If tax reform were a cartoon, it would have to be Wile E. Coyote and the Roadrunner: Congress starring as Wile E. Coyote and Tax Reform itself is the elusive Roadrunner.
Congress seems to have thrown everything at tax reform over the years, but almost unbelievably, comprehensive tax reform has escaped action time and time again. But, as the last quarter of Trump’s first year begins, the Administration and congressional Republicans once again have set their sights on an important goal: passing comprehensive tax reform this year.
In fact, Gary Cohn said in August that tax reform could be done before Congress’s Thanksgiving recess – that isn’t going to happen, but it will likely at least pass the House. And, two months ago, the Administration pushed out what they called their “Tax Framework.” And even then, there seemed to be broad consensus on most of the provisions in the Tax Framework.
However, like Wile E. Coyote drawing up his plans to catch the Roadrunner, right after the broad consensus is agreed to – that is where the plans begin to get complicated. The Democrats want lower individual rates – which have an immediate impact on take-home pay, spending, and saving. The Republicans want corporate tax reform, which has greater economic effects – jobs, economic growth, international competitiveness, and so forth – but that usually isn't as noticeable as a few extra dollars in a paycheck.
But, this type of needle-threading strategy is where the plan always seems to go wrong. The Coyote wants the Roadrunner to turn right, and the Roadrunner turns left. He wants the Roadrunner to set off a trap, but the Roadrunner zips through so fast it doesn’t go off until the Coyote triggers it himself.
Fortunately – unlike the Coyote and the Roadrunner cartoons though – sometimes Congress actually catches tax reform. And, Republicans in the House are on schedule to claim the first real victory this week.
That is good news because we need tax reform. The U.S. corporate rate is one of the highest in the world. The rest of the developed world has realized what Ronald Reagan and others said 40 years ago. Our high rates are slowing job creation, wage growth, and even giving corporations the incentive to relocate. But, you don’t have to take my word on it, a recent study by two tax experts shows how important reducing our corporate rate is for job creation and wages.
There were several important findings highlighted in their paper, including the fact that a 10-20 percent reduction in the rate would translate into a 2-10 percent boost in long-term employment. Coupled with that boost, a one percentage point reduction in the corporate income tax would boost income by .3 percent to .6 percent; or about 3-12 percent, given the Trump Administration’s proposal. By increasing the rate that businesses are willing to bring back taxes – repatriation taxes – the number of companies locating to the US would increase ~33 percent.
The benefits of cutting the corporate rate are clear. Pairing this with cuts to individual rates – while simplifying the tax code and closing loopholes – will have an immediate and long-term impact on economic growth. The unprecedented post-Trump stock market boom is an indication that investors are excited about the future: this is the chance for Republicans to make those gains stick and lay the foundation for the next generation of American prosperity.
So, the current bills are economically sound. What does that mean for the future of tax reform?
Well, the question at the end of each cartoon is if the Coyote’s plan is good enough to finally catch that annoying bird.
In other words, there is still hope that bipartisan tax reform can be accomplished – if Democrats can come around ahead of the House vote. In addition to the agreements by the “Big Six,” a handful of moderate, influential Democratic senators have signaled that they support pro-growth tax reform. And after all, President Obama proposed cutting the corporate rate only a couple of years ago – and he picked his vice president from the low-tax, business-friendly Delaware.
As watchers of the cartoon understand at some level – the Coyote has to catch his share of roadrunners at some point in his life … he is still alive and can afford lots of cool gadgets from Acme. Likewise, regardless of whether Democrats and Republicans can get past the partisan bickering, comprehensive tax reform must pass soon – the consequences of not doing so are too great for everyone.
We don’t want to hear “Beep Beep” again with this Congress.