Alex Brill, resident fellow at the American Enterprise Institute, published a new report examining the House GOP’s tax reform plan released earlier this year titled, “A Better Way: A Pro-Growth Tax Plan for All Americans.” Brill’s report summarizes the plan, analyzes some key components, and estimates the budgetary impact of the individual income tax provisions along with an estimate of the effective marginal tax rate on new investment.
Digging deeper, on the individual tax reform side, Brill highlights the plan’s proposal to replace the current seven ordinary income tax rates with three, along with 50 percent exclusion for capital gains, dividends, and interest income. Furthermore, the plan would reform the standard deduction, additional standard deduction, personal exemption, and child tax credit. Finally, the plan would repeal the alternative minimum tax (AMT) along with the estate tax. All in all, Brill finds that the “plethora of individual income tax reforms approach revenue neutral at the end of the budget window and beyond.”
When it comes to corporate tax reform, the GOP plan does what many on both sides of the political aisle are calling for – it reduces the federal corporate tax rate from 35 percent to 20 percent. It would also repeal the corporate AMT along with current rules for depreciation, replacing it with immediate expensing for new investment in equipment, structures and intellectual property.
Under the plan, the average marginal tax rate on new corporate investment drops from the current 31.6 percent (without bonus depreciation) to 17.9 percent under the proposed plan. Equity financed corporate investment would drop from 38.5 percent to 16.9 percent. This decrease is “likely to spur considerable amounts of new investment.”
Brill notes that, “With the inclusion of the business tax reforms (primarily lowering the corporate tax rate to 20 percent) and the repeal of the estate tax, this proposal is expected to reduce revenues relative to current law using standard revenue-estimating methodologies. A dynamic or macroeconomic analysis of the plan, a subject for future research, is likely to find positive economic effects, including offsetting revenue gains from growth.”
This is good news for both individuals and businesses that have been crying out for tax reform that produces a pro-growth, pro-investment tax code that is simplified and uniform. The House GOP plan hits that mark. As Brill concludes, “The House Republican tax reform plan represents a bold reform framework, one that simplifies the tax system, dramatically reduces marginal tax rates on new investment and capital income, and modestly lowers the average marginal tax rate on labor.”
Let’s hope the new administration and Congress are ready to come together and make this “bold reform” a reality when they take office in January.