As we hoped, the Republican tax legislation improved as it moved through Congress. Harmful ideas such as eliminating the adoption tax credit were abandoned. Some tax relief for the working poor was added. The final bill should increase investment, reduce the distortionary effect of tax breaks, and lighten the especially excessive burden that the federal government puts on parents. While the bill is nobody’s idea of perfection, it is nonetheless a solid accomplishment and we are glad that Congress is moving quickly to pass it.
Our 35 percent corporate tax rate has stayed in place for decades as our major trading partners cut their rates. The new tax rate of 21 percent should help us compete better for capital. Allowing businesses to write off the cost of investments more rapidly is another pro-growth win in the bill.
The legislation rightly pares back two major deductions: the ones for mortgage interest, which will be capped at mortgages of $750,000 rather than the current $1 million, and for state and local taxes, which will be capped at $10,000 rather than being unlimited. In both cases we would have preferred more aggressive action, but the more moderate course chosen has the virtue of reducing the number of people who will face tax increases thanks to the bill. If some high-income households react to this change by leaving high-tax states, perhaps those states will in turn be moved to rethink their policies.
The bill’s major contribution to tax simplification is the expansion of the standard deduction. That expansion will make tax deductions less important: Only a small percentage of taxpayers will find it worthwhile to itemize. The bill also reduces the number of people who will have to calculate their taxes twice, by limiting the reach of the alternative minimum tax.
Thanks largely to the interventions of Senators Marco Rubio and Mike Lee, the legislation expands the child tax credit. We have long favored a large tax credit for children as the most practical way to remedy a disparity in our old-age entitlements: They overtax parents, who pay the same tax rates and get the same benefits as childless adults no matter how much they have contributed to those programs by raising children.