No substance in tax reform plan

The first objective stated in the Republican plan for US tax reform is simplification. And that does appear to be on offer. For example, there are seven federal income tax brackets in the US, ranging from 10% to 39.6%. The Republicans want just three: 12%, 25% and 35%.

Simplicity is of no use, however, when not backed by substance. The plan, astonishingly, does not specify what incomes the three brackets would apply to. This is the information that would give the proposal meaning.

Do we know, at least, that the highest earners will pay less? No. The plan says a fourth, higher rate “may apply” to the highest earners. Who will fit in this additional category and what rate they will pay are, again, not specified. This is not reform. It is not a laying out of principles. It is rhetoric.

The plan advocates a move to a territorial system of corporate tax, rather than the current worldwide tax system. Ideally, this would encourage some of the $2.6-trillion of US foreign earnings trapped abroad to come home. The plan would tax those trapped earnings at a one-time, low rate — again, unspecified — and allow future foreign earnings to come home tax-free.

There is a basic issue with such a plan though. Unamended, it would incentivise maximisation of foreign profit. Companies in tech and pharma, for example, can place the earnings from their intellectual property in tax havens.

Real reform lowers rates and broadens the base. The plan indicates the lower rates it wants — specifically a much lower rate for corporations and the owners of partnerships and small businesses — but other than general talk about eliminating deductions, the basebroadening is scarce.

Most of the biggest loopholes — mortgage interest, charitable contributions, the carried-interest exemption — go untouched. London, September 29.