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Democrats Should Stop Worrying and Learn to Love GOP's Tax Plan

Trump's tax plan has something for everyone.
Image: Chuck Schumer
Talking taxes. Michael Reynolds / EPA

President Donald Trump and Republican congressional leaders have outlined the framework for a powerful, pro-growth tax reform plan they intend to pass and sign by Christmas. We believe this plan will turbo-charge the U.S. economy by fixing major flaws in the federal tax code, while reducing tax rates and providing relief for individuals, families and employers nationwide.

To facilitate all these pro-growth changes, various credits and deductions will need to be scrapped to offset revenue lost because of rate cuts. The most important "pay for" is repeal of the federal tax deduction for state and local taxes, or SALT. It would raise a significant amount of money — $1.8 trillion in higher federal revenue over a decade — according to the non-partisan Tax Foundation, which can then be plowed into lower income tax rates for all Americans.

Democratic politicians and progressive activists who oppose tax breaks for “the rich” should support repealing the state and local tax deduction because its benefits will go disproportionately to upper-income taxpayers. This is especially true for those who live in high tax states and cities like San Francisco, New York, Los Angeles and Philadelphia.

Today taxpayers can deduct both state and local income and property levies when calculating their taxable income for federal income tax purposes. But this just provides an incentive for state and local politicians to spend more than they would were that provision not in the tax code.

Heck, even the Tax Policy Center acknowledges the SALT deduction leads to larger state and local government. “By lowering the net cost of taxes,” the center’s March 2016 report notes, the SALT deduction “encourages state and local governments to levy higher taxes and provide more services than they otherwise would.”

New York and California — which have some of the nation’s highest state and local tax burdens — receive almost a third of the total nationwide value of the deduction. Meanwhile, this deduction matters far less to taxpayers living in low-tax states, especially the states with no personal income tax.

Democrats are in a tough place arguing to keep this deduction since, as previously mentioned, it is used by — and disproportionately benefits — high-income Americans in richer states and cities. Households with income in excess of $100,000, for example, reap the majority of the benefits. Opposition to scrapping this preference makes the Democrats’ repeated public demands to tax “the rich” ring hollow.

Allowing taxpayers to deduct their state and local taxes does not create jobs or help the economy grow. It helps state and local government bureaucracies grow.

Allowing taxpayers to deduct their state and local taxes does not create jobs or help the economy grow.

Wait right there. Ending tax deductions and credits means someone's taxes are going up. Whose? Why? And won't that create opposition to the entire reform? The answer is no, not in the context of the rate reduction and all other positive changes included in the tax framework put forth by the White House and Republican leadership in Congress.

Eliminating the state and local tax deduction and doing nothing else would certainly be a tax increase. However, repealing it as a trade-off to get all the rate reduction and other desperately needed changes included in the GOP tax plan is a great deal for U.S. taxpayers. The gross domestic product-boosting features of the framework will soon be put into legislative language.

We believe that the GOP's plan will cause the corporate tax rate to fall from 35 percent to 20 percent, making U.S. companies more competitive in the global economy. China’s corporate rate stands at 25 percent, for example, Ireland is at 12.5 percent, Great Britain at 19 percent, and Canada levies a 15 percent corporate rate.

Even France’s 33 percent rate is more competitive than the U.S. rate, given that America has the highest corporate tax of advanced economies. Now French President Emmanuel Macron has proposed cutting his nation’s rate to 25 percent.

In addition to healing the self-inflicted economic wound that is the current U.S. corporate tax rate, Congress will soon begin moving a reform plan that ends the double taxation on income earned abroad by U.S. companies.

By some estimates, $2.5 plus trillion in American business earnings remains stranded overseas, money that should be allowed to be repatriated back to the U.S. without the stiff double taxation penalty.

Meanwhile, the 30 million smaller businesses we estimate pay taxes through the personal income tax system (aka "pass-throughs") will see their rates fall from a high of 44 percent to 25 percent. Business investment can largely be expensed the first year, replacing long depreciation schedules.

For individuals and families, the number of personal income tax brackets will be cut to four: 0 percent, 12 percent, 25 percent and 35 percent. The standard deduction will double from $12,000 for a married couple to $24,000. The so-called death tax, which has existed in some form or another since 1797, finally meets its own demise and the Alternative Minimum Tax will be repealed.

Contrary to conventional wisdom, overtaxed citizens of blue states and deep blue cities will actually be among the biggest winners from tax reform that ends the SALT deduction.

Why? Because the federal tax subsidy driving higher state and local taxes will be eliminated and the bias against state and local tax reduction will end with it. Different people will win elections in cities and states that find their overspending no longer subsidized by others.

The federal government, especially a federal government that is $20 trillion in debt, has no business subsidizing the overspending of governors like Jerry Brown of California, Andrew Cuomo of New York, Dannel Malloy of Connecticut and their ilk.

By ending this inappropriate practice as part of tax reform, Congress can make tax relief for all Americans a reality.

Grover Norquist is president of Americans for Tax Reform.

Patrick Gleason is Americans for Tax Reform’s director of state affairs.