How To Help The High Tax States

Editorial Board, The Wall Street Journal

As Republicans try to merge the House and Senate tax bills, one big issue is taxpayer anger in high-tax states over ending the state-and-local deduction. The solution is easier than they think: Cut the top tax rate enough that Republicans won’t raise taxes on so many productive Americans.

If you look at the big picture of both tax bills, they include an historic pro-growth reform of the business tax code. Cutting the corporate rate to 20% from 35%, with a comparable cut for pass-through companies while cleaning up dozens of tax breaks that distort investment, will instantly make American firms and the U.S. more competitive and should spur capital flows that lift wages. 

The bad news is that the reform of the individual code is something of a mess. Taxpayers at lower and middle incomes will benefit from a doubling of the standard deduction and raising the thresholds when certain tax rates hit. The increase in the child tax credit will reduce taxes for some people, though it complicates the code because it’s a form of social policy that favors some Americans over others. 

But the biggest weakness in the bills is that they punish taxpayers in high-tax states who earn relatively high incomes but will lose the state-and-local tax deduction. The original reform idea was to offset the loss of that deduction by lowering top rates. Broaden the tax base in return for lowering the rate. [Subscription required.]

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Thanks to "bracket creep," the inflation of the 1970s pushed millions of taxpayers into higher tax brackets even though their inflation-adjusted incomes were not rising. To help offset this tax increase and also to improve incentives to work, save, and invest, President Reagan proposed sweeping tax rate reductions during the 1980s. What happened? Total tax revenues climbed by 99.4 percent during the 1980s, and the results are even more impressive when looking at what happened to personal income tax revenues. Once the economy received an unambiguous tax cut in January 1983, income tax revenues climbed dramatically, increasing by more than 54 percent by 1989 (28 percent after adjusting for inflation).


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