Looney is an economist and was a top tax analyst in the Obama Treasury, so he knows his topic well. Here’s his rundown of the bill’s pluses and minuses.

First, the big plus:

“This plan addresses most major problems in our international corporate tax system with thoughtful and well-designed changes. It offers investment incentives and substantial simplification for small businesses. It picks up revenue to finance lower rates by eliminating ineffective deductions and credits, and through a host of other changes that chip away—modestly—at a variety of preferences for insurers, homebuyers, and other narrow interests that simply don’t make sense…That is how tax reform is supposed to work.”

On the downside, Looney sees three problems:

  1. A surprising lack of incentives to encourage or reward work. Why no increase in the earned income tax credit, for instance?
  2. A misguided plan to provide a tax break based on number of children, without regard for income—cutting taxes in “upper income taxpayers without encouraging either work or saving.”
  3. A gaping $1.5 trillion price tag over ten years, to be paid by the next generation of American taxpayers, who already face the prospect of paying the exploding costs of baby boomer retirement benefits.

Business groups, known to worry about deficits in the past, have reconciled themselves to point #3 by assuming the plan will boost economic growth enough to cover costs. That’s a heroic assumption. The plan will encourage investment in the U.S., but it requires some serious torturing of any economic model to get a $1.5 trillion payoff.

Looney offers some helpful suggestions to defray the cost—a top corporate rate of 25%, rather than 20%, for instance; or eliminating the exclusion of capital gains taxes at death. But the real danger is that special interest lobbying will push the price tag up, not down, as Republicans, unable to count on any Democratic votes, scramble to “buy” the support they need for passage.

Several tax-literate CEO Daily readers have also offered their thoughts on the bill.

P.M., a life-long tax ninja, praises the bill’s limits on the deductibility of executive compensation, and its 1.5% excise tax on elite college endowment earnings. “Gotta love the anti-elitist stuff!”

And N.P., also a tax connoisseur, explains why the NFIB is opposing the plan. He notes that “most small businesses are service businesses,” will get no benefit from the pass-through provision, will lose state and local tax and other deductions, and may see their personal rate rise from 25%, 28%, or 33% to 35%.

More news below.

Alan Murray

Top News

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Game of Desert Thrones

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Around the Water Cooler

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Thor Hammers the Box Office

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Summaries by Geoffrey Smith;