Tax Reform: The Triumph of Vision and Courage

The passage of the 2017 Tax Cuts and Jobs Act (TCJA) represents a triumph of ideas and of courage. No, the bill wasn’t perfect. Reflecting multiple and sometimes conflicting goals, the TCJA was not as powerfully pro-growth as it could have been. It didn’t simplify the tax code as much as it could have. Yet despite its flaws, which in perspective were minor in nature and consequence, TJCA represented a tremendous legislative accomplishment benefitting American families and businesses for many years to come.

Creating the very possibility of tax reform, for the first time in over 30 years voters empowered the right people in Congress and in the White House with a sufficiently shared vision of how the tax code could be made less burdensome to economic growth. This vision arose as the crystalized product of decades of debate and research in academia, in think tanks, and in earlier legislation.

An enduring feature of sound tax reform has been the mantra of “lower the rate, broaden the base.” This conception animated the 1986 Tax Reform Act, and is well represented in the TCJA as the corporate tax rate is reduced to 21%, thus finally bringing the U.S. rate into better alignment with its major competitors, while the effective passthrough rate is similarly reduced. The latter component of the mantra is also in evidence in both business and individual taxation as many deductions, exemptions, and credits are either eliminated or made irrelevant.

TCJA was not just a rehash of 1986, however. Especially on the business side, two features reflected the evolution in thinking brought about by decades of previous debate. The regime of accelerated depreciation long suffered from a lack of theoretical basis. Expensing has a sound theoretical basis. Economic depreciation also has a theoretical basis, albeit a badly flawed one. Accelerated depreciation is a hybrid without theoretical parentage. Whereas the 1986 tax reform retained this baseless hybrid with on net an even greater lead toward economic depreciation, years of debate pushed expensing mainstream and thus expensing was obvious for nearly all those involved in developing TCJA.

Likewise, international tax policy is dominated by two main theoretical perspectives. The 1986 tax reform actually made the international tax system notably less neutral and American businesses less competitive by lurching further toward worldwide taxation. Indeed, so dominant were worldwide’s U.S. proponents that in 1986 supporters of the alternative territorial system were generally relegated to a far more distant hinterland even than were proponents of expensing.

In the succeeding years nearly all of America’s competitors migrated toward embracing a territorial system. This alternative, now also the law of the land for U.S. businesses operating abroad, was again made possible by years of hard debate. The United States will no longer be the land from which great companies flee, but increasingly the land to which companies around the world flock.

Tax reform was further abetted by the utter lack of credible alternatives offered by its opponents. It is generally true in Washington that “you can’t be something with nothing.” The opposition had nothing, leaving them in effect to argue that the current tax code is pretty much just fine and dandy. Talk about a losing argument.

The winning vision, along with the courage to act on that vision, is as remarkable. Why courage for legislation that would so obviously strengthen the U.S. economy, raising jobs and wages and opportunity more than could any other legislation Congress is likely to consider? The answer lies with the supporters’ courage in the face of adverse public opinion polls.

Why? Why should the American people look with such disfavor upon tax reform? Do they not want a simpler tax system which tax reform would clearly deliver for the vast majority of taxpayers? Do they not want a stronger economy? Of course they want both, but tax reform’s proponents struggled to get these messages out in the face of an unrelenting campaign of firm opposition by the mainstream media. The major news broadcast channels, the major newspapers, and all the rest have run every kind of opposition story they could think of, save perhaps blaming climate change on tax reform.

Having exhausted its imagination regarding the possible ills tax reform could inflict, one paper resorted to arguing, based on tangentially related evidence from France, that self-employed people would be willing to pay “as much as $830” more in tax annually for an undefined “user-friendly” tax code. Everyone wants a more user-friendly tax code, but when millions of Americans voluntarily choose to itemize and thereby make the tax code significantly less user friendly than if they filed the standard deduction, and all just to cut their taxes, the French-based story is quickly revealed as farce. When all Americans hear are dire predictions of tax reform’s consequences, it should not surprise anyone that taxpayers are more than a little unsure about what Washington is up to.

Fortunately, these negative stories will fade with time, while the U.S. economy, strongly buttressed by tax reform’s realities, will continue to charge forward.

The first glimmer of tax reform’s benefits will appear in larger paychecks in 2018 when the new withholding tables appear. This will then be followed in the spring of 2019 when taxpayers file their previous year’s returns and find the exercise significantly less painful.

And sometime in 2018 through 2019 and beyond, the economy will continue to grow, wages will rise, jobs will be created, opportunities will expand, and perhaps some will remember those in strident and unapologetic opposition, even as they properly credit the Congress and President who overcame every hurdle and doubt to enact a truly pro-growth tax reform.

About the authors

J.D. Foster

Dr. J.D. Foster is the former senior vice president, Economic Policy Division, and former chief economist at the U.S. Chamber of Commerce. He explores and explains developments in the U.S. and global economies.