This article originally appeared on OZY

The White House and congressional Republicans unveiled their unified framework for tax reform they expect to pass before the end of 2017. So will tax reform meet the same fate as Obamacare repeal — failing because three Republican senators break rank? Is this just a replay of Reagan’s supply-side 25 percent across-the-board reduction in marginal tax rates? Or is it closer to the bipartisan 1986 Tax Reform Act that was revenue neutral — not a net tax cut — and simplified the code by culling deductions and credits and reducing individual tax rates?


The outline presented last week by the White House does call for lower marginal tax rates for all Americans who pay taxes. The seven rates — from 10 to 39.6 percent — will be reduced to four: zero, 12, 25 and 35 percent. The standard deduction will double from $6,000 to $12,000 for an individual and from $12,000 to $24,000 for married couples. Your first $24,000 is taxed at the zero rate, and the larger standard deduction means that a whopping 95 percent of Americans will not have to itemize, compared to the third who itemize today.


Forty-five of the 48 Democrat senators wrote a letter to the GOP — before the framework was unveiled — saying they would oppose any tax reform that actually cut taxes, that cut tax rates for all Americans or that did not receive at least eight Democrat Senate votes. That was a not-too-subtle way of saying they would oppose any Republican tax reform.

And they will. But that was expected. No one has ever assumed a single Democrat vote. The Democrat opposition today is the same as its opposition to all tax cuts — they say they benefit the rich. So look out for “studies” saying the Trump/GOP tax cut will benefit high-income earners. Since the plan is only in outline form, much of these early assertions are based on assumptions by critics. But the fact is that this battle will be won or lost by winning (or failing to win) 50 Senate Republicans on the benefits of growth — not by asking for Democrat votes.


So how will this stack up against the 2.2 percent average of the Obama recovery, the 3 percent average growth after World War II or the 4.8 percent rate following the Reagan tax cut? The plan claims to boost growth with three new approaches. First, the corporate rate will drop from 35 to 20 percent. At 35 percent, we have the highest business tax rate of all our significant competitors — China’s 25 percent, Russia’s 20 percent and Canada’s 15 percent. Because the corporate capital gains tax rate is the same as the regular corporate rate, reducing the corporate rate from 35 to 20 percent also slashes the capital gains tax rate and is expected to encourage companies to sell trillions of dollars of long-held land and other appreciated assets.

The corporate tax will also shift from a worldwide tax system — we now tax all earnings by American firms both here in the United States and abroad — to one used by most other countries: a territorial system, where each country only taxes economic activity inside its borders. Moving to a territorial system will start with allowing much of the $2.5 trillion to $3.5 trillion in American earnings to return to the United States, paying a one-time hit of perhaps 8 percent on cash, but with all future repatriation being tax-free. Today’s high 35 percent rate and worldwide taxation makes any American multinational firm more valuable if purchased by a foreign company. Hundreds of billions of dollars worth of U.S. firms have moved to or been bought by foreign businesses because of this self-inflicted wound. This change is expected to attract capital from around the globe and end inversions (relocating a firm’s headquarters to a country with lower taxes) and tax-driven purchases of U.S. firms.

The second growth factor? The move from long depreciation schedules for business investment to immediate and full business expensing. Today if you buy a plant and equipment and you expense the cost that year — not depreciating it over 10 or 20 years — it reduces the cost of new investment. Expensing is scheduled as a temporary five-year measure, but everyone understands that expensing would, like the research and development tax credit, be extended and eventually made permanent.

This tax reform is focused on growth through reducing business taxes, rather than the Reagan 1981 focus on reducing high — 70 percent — tax rates on individual income and the 2003 Bush tax cuts that slashed capital gains and dividend taxes paid at the individual level. Trump and the Republicans have added a new twist, focusing on the 30 million Americans who own “pass through” businesses, where they pay individual tax rates on their business earnings. (These are sole proprietorships, partnerships and subchapter S corporations.) The top rate for pass throughs is higher today than the top rate for corporations. These, usually smaller firms, employ half of the U.S. private sector workforce and earn half of American business income; corporations employ and earn the other half. But past tax cuts have ignored this rather large number of businesses. This time the top rate for pass throughs will drop to 25 from 39.6 percent, the same percentage reduction corporations got when their top rate fell from 35 to 20 percent.


Republicans do know how to do one thing: cut taxes. There is a consensus in the GOP on all the major parts of the tax cut — ending the death tax and the Alternative Minimum Tax, reducing rates on all business income, and simplifying and reducing personal taxes. And the business community from Silicon Valley to the Rust Belt manufacturers are strongly in support of lower rates and expensing. One suspects that 30 million small business men and women and their spouses are a heretofore untapped reservoir of support for tax reduction/reform.

The GOP failed to deliver on the repeal of Obamacare. So they will face voters in 2018, not with the double-barreled “we ended Obamacare and cut taxes” slogan but with one visible, measurable accomplishment: tax reform. The incentives are strong to make it big, pro-growth and to have it fully in effect by Jan. 1, 2018, nine months before Election Day on Nov. 6, 2018.