BusinessDay 11 Dec 2017

14 BUSINESS DAY C002D5556
Monday 11 December 2017
In Association With
Tax reform
How the Republican tax bill compares with previous reforms
Today’s bill does not much resemble the 1986 tax overhaul
REPUBLICANS like to
say that their tax bill,
which passed the Senate
on December 2nd,
is the first tax reform
since 1986. President Donald
Trump likes to call it the biggest
tax cut in history. Mr Trump’s claim
is easily disproved (see chart). Yet
the comparison with the law of
1986, passed under Ronald Reagan,
is more curious. There is no
doubt today’s bill, like the older
one, contains significant reforms.
But the differences between the
two efforts stand out more than
the similarities. They are not quite
mirror images of each other—but
they are not far off.
There are three main differences
between then and now. First, the
centrepiece of today’s bill is a cut
in the corporate tax rate, from 35%
to 20%. At first glance, this seems
comparable to the change to the
levy in 1986, when it fell from 46%
to—after a brief delay—34%. Yet
such was the volume of deductions
that the 1986 reform swept away,
that it in fact raised average taxes
on businesses. Notably, investment
incentives were sharply curtailed.
Today’s bill expands them, allowing
businesses to deduct the full
cost of investments in the year
they are made (until 2023). Many
economists see these investment
incentives as a powerful stimulus
for the economy. Because the reform
of 1986 weakened them, and
also raised capital gains taxes, the
Tax Foundation, a right-leaning
think-tank, reckons it might have
reduced economic growth—a
remarkable possibility, given the
esteem in which it is held.
Second, the reform of 1986 was
more egalitarian. Again, this is
not easy to spot. Reagan’s reform
slashed the top rate of personal
income tax almost in half, from 50%
to 28%. By most accounts, this was
the number Reagan cared about
most. But a loss of deductions, and
the rise in overall business and
capital gains taxes, were countervailing
forces. And lower earners
got income-tax cuts, too. According
to the Centre for American
Progress, a left-leaning think-tank,
the tax system as a whole reduced
the Gini index, a measure of inequality,
by 5% before the reform,
but by 7% after it.
Today’s bill is sharply regressive,
despite the fact that it barely
touches the top rate of tax. That is
partly because Mr Trump’s priority
has been tax cuts for businesses,
whose owners tend to be rich.
True, the bill curbs some corporate
deductions, such as a tax break for
manufacturers, and another for
debt interest. But these changes
do not come close to paying for the
size of the tax cut that Republicans
propose. A look at the stockmarket,
which soared as the bill passed
the Senate, shows that most businesses
can expect to do well.
The third difference between
the bills is their cost. The reform of
1986 was revenue neutral. Today’s
effort will cost $1.4trn in forgone
revenue by 2027, or $1trn, once its
likely effect on economic growth is
taken into account, according to
an official score of the Senate’s bill.
For that reason, the better
comparison is to Reagan’s tax
cut in 1981, which really does
have a claim to be the biggest in
post-war history. That bill, much
like today’s, was sold on the basis
that tax cuts pay for themselves.
It contained big across-the-board
income-tax cuts, and investment
incentives for businesses. Over its
first four years, it cost a mammoth
2.9% of GDP—or rather, it would
have done, had lawmakers not
spent the next few years reversing
it in an attempt to get deficits
under control. Between 1982 and
1985 lawmakers passed tax rises
worth 1.7% of GDP, according to
the Treasury Department.
Such an about-turn is very unlikely
on this occasion. That said,
the Senate bill’s cuts to individual
income taxes are to be phased out
after 2025, to keep the costs down.
What is initially a tax cut for most
lower- and middle-earners will
turn into a tax increase, because
of changes to how tax brackets will
be adjusted for inflation.
Republicans last passed temporary
tax cuts under George W.
Bush in 2001 and 2003. Like the
law of 1981, these contributed to
growing deficits. However, they
were not reversed. In 2013, under
Barack Obama, they were mostly
made permanent by a bipartisan
deal, although taxes on top earners
went back up. It is possible
that, come 2025, Congress will
implement a similar extension of
the Trump tax cuts. If it does, their
long-term costs will be greater. If
it does not, the effect on inequality
of today’s bill will be worse,
because its business tax cuts are
permanent.
The tax bill could yet change
as the House and the Senate negotiate.
For example, one part of
today’s tax reform is its abolition
of the deduction, from federally
taxable income, of money used to
pay state and local income taxes.
Republicans tried and failed to
eliminate this deduction in 1986,
but it was spared by the efforts of
representatives of high-tax states
such as California and New York.
Both the House and the Senate
bills scrap it (while keeping a deduction
for local property taxes in
place). Republican representatives
from California are mounting a
last-ditch attempt to preserve the
deduction, up to a limit. “There’s
a lot of things that Californians
are working on,” said Kevin Mc-
Carthy, the House majority leader.
In November, 11 of the 14 House
Republicans from California supported
the tax bill. If they switched
sides, they could potentially block
it in the final vote.
That remains unlikely, because
Republicans are desperate for a
legislative achievement. But the
threat demonstrates how difficult
it is to take away tax deductions
once they are granted. Reagan’s
reform managed it in part because
of bipartisanship: the bill was
introduced in the House Ways &
Means Committee by a Democratic
chairman, and ended up passing
the Senate with 74 votes. If Republicans
succeed in passing a tax bill
by Christmas, as Mr Trump wants,
and without any Democratic votes,
it will at least be an act of impressive
political discipline.
Found in translation
Western companies are
getting creative with
their Chinese names
Simple transliteration is giving way to
more evocative phrases
MCDONALD’S drew ridicule
in China when it changed
its registered name there
to Jingongmen, or “Golden Arches”,
in October, after it was sold to a Chinese
consortium. Some on Weibo,
a microblogging site, thought it
sounded old-fashioned and awkward,
others that it had connotations
of furniture. The fast-food chain was
quick to reassure customers that its
restaurants would continue to go by
Maidanglao, a rough transliteration
that has, over the years, become
a recognisable brand name. But
for most companies now entering
Chinese markets, transliterations
are a thing of the past, says Amanda
Liu, vice-president of Labbrand, a
consultancy based in Shanghai that
advises firms on brand names.
Companies are instead choosing
Chinese names with meanings
that capture people’s imagination.
That often involves going beyond
a direct translation. New entrants
are taking inspiration from BMW,
which is the evocative Baoma, or
“treasure horse”, in China, and from
Coca-Cola, which is Kekoukele, or
“delicious happiness”.
The naming process is forcing
companies to think harder about
the image they want to project in
China, says Ms Liu. LinkedIn, a professional-networking
site owned by
Microsoft, chose the name Lingyin,
or “leading elite”, in 2014, signifying
more exclusivity than its Western
name. Her other corporate customers
have included Airbnb, Marvel
Comics and Haribo. Labbrand tests
proposals with focus groups, ensuring
that the name has no negative
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