Business

Evan Horowitz | Quick Study

Here’s the problem with high-speed tax cuts

The US Capitol
MICHAEL REYNOLDS/EPA-EFE/REX/Shutterstock
The US Capitol

The last-minute machinations were certainly unusual, with members of the US Senate given just a few hours to peruse the tax bill before voting late Friday night, to say nothing of the last-minute, handwritten changes in the margin.

But the speed with which these tax cuts have moved from campaign proposal to congressional vote isn’t actually that out of the ordinary. When tax cuts happen, they often happen quickly.

George W. Bush’s plan to reduce taxes for individuals became law within six months of his inauguration. Ronald Reagan was seven months into his term when Congress endorsed his plan to dramatically lower rates for top earners — and that in a first year in which the president was recovering from an assassination attempt.

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By those standards, you might even argue that Trump’s tax plan is moving slowly, held back by the fact that taxes weren’t Trump’s top priority; health care was.

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There is, however, one big difference with the effort this time ’round — and a big reason to think it should take longer: from the beginning, Republicans have said they intend to go beyond just cutting taxes and reform the whole tax system. Though they’ve fallen short of this goal, what they’ve done so far involves a lot more than just lower taxes.

Call it tax reform lite.

Tax reform has a well-defined meaning in Washington: simplify the tax code, lower rates, eliminate tax breaks, and ultimately produce a result that doesn’t add to the deficit.

When Congress last took on tax reform in the mid-1980s, the process took years, not months — with hundreds of hours of hearings and testimony, and lengthy analysis and reports from government agencies.

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Such prudence is essential when redesigning a system as complex as the US tax code. If you want to avoid warping business incentives and enabling tax evasion you need to understand the impact of every closed loophole and every rate change.

And a similar kind of judiciousness would seem to be necessary for the tax-reform-lite approach currently racing through Congress. Otherwise, things can go badly wrong.

Like now: At the last minute, Senate Republicans decided not to repeal the alternative minimum tax for corporations, a provision intended to ensure profitable businesses pay at least some taxes. The virtue of keeping the corporate AMT in place is that the money from it can be used to offset the lost revenue from other cuts.

Only after the vote did it become clear that keeping the AMT creates a big problem — because of the way it interacts with other parts of the Republican tax bill.

Think of it this way. The AMT is around 20 percent, a lot lower than the regular 35 percent rate for corporations. So only companies with a vast number of credits and deductions reduce their rate far enough to push their tax bill below 20 percent and have to pay the AMT.

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But with Republicans planning to lower the corporate tax rate to 20 percent, that all changes. Suddenly, companies looking to take advantage of things like the deduction for research and development will find they can't — not without pushing their rate below 20 percent and thus triggering an AMT payment.

Had Republicans held hearings about their plans, they might have seen this problem sooner — and been able to address it. But in the wee hours of the morning, when they were voting on unexamined portions of their bill, it slipped through.

This is just one example, but it speaks to the risks of rushing. Both the Senate and House bills include many moving pieces: rates that expire, deductions that disappear, and a wholly new approach for noncorporate businesses, the kind where profits get passed directly on to owners who treat them as income.

With a bill like this, the risk of unintended consequences are that much higher. Which is why you might well worry about the rapid passage of Republicans’ tax reform lite, even if it doesn't look out of line with the quickly done tax cuts under Reagan and Bush.

Evan Horowitz digs through data to find information that illuminates the policy issues facing Massachusetts and the U.S. He can be reached at evan.horowitz@globe.com. Follow him on Twitter @GlobeHorowitz