Tax reform comes with price tag

President Donald Trump, who likes to talk big, promises to unveil a tax reform plan that will include a “massive tax cut” for businesses and individuals. “It will be bigger, I believe, than any tax cut ever,” he told the Associated Press in an April 21 interview.

Boasts like that have allure because the U.S. tax system is a mess. It’s overly complex, riddled with loopholes and inconsistencies, and bad for business. Devising a fairer, simpler system that fans economic growth would give the president a big win.

But tax reform is devilishly difficult to pull off. Cutting taxes without adding trillions to the federal debt is especially hard to do.

The last major tax overhaul came in 1986 under President Ronald Reagan. Republicans and Democrats worked together on that bill. Steven Mnuchin is hoping to hit an end-of-year deadline. White House officials seemed stunned by Trump’s declaration that he’d start in on tax reform as soon as Wednesday. Most likely that’s when he starts the official cheerleading. The devilish details will come later.

The case for tax reform starts on the business side because that’s where an overhaul could make a direct contribution to economic growth: the creation of more jobs. The lower the tax burden, the more competitive American businesses will become, the more likely they will invest at home. U.S. corporations are on the hook for a 39.1 percent tax rate, one of the world’s highest, according to a Tax Foundation report. Savvy companies probably don’t pay that rate, but the ways they reduce their tax liabilities can come at the cost of America’s prosperity. Some multinationals move their headquarters overseas, where U.S. companies also hold more than $2 trillion in profits overseas.

Cutting the corporate rate to, say, 20 percent would make a big difference in how businesses manage worldwide earnings. They’d be more likely to stay headquartered in the U.S. and bring home earnings generated abroad. To recapture some of the $2 trillion out there now, one sensible proposal is to offer companies a repatriation discount: Bring your money home and pay just 10 percent or 15 percent. That tax revenue bonanza could be used by the federal government to repair roads and bridges.

For individual taxpayers, the idea touted by Trump and by House Republicans is to reduce taxes for most people, including the wealthy, and streamline the system by reducing the number of tax brackets, simplifying deductions and closing loopholes. Bear in mind that about 45 percent of U.S. households pay no federal income tax whatsoever, either because they don’t have sufficient income or because their mortgage interest and other tax breaks eliminate their tax liability.

We need to see a realistic plan to pay for cuts. The White House argues tax reform will pay for itself. But we’re talking about reducing revenue to a nation whose reckless presidents and Congresses have accumulated just under $20 trillion in taxpayer debts.

The tax system should be fairer to individuals, and businesses should get a break to be competitive with the rest of the world. There is a way to get this done. But it’s got to improve U.S. prosperity in the short-term without stealing even more from America’s future.