Maximizing economic growth should be the priority of tax reform

Classic tax reform means lower rates in exchange for closing loopholes. The lower rates promote economic growth. But we need to make sure that is not undercut by eliminating helpful deductions. 

President Trump and his Republican allies in Congress have promised to lower individuals’ income-tax rates and generate more job creation by reducing the rates businesses pay. This will give the economy the jolt it needs to kick into higher gear, generating some 1.7 million new jobs and boosting wages by nearly 8 percent, according to the Tax Foundation.

This is definitely the kind of change that will Make America Great Again.

{mosads}Of course, nothing is ever that simple in Washington. Democrats want to spend more of your tax dollars. There are a lot of ideas out there to raise more tax revenue to offset the rate reduction, like limiting charitable contributions or the amount of mortgage interest you can deduct. But trying to end those highly popular deductions might just bury the whole tax reform project with the political blowback.

Antigrowth ideas would end some deductions for small-business investments and limit the amount of money companies can deduct for investing in research and development. Another counterproductive idea would change how the federal government taxes partnerships – like doctor’s offices and clinics, law firms, and other professional associations such as for architects or accountants.

Under the proposal, these partnerships would have to pay taxes on income they haven’t even received. In other words, taxing phantom income. Here is how it works: Imagine your child is sick and you go to the pediatrician for a check-up. That doctor would then owe taxes for treating your child whenever he or she sends you a bill, even if you or your insurance company take a few weeks, or months, to settle up.

This may seem like a small change, but just consider how this would impact a pediatrician who bills his patients for visits in November or December, the height of cold and flu season, only to be paid in February or March – which is fairly standard for most insurance companies. He would have to scrounge for the money to pay taxes on that visit before he even gets paid for it.

Forcing partnerships to adopt so-called “accrual” accounting methods, rather than leaving each taxpayer free to choose the best for their business, would make the tax code more complicated, not less, and hurt business and growth. Worst of all, it doesn’t even generate more money for the government. This change is a complete shell game to manipulate outdated Congressional Budget Office rules, borrowing money from future years to fill in whatever holes tax reform might create over the first decade.

Reagan led adoption of a tax cut, which actually doubled revenues over the first decade. That was because of the booming economic growth that resulted, as increased growth increases revenues.

But mandatory, forced accrual accounting is counterproductively anti-growth. Rep. Richard Hudson has led the way by signing a letter to protest this change. Other conservatives, such as Reps. Mark Meadows and Mark Walker, can add their voice to this debate to maximize the economic growth that comes from tax reform.

Tax reform is long overdue. But maximizing the resulting economic growth should be the top priority.

Peter Ferrara is a senior fellow at the Heartland Institute and senior policy advisor at the National Tax Limitation Foundation. He is also principal and general counsel at the Raddington Group, an international economic consulting firm. He served in the White House Office of Policy Development under President Reagan, and as associate deputy attorney general of the United States under President George H.W. Bush.

The views expressed by contributors are their own and are not the views of The Hill.