If your house floods or burns in a routine accident, not a national emergency? That loss is no longer deductible, either.
There’s even what looks like a special revenge tax upon the National Football League: Pro athletes may no longer deduct their agents’ commissions from their salaries.
(The deduction for major medical expenses was, however, reinstated by the Senate after a surge of protest. It was even made more generous for the tax plan’s first two years, returning to the 2017 level in 2020.)
Yet my expectation of blue-state GOP dissent was wrong. The Republican caucus cohered. The GOP has likely traded away the last of its seats in New York, New Jersey, Northern Virginia, and California. What did it get in return?
At the core of the bill is an important and needed reform: a reduction in the corporate income tax to something like the developed-world norm of 21 percent from the current 35 percent, which had been among the highest rates in the world.
Such a reform, properly executed, would have cost the Treasury surprisingly little in forgone revenues. While the U.S. taxes corporations at a high rate, the corporate code is so perforated with exemptions that U.S. tax collections from its corporate income tax fall far below the developed-world norm: 2.5 percent of gross domestic product in the U.S. vs. 3.5 percent for the developed world as a whole. Moving from a high-rate, narrow-base corporate tax code to a lower-rate, broader-base code would have rationalized economic decision-making and actually topped up federal revenues.
Two decisions blocked that happy outcome. The first was a decision against broadening the corporate tax base very widely. The second—even more fateful—was to insert an amazing new tax refuge into the tax system: a super-low tax rate for pass-through businesses.
Most American businesses do not pay the corporate income tax. They pay through the individual tax system. So long as the corporate rate and the individual rate more or less tracked each other, this fact did not muck things up too much.
But once the decision was made to lower the corporate rate so substantially, those other businesses faced a heavy tax penalty. What to do? The congressional GOP’s answer: Let them pay at a new radically lower “pass through” rate.
The implications of the pass-through decision are staggering. Not only is it massively disruptive of federal revenues, but it wildly distorts decision-making throughout the private economy. Adam Looney at the Brookings Institution computes:
If a plumber makes $60,000 a year as wages paid by an employer, he or she will pay 60 percent more in income taxes than if that plumber had been a sole proprietor or self-employed and takes advantage of the pass-through rate.
As of 2014, there were already 30 million pass-through businesses in the United States. Under the new incentives, there will instantly appear many millions more. To deal with the ensuing revenue loss, Congress had to squeeze somebody. Upper-income blue-state residents got the chop.