The Senate-passed tax bill is a policy triumph that will provide a shot of performance-enhancing drugs to the veins of the economy. It's not perfect, but with the combined effect of cutting business tax rates, eliminating the state and local tax deduction and repealing the Obamacare individual mandate tax, we are at the precipice of the biggest conservative policy victory since the Reagan years.
If Republicans were wise, the House would vote immediately to approve the Senate bill and get it to President Donald Trump's desk for signing before anything can go wrong. (Think Obamacare repeal fiasco.)
But since they are insisting on a conference, there are still a number of ways to further improve the bill, grow the economy even faster and counteract some of the liberal complaints against it. Some of these reforms were in the original campaign tax plan that Larry Kudlow and I helped draft for then-candidate Donald Trump.
Here they are:
1) No stealth capital gains tax hike.
The Senate bill changes the rules for capital gains taxation. It requires shareholders to sell their oldest shares in a company before their newest purchased shares. The older the share, the larger the taxable capital gain.
This might make sense, except that the gains on long-term stocks are not adjusted for inflation. So on many sales of long-held stock, as much as half of the reported and taxable "gain" is due only to the compounding effect of inflation.
This new "FIFO" (first in, first out) rule will require millions of Americans to pay additional tax on phantom gains and will discourage the very long-term investment that the economy needs now.
Worse, under the Senate bill, there is an exception for mutual funds and other institutional funds. Companies such as Fidelity and Vanguard would be exempt from the tax, but not the little guy who wants to buy and sell stock on his own. Unfair. Kill it.
2) Repeal the corporate state and local deductions.
Big companies, such as Boeing and Microsoft, will get to continue to deduct their state and local taxes. Small businesses won't. This is absurd and only shows the continued power of K Street swamp lobbyists. This deduction requires taxpayers in low tax states to subsidize companies in high tax states. Get rid of the corporate state and local deductions, and states such as New Jersey, Iowa and Pennsylvania will be forced to cut their corporate tax rates to stay competitive. It's a win-win for everyone.
3) Cut the highest income tax rate.
The money raised by eliminating the state and local tax deduction for corporations should be used to pay for a reduction in the highest income tax rate. This would provide relief for people living in high tax states, such as New York, Connecticut and California (who lose the state and local deduction), and would allow small businesses to get a bigger tax cut as well. As Arthur Laffer and Steve Forbes remind us, the highest income tax rate is the one that does the most harm.
4) Close the George Soros loophole.
George Soros just recently gave $18 billion to his family foundation, and the money went in tax-free. This is possibly the biggest tax dodge in American history. Millionaires and billionaires who give money tax-free to private foundations should pay capital gains taxes on these assets, then give it to the foundation. This will raise hundreds of billions of dollars for the government over time and can then lead to a lower capital gains tax for everyone.
These are small tweaks to the tax bill that would make a big difference for growth and fairness. But above all else, Congress, stop dithering, and get going to deliver this pro-growth tax bill before Christmas.
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