Larry Kudlow, the Reagan administration economist who also advised the Trump campaign, said the Republican tax reform plan threatens to “hurt a lot of different people” with changes to personal income taxes. He also said corporate taxes are the “sickest part of our tax system” in an interview with Politico.
"The individual side of this is maybe not the worst thing I've ever seen,” he said in a podcast. “But when you end the state and local deduction, because rates are still relatively high, you are going to hurt a lot of different people. So the internal logic was not good and this is not a true tax reform bill.”
The current system allows people to deduct state and local income taxes from their gross income before paying federal taxes. That means residents of New York, California and other high-tax states get a break. People who live in Texas and Florida, which are among the states that don’t tax income, have nothing to deduct. That has led critics to say the no-tax states are subsidizing the high-tax states.
President Donald Trump made tax reform a key part of his campaign platform while promising to boost jobs. Kudlow, who advised Trump and lawmakers on lowering the corporate tax rate, said the cuts will lift growth and boost wages even if it means higher short-term deficits.
"The sickest part of our tax system is the business side because of international competitive reasons and because of American's prohibitively high tax rates ... Profits have been coming in rather well over the last 10 years,” he said. “But the money is going offshore and that's really hurt, not only investment it's also hurt wages."
Republicans propose to cut the corporate tax rate to 20 percent from the current 35 percent, although companies are able to claim a variety of deductions to reduce their effective tax rate. Shareholders also pay a tax on dividend income they receive from companies.
Senate Republicans are discussing adding provisions to their tax bill that could trigger up to $350 billion in automatic tax increases over 10 years beginning in 2022, two people briefed on the plan told Bloomberg News.
Republican senators including Bob Corker of Tennessee and James Lankford of Oklahoma sought the trigger to prevent the tax cuts from increasing federal deficits. Senate leaders hope to hold a floor vote on the bill on Thursday or Friday.
The bill is estimated to cut federal revenue by more than $1.4 trillion over 10 years before accounting for any economic growth it might produce.
Raising $350 billion would mostly reduce the $516 billion revenue loss that the right-leaning Tax Foundation estimated would result from an earlier version of the bill. The estimate accounted for possible macroeconomic effects.
The official Joint Committee on Taxation is aiming to release a macroeconomic score of the bill late Wednesday.
Critics of the corporate tax cut say it won’t help the U.S. economy by encouraging companies to invest in growing their operations.
“Because the bill requires to do nothing specific with this money, it will be used to repurchase more stock and increase dividends,” hedge-fund manager Michael Lewitt said in the December issue of his Credit Strategist newsletter.
The Federal Reserve cut interest rates to record lows during the 2008 financial crisis to urge spending, punish saving and give consumers and companies access to cheaper capital. Corporations responded by boosting their borrowing to record levels while buying back stock and paying out dividends.
“This is money they didn’t spend on hiring more workers, starting new R&D projects, building new plants and buying new equipment,” Lewitt said. “Congress should create greater incentives for investment in intellectual and physical capital rather than financial engineering.”
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