“We’re going to give the American people a huge tax cut for Christmas,” President Donald Trump explained in a cabinet meeting earlier this week. “Hopefully, that will be a great, big, beautiful Christmas present.”
Five Republican grinches — Senators Jeff Flake (Ariz.), Bob Corker (Tenn.), Susan Collins (Maine), John McCain (Ariz.), and Ron Johnson (Wisc.) — threaten to replace that $1.5 trillion present with a lump of coal.
Flake, recent claims by the president aside, remains officially “undecided” regarding the tax bill and, through a spokesman, promises to cast his vote on “nothing to do with the president” but rather on the legislation’s “merits.” His Arizona colleague McCain gripes about process issues along with concerns regarding the repeal of the individual mandate.
Corker worries about the $1.5 trillion (over ten years) tax cut’s effect on the national debt. Collins dislikes the repeal of the individual mandate that reduces the deficit by $338 million. You can please Corker here. You can please Collins here. You can’t please both.
Given the narrow 52-48 margin enjoyed by Republicans in the Senate, and the lockstep opposition of disciplined Democrats, the president must convince at least two of the four GOP opponents to switch him from their “naughty” to their “nice” lists. Vice President Mike Pence then presumably casts the deciding vote.
With Corker and Flake frequent targets of Trump’s periodic 140-characters-or-less nastygrams, the retiring duo appears as unlikely enthusiasts for anything prefixed with the word “Trump” — including, at this point, “Trump Card,” “Trump Up,” and perhaps even “Trumpet Player.” So, voting “yea” or “nay” for “Trump Tax Plan” requires a choice to become either the bigger person than the president or the bigger ego than him.
Johnson offers the most interesting, and principled, reasoning for opposing the plan. The president could at once improve his plan and improve its chances should he prevail upon his allies on the Hill to incorporate some of the Wisconsin senator’s ideas into the bill.
Johnson argues that the bill benefits big corporations at the expense of the pass-through entities favored by small businesses, which, he points out, employ most employed Americans. Ideally, he wants to eliminate the tax designation for C corporations and make all private businesses pass-through entities.
Faithful readers recall that your two correspondents argued for the exact opposite approach. Careful readers grasp the similarities between Johnson’s idea and the one argued for here.
The benefit of pass-throughs, such as limited liability companies, stems from their ability to avoid the double-taxation — one on income and again on dividends — that C corporations endure. The benefit of C corporations involves the ability to allow investors to easily own stock in the company if they choose to. Why not merge the best of both constructs into one legal regime for the purposes of the tax code?
This requires eliminating double taxation — which necessitates a credit on dividends for entities already taxed on that money — and allowing stock ownership for any business entity. The businesses, small or large, get taxed one time, as pass-throughs now do, but via the corporate rate, which, under the Trump plan, sensibly moves from 35 percent (third highest in the world) to 20 percent (lower than the global average). Who cares whether we call these entities “pass throughs,” as Johnson wants, or C corporations, as this column advocates? What matters is that the unfair principle of double-taxation dies a quick death and that employees of pass-throughs get a chance to share in the American Dream by earning shares of the businesses for which they work.
Restructuring the corporate tax code in this way does not strike at anything sacrosanct. The C corporation designation started in the 1950s and limited-liability companies, one type of pass-through, began in Wyoming in the 1970s. They represent not development of an organic sort but constructs devised by politicians rather than businessmen.
The taxes laid upon businesses should, as Johnson advocates, appear clear, fair, and low. Do any of those three words apply to the current corporate tax code?
A $1.5 trillion tax cut fits the president’s description of a “great, big” gift. Adding clear and fair to low makes it a “great, big beautiful Christmas present.”
Hunt Lawrence is a New York-based investor. Daniel Flynn is the author of five books.