Here’s a GOP tax plan that can bridge the political divide

Nearly half of low- and middle-income earners pay no federal income tax. So how can President Trump give them a tax cut and stimulate economic growth as he promised?

Step one is to take a page from President Barack Obama’s playbook and enact a payroll tax holiday similar to the one Americans enjoyed in 2011 and 2012. Only this time the tax holiday would be permanent.

{mosads}For the millions of taxpayers who don’t pay any federal income tax, the payroll tax that goes to Social Security is their biggest federal levy. Abolishing that 6.2-percent tax would provide working Americans with an immediate and substantial increase in take-home pay. A wage earner with a $50,000 income would take home $3,100 more each year.

This would amount to $500 billion more in the pockets of working families every year. It would also kill the Democrats’ “tax breaks for the rich” argument. Just as Obama’s tax holiday didn’t harm Social Security, neither would this one. The funding would be replaced from general revenue.

How can the government make up for the revenue lost from the payroll tax cut? One idea: eliminate the deduction that businesses get for the wages and benefits they pay their employees. Our modeling suggests this would generate a massive $11.6 trillion in revenue over 10 years.

No one likes to lose a tax deduction, but companies don’t hire people to get a tax break; they hire people to produce value for their owners or shareholders. Besides, employers would benefit from the same payroll tax cut that their employees would receive — the payroll tax is shared by employers and employees — saving them another $500 billion a year. 

Abolishing labor deductibility also generates enough revenue to lower the tax rates on business income five percentage points below the rates envisioned by the House Republican “blueprint” for tax reform, according to our modeling. That translates into a 15-percent corporate rate and a 20-percent rate for businesses that pay taxes using the individual tax-rate system.

Add the House blueprint’s other provisions, including full expensing of capital investment and a shift to a modern territorial system for taxing international income, and suddenly, employers are looking at an attractive trade-off.

The new system would be among the most competitive in the world. The Tax Foundation reports that, of the 35 countries in the Organisation for Economic Co-operation and Development, 30 currently have more competitive tax systems than the U.S. This fact alone should have members of Congress lining up to support tax reform that lowers rates significantly.

Our modeling shows the proposal would fuel U.S. economic growth, boosting the gross domestic product nearly seven percent over a decade. That might not sound like much but, in a $19 trillion economy, it’s real money, particularly since growth compounds over time.

Taking the additional economic growth into account, this modified House blueprint would be roughly revenue-neutral, reducing federal revenue by less than one percent over a decade. Deficit hawks in Congress would have little reason to oppose the measure.

Faster economic growth under this modified blueprint would lead to higher real incomes and shared prosperity. Economic benefits would be shared across all income quintiles. Our modeling suggests after-tax income increases ranging from 3.9 percent to 4.2 percent.

Slashing payroll taxes could turn what’s now a partisan exercise into something that some Democrats, as well as most Republicans, could accept. Add President Trump’s childcare proposals and a Republican commitment to link tax reform to additional infrastructure funding, and congressional Democrats would have little excuse not to work with Republicans (for a change).

Now is the time for bold, bipartisan tax reform that restores America’s tax competitiveness and promotes economic growth and shared prosperity. Cutting the payroll tax and eliminating the deduction for labor compensation would allow the House Republican plan to do just that.