Working together, supply-side conservatives and populist conservatives can forge a pro-growth, pro-family, pro-work, anti-woke, and America-first tax code.
Working together, supply-side conservatives and populist conservatives can forge a pro-growth, pro-family, pro-work, anti-woke, and America-first tax code.
W hen J. D. Vance was announced as Donald Trump’s vice-presidential candidate (and perhaps intended heir apparent), policy folks immediately did an inventory to see where their pet issues fit into the populist/new-right regime. No domestic policy issue early in a second Trump term is going to be more important than tax reform, so it’s important that those of us working on pro-growth tax policy make some room for the policy preferences of the new administration while fusing it onto what’s come before.
Below are ten suggestions for tax reform in the Trump-Vance era.
1. Make the Tax Cuts and Jobs Act (TCJA) permanent. The first duty is to do no harm. Unless the TCJA is made permanent, income-tax rates will rise across the board. The standard deduction and the child tax credit will be cut in half. The alternative minimum tax (AMT) will make an unwelcome return. Family-owned and pass-through businesses will face much higher tax rates than they do today. The tax code will be heavily biased against business investment in America.
2. Cut the corporate rate to 15 percent or less. President Trump has said this is his goal (the TCJA having already permanently brought this rate down from 35 percent to 21 percent), and he’s right to do so for two reasons. First, around half of the corporate-income tax is paid by employees in the form of lower wages — this is a pay raise for American workers. Second, the high-tax Europeans want to impose a 15 percent minimum tax, so we might as well beat them at their own game. Only plucky Ireland at 12.5 percent would have a lower corporate rate than ours. There’s a reason you don’t read about corporate inversions anymore, and a lower tax rate would only accelerate the trend of companies moving to America.
3. Finish the job on full expensing. In tax policy, there is no greater overlap between supply-side conservatives and America-first populists than on full expensing. Making TCJA permanent goes a long way there — research expenses would again be deductible, and business equipment would be fully expensed the first year. We should add to this all business investment in America — real estate, inventories, intangibles like goodwill, etc. Tax economists agree there is no more powerful tax reform for economic growth than full expensing for businesses. We can help pay for this by repealing the crony capitalist “Green New Scam” tax credits enacted by President Biden and a Democratic Congress in 2022.
4. Border adjustability is better than tariffs. You often hear loose talk about using tariffs to pay for tax reform. For several good reasons, this is a very bad idea. But that doesn’t mean there isn’t a pro-growth way to scratch that itch. The original U.S. House version of TCJA featured a border-adjustable tax system, where exports were not taxed but imports were. This isn’t a tariff, but it walks and quacks like one. When combined with a 15 percent corporate-tax rate and full expensing for everything, it’s something for Congress to look at, and it should make conservatives of all stripes happy.
5. Go after the woke nonprofit sector. Scott Hodge of the Tax Foundation has done some masterful work on how the so-called nonprofit part of our economy is too big, too arbitrary, and too political. Now is a good time to start to dismantle the tax exemptions for giant corporations masquerading as charities — companies that overwhelmingly are part of the Left’s coalition. The starting point here is universities, of course, but there’s a lot more work to do — from nonprofit hospital conglomerates to the AARP earning millions from selling health insurance tax-free.
6. Make peace with the child tax credit. Too many supply-side conservatives have a disproportionate distaste for the child tax credit. This attitude even contributed to the partial expiration of business-expensing provisions from the TCJA. On the other side of the coin, the populist conservatives are far too willing to let the child credit become a welfare program. Any tax reform should have a generous child tax credit (it’s currently $2000 per child, but could and should be larger and inflation-indexed); if it’s to be refundable, there must be a strong work requirement, and it should only go to families where the parents and children are citizens or legal permanent residents.
7. Reform the earned-income tax credit and the payroll tax. For many American families, the largest tax they pay is the Social Security and Medicare FICA payroll tax, which kicks in at the first dollar of income. Last year, 23 million tax returns claimed the EITC, which was originally intended to rebate and coordinate with the payroll tax. EITC has child benefits that don’t coordinate with the refundable child tax credit. There are large disincentives to earn more income as one becomes less eligible for these payments.
The time has come to reform these three tax items — the payroll tax, the EITC, and the refundable child credit — so that together they can induce able-bodied poor people, who are in America legally, to work, without punishing the working poor as they move up to the lower middle class.
8. No tax on tips. If there’s one tax cut a reelected Trump will insist on, it’s no tax on tips. Rather than roll their eyes at how unserious an idea this is, tax experts in the conservative movement ought to help design it well. After all, it’s not as if the tax code doesn’t already have wonky deductions and exclusions here and there. It will be important to keep this exclusion focused on the intended target — lower-income workers in fields that historically have been tipped by custom in the United States. It’s meant for waitresses at the diner, not the lawyer who has lunch there and decides to start charging her clients in “tips” as a tax shelter for her S-corporation.
9. End corporate SALT to give marriage-penalty relief to family SALT. The state and local tax deduction (SALT) has been a source of consternation within parts of the House Republican conference, especially the New York members. TCJA affixed the SALT deduction at $10,000 for all types of tax returns (single and married), creating a marriage penalty. An easy swap would be to deny a SALT deduction for big corporations and to use that money to create a $20,000 SALT deduction for married couples. This SALT-deduction increase would have to be means-tested so that it benefits families with no higher income than the mass affluent level. When combined with what the TCJA already does — a doubled standard deduction, lower rates, and the permanent end of the AMT — this swap should satisfy any SALT concerns within reason.
10. Allow 529 accounts to pay for homeschooling. This was intended to be part of the original Tax Cuts and Jobs Act but was disallowed by the Senate parliamentarian. Already, 529 plans can be used for college tuition and fees, trade-school tuition and fees, up to $10,000 of annual K–12 private tuition, and a “Roth IRA” booster for recent college grads. It makes sense to allow 529 plans to also be used to cover expenses for the more than 3 million kids in America who are homeschooled.
Working together, supply-side conservatives and populist conservatives can forge a tax code that gets each side what it needs: a pro-growth, pro-family, pro-work, anti-woke, America-first tax system.