Every single loophole in the tax code has a ferocious defender, a fact that has scared off all the recent administrations from attempting tax reform.
The Republican Health Care bill failed because it was a bad bill that had almost no authentic public support. It took benefits away from tens of millions of vulnerable people to give tax breaks to the rich few.
When Republicans turn to tax reform, they will start on much stronger ground. The Republican plans, at least in their broad conceptions, are built solidly on the two frameworks that have shaped recent tax-reform discussions.
The first is simplification, the idea that a cleaner tax code, with fewer loopholes and lower rates, would foster economic growth. The second is substitution, the idea that the overall rate of taxation is less important than what you tax. The current code taxes income heavily and barely taxes consumption. To increase dynamism and growth, we should substitute taxes on investment with taxes on spending.
The first framework shaped the tax reform of 1986 and is locked in many people’s brains today. But my impression is that economists have come to see the second framework as more important.
The research shows that cutting top marginal rates does not produce as much growth as the supply siders expected. Meanwhile, research by the Organization for Economic Cooperation and Development and others has found that corporate income taxes have a more negative effect on growth than income, payroll or consumption taxes. It’s more important to cut those.
Most rich nations today combine consumption taxes and a low corporate rate. As Kevin Hassett, who’s been mentioned as President Donald Trump’s likely Council of Economic Advisers chairman, has noted, 34 out of the 35 OECD nations have VAT or VAT-like consumption taxes. The United States is the only outlier.
The House Republican tax reform bill embraces both frameworks, but it leans on the substitution…