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The GOP Tax Reform Plan Has A Huge New Flaw

Reported on Fortune: The Republican Party has long championed granting companies a giant tax break for plowing funds into new plants, productivity-enhancing equipment, and groundbreaking IP. Indeed, no tax reform measure would do more to recharge America’s tepid growth than a blueprint that radically lowers the cost of fresh capital investments. A surge in capex would create millions of new jobs, fast-track GDP, and if done right, even ease the looming threat of crushing deficits and debt.

The new GOP tax platform not only won’t do the job, it doesn’t come close.

In fact, the latest proposal is a major disappointment, because it aims far lower than the Republicans’ previous, super-ambitious blueprint. In late September, President Trump’s top economic advisers and GOP congressional leaders unveiled their long-awaited framework for tax reform. The nine-page outline proposes lowering the overall statutory tax rate from 35% to 20% for corporations, and from 39.6% to 25% for “pass-through” businesses, levied on the owners’ individual returns.

On page 7, the framework addresses the crucial issue of “expensing capital investments,” and its proposal amounts to a surprising retreat. The proposal advocates allowing businesses to “immediately write off (or ‘expense’)” the cost of newly-acquired assets, but with two big exceptions—and those exceptions are the killers. First, the 100% deductions would apply mainly to machinery, equipment and IP, and would exclude all “structures,” meaning factories, the backbone of America’s capital stock. Second, the new regime would remain in force for “at least five years,” after which it would either expire or need to be re-enacted by Congress. And a temporary, sunsetting reform package that moves the tax code in the right direction then reverses course is barely better than none at all.

Those two exceptions are designed to minimize the loss of federal revenue from full-expensing. That’s a crucial objective, because in order to pass with just 51 votes, no tax reform package is permitted to raise deficits beyond their current projected level in 2027. And prominent GOP budget hawks led by Sen. Bob Corker of Tennessee have pledged to oppose any proposals that swell deficits and debt.

By contrast, the House Republican proposal from June 2016 was a lot more daring, and a lot more expensive. It recommended 100% expensing for all capex, including plants and other buildings, and also proposed making the new system permanent. According to the free-market-leaning Tax Foundation, the House blueprint would have slashed future receipts from the corporate income tax by $1.45 trillion from 2018 to 2027, even assuming a strong boost to economic growth. That would shave 37% from the $3.9 trillion the CBO projects that the corporate levy will collect over that period under current law, and raise the projected annual deficits by as much as $200 billion by 2027, or 14%.

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