The tax reform package just passed is a mixed bag, but it’s a clear improvement over the current system. Amidst all of the details, there are 4 takeaways that will be good for the country.
First, the $10,000 limit for state and local taxes means that tax increases for upper (and some moderate) income earners at the state level will no longer be subsidized by the federal government. As a simple example, with unlimited SALT deductions, a $1000 tax increase at the state level would reduce the federal tax burden of an itemizer with a 35% marginal rate by $350. States will be under greater pressure to manage their own fiscal houses without indirect federal subsidies.
Second, the increased standard deduction means that many middle-income Americans will be able to reduce their taxable income without itemizing, thereby weakening the effect of political intervention through subsidies and deductions. This could make the transition to a flat tax—or something close—easier one day.
Third, reducing the corporate tax rate from 35% to 21% will level the business playing field for firms. Companies will invest a significant part of the savings, which will drive economic growth in the near term. The actual benefits of this change are hard to calculate, but it’s a definite plus for the economy and jobs.
Finally, the tax plan eliminates the individual mandate for health insurance. The left’s contention that Trump is “taking healthcare away from millions of Americans” is a lie. Eliminating the mandate only gives them a choice without a tax penalty. The ACA is built on the mandate, so this simple change will bring Obamacare back to the forefront. The ball is now in the Democrats’ court, because the program will struggle even more without increased subsidies.
The reform package didn’t go far enough, but compromise was inevitable.