Evaluating Trump’s Tax Cut And Tax Reform

The commentariat has spilled millions of gallons of digital ink and spoken millions of syllables on the pros and cons of President Trump’s tax cut and the degree to which it represents real tax reform.

Supporters point to the lower 21% corporate tax rate and expensing (100% first-year write-off) of investment spending, the latter for only five years, but perhaps to be extended upon its expiration.  In combination, these should encourage investment in new business, expansion of existing business, new jobs, higher wages, and a higher return to capital.

Supporters also praise doubling the standard deduction, which is projected to reduce the share of individual tax returns with itemized deductions from about one-third to one-tenth.  This is an indirect way of simplifying the tax code by reducing the benefits of itemizing.  Ideally, it would be nice to eliminate all deductions, preferably by sheer brute political will in exchange for yet lower rates.

A 500-page law with 500 pages of explanation cover a lot of ground.  I will leave details to the tax lawyers and accountants.

Here I want to put the tax reform into a broader context, namely, how does it compare with an ideal income tax code:  a progressive, fully integrated, cash-flow expenditure tax.

You are correct if you recognize that ideal as the Hall-Rabushka Flat Tax, first proposed in 1981, which many commentators have called the “gold standard” of tax reform.  (The current edition of the book is free online at the Hoover Press.)  Its core features include (1) expensing of business investment, (2) a single flat rate on all labor and business income, (3) full integration, (4) progressive in the form of a personal allowance for all taxpayers based on the composition and size of households, in effect a zero rate up to a specified level of income, and (5) no taxation of interest, dividends, capital gains, gifts, and estates.

A variation of the flat tax has been adopted in more than 40 countries and political jurisdictions around the world.  Estonia, for example, has eliminated the corporate income tax.  I encourage you to have a look at specific legislation in these territories to see how a flat tax has been put into practice.

To summarize, pieces of the new tax code are a good start.  Much more remains to be done.  Perhaps in a second Trump term!