Nancy Pelosi characterized the Trump tax legislation earlier this week as “one of the worst bills in the history of the United States of America.”
The Cut, Cut, Cut Act, as Trump wished to call the legislation, may rank as one of the worst names for a bill in the history of the United States of America. But, at the risk of contradicting Ms. Pelosi’s judgments as a historian, the Fugitive Slave Act and the Eighteenth Amendment safely beats it for bad.
Politicians, better students of hyperbole than history, regard their latest victories as among the greatest victories and their most recent defeats as among the gravest defeats. Politicians possess a talent for overstatement, and perhaps when the bill finally passes the president’s talent for this will match Nancy Pelosi’s.
Trump’s triumph surely does not as radically reorient the tax code as such predecessors as Ronald Reagan and Calvin Coolidge, on the one hand, or Franklin Roosevelt and Woodrow Wilson, on the other, did. The top individual rate, for instance, drops by either one percentage point (Senate bill) or by about five percentage points (House bill), or, perhaps in conference, to somewhere in between. That’s not radical. It’s the type of milquetoast change that all of his immediate predecessors instituted — Barack Obama, George W. Bush, Bill Clinton, George H.W. Bush — instituted in one direction or the other.
The one way the legislation radically, and sensibly, reorients the tax code involves the corporate rate. Stuck at 35 percent, above every other nation save three, it now goes to 20 percent, slightly below the global average. This makes American businesses more competitive and gives them less of a reason to shelter money overseas.
While Pelosi’s rote response convinces only of her kneejerk opposition to the president, the bill, certainly an improvement over the status quo, does not approach ideal. It is, evidenced by the narrow margins by which it gained approval in both houses, to borrow from Bismarck, politics as the art of the possible.
When this bill becomes actual, what, then, serves as the art of the possible?
By targeting cuts for C-Corporations, the bill overlooks the pass-throughs that serve as the primary drivers of the economy. Senators Ron Johnson (R-Wisc.) and Steve Daines (R-Mont.) recognized this, and fought for improvements to the bill. But on the next go around, legislators should more faithfully heed their counsel.
Most job growth happens in small-to-medium sized private businesses taxed at personal rates as limited-liability companies (LLCs) and Sub-S Corporations. One way to include them in the tax benefits now bestowed upon C-Corporations would be to classify all private businesses, for tax purposes, as C-Corporations — or at least provide this option for pass-throughs.
Apart from the obvious tax benefits, this classification would allow pass-throughs to more easily allow employees to benefit from ownership stakes. Doing so not only motivates workers to work harder, it stands to expand their wealth and give them a larger piece of the American Dream.
Under the legislation working its way through conference, a business classified as a pass-through may pay at a rate of close to 39 percent while a standard C-Corporation faces a 20 percent rate, albeit with taxes on dividends the amount paid may actually dwarf that 20 percent rate. The fix for this involves an elimination, perhaps through a credit, of the double taxation represented by taxes on dividends. In this way, the code treats all private businesses more or less equally.
Alas, opportunities to reorient the tax code come along once or twice in a generation. And the opportunity to institute such a radical reorientation did not present itself with the razor-thin margins, particularly in the Senate, by which this bill passed.
Trump’s tax reform does not rank as “one of the worst bills in the history of the United States of America.” It is for posterity, anyhow, to make that judgment, and for posterity to make further legislative improvements, which, no doubt, win classification as “one of the worst bills in the history of the United States of America” by some complainer or another.
Hunt Lawrence is a New York-based investor. Daniel Flynn is the author of five books.
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