RUTHFULLY YOURS

The bill’s biggest achievement is reforming at long last the self-destructive U.S. corporate tax code. The top U.S. rate of 35%—highest in the developed world—will fall to 21% on Jan. 1. Cash currently held overseas will be taxed at a 15.5% one-time “deemed” repatriation rate, and America will move to a territorial system that allows money to be taxed where it is earned. The bill includes rules to prevent companies from concealing taxable income, especially on intangible assets such as intellectual property. And it sweeps away billions of dollars worth of industry-specific loopholes that misallocate capital.

All of this will go a long way to restoring American competitiveness that has eroded over several administrations. Even Barack Obama acknowledged this problem, though he declined to do anything lest some large business end up with a tax cut.

The same economists who presided over the weakest recovery since World War II now say none of this is needed with the economy finally growing at 3%. But the faster growth never materialized when they were in power, and this expansion has been notable for slow business investment and weak productivity growth.

This GOP tax reform—including five years of 100% immediate business expensing—is aimed directly at that weakness to keep the expansion going even as the Federal Reserve raises interest rates. This isn’t a demand-side “sugar high.” These business tax changes are supply-side reforms that will increase the economy’s productive capacity.

Reducing the cost of capital should raise business investment and invite a capital inflow to the U.S. More investment means more hiring and more productive workers, which is what increases wages. Especially with a tight labor market, the share of income that goes to workers should increase. After eight years of trying to redistribute income through higher taxes and more subsidies, why not try a return to growth economics?

***

The individual tax reform isn’t nearly as ambitious. The GOP has rearranged some furniture to try to give everyone a tax cut while trying not to change the distribution tables of who pays taxes. The one bow toward simplification is nearly doubling the standard deduction to $24,000 for married couples, which means most taxpayers will elect not to itemize.

Far more confusing is the reform for business owners who declare income on personal returns, known as “pass-throughs,” which won a 20% deduction for some business income. Smaller businesses deserve tax relief but the deduction contains considerable risk of gaming.

For instance: A salaried manager at a corporation would pay a top marginal rate of 37%, yet a store owner gets a lower rate. This favors some industries over others, and the better route would have been cutting the top rate to the 1986 reform rate of 28%. Some lawyers, accountants and other professional services can claim some income against the deduction. And you bet they will: Look out for the college basketball coach who tries to become an LLC.

Yet Republicans deserve credit for at least trimming the top rate on individuals to 37% from 39.6%. The conferees dumped the House’s bubble bracket that slammed some folks with a 45.6% top rate. The 2.6-point top rate cut won’t increase the incentives to work by all that much, though the move is significant as a matter of principle that tax reform means lower rates for everyone. And lowering the top rate took political courage amid tendentious attacks from left and right.

A lower top rate also offers relief to productive earners in high-tax states who will lose most of the state-and-local tax deduction. That subsidy for progressive politicians in Sacramento and Albany will be capped at a $10,000 write-off for property, income and sales tax. A full repeal would have been better policy, but the accommodation brings along Republican Members in New York and California.

The worst individual tax policy is the doubling of the tax credit for children to $2,000 from $1,000. This costs half-a-trillion dollars and contributes nothing to growth because it doesn’t change incentives. Up to $1,400 of the credit will also be refundable after Florida Senator Marco Rubio staged a hostage crisis on Thursday, and this means checks in the mail to households with no income tax liability. Mr. Rubio demanded this change as the price of his vote even after his child-credit amendment lost on the Senate floor, 29-71.

The long-term politics of the credit are worse. Mr. Rubio concedes such households don’t owe income taxes but says they need relief from payroll taxes, which fund Social Security and Medicare. But the way to do that is to propose cutting payroll tax rates. Mr. Rubio’s backdoor raid means the payroll tax will be the new pot of cash to redistribute income, and entitlement reform could become that much harder.

The House and Senate compromised on the mortgage-interest deduction, which will now be capped at $750,000, down from $1 million under current law. This is a small victory over the housing lobby, but Republicans couldn’t even eliminate the deduction for second homes. Republicans also won’t repeal the death tax, though the exemption will be doubled to about $11 million. A menu of energy subsidies survives, and so does the loathsome alternative minimum tax that requires families to calculate two sets of tax assumptions.

Some of these survive due to political support and others are ways to pay for cuts elsewhere and comply with the Senate’s budget rules. One asterisk is that the cuts for individuals expire after 2025, though the political pressure to extend them will be immense, especially for middle-income families.

In better news, the bill will repeal the Affordable Care Act’s individual mandate that punishes Americans for declining to buy health insurance that they can’t afford or don’t want. This chips away at ObamaCare’s command-and-control model, and may open the door for larger reform.

***

Republicans have been promising to reform the tax code for decades, and Speaker Paul Ryan deserves particular notice for years of intellectual and political spadework. The House campaigned on tax reform with its Better Way agenda, and Donald Trump made it a 2016 theme. This bill fulfills that promise.

For eight years the Democrats put income equality over growth and ended up with less of both. Now Republicans are poised to enact a tax bill that on the whole makes broad prosperity the priority. Next week the House and Senate will call the roll and we’ll see which politicians in Washington still think America is one of the world’s great underdeveloped countries.