Neutral Tax Reform with 15 Percent Business Income Tax Rate

The Trump administration has announced the broad outlines of a tax reform plan that contains many provisions similar to those in the House GOP tax reform “blueprint” announced last year, but there are fundamental differences in the provisions affecting businesses and investors. While different, in both plans these provisions raise serious policy issues. They are not revenue or distributionally neutral, and are not neutral among economic activities. This paper describes and analyzes an illustrative plan that retains key features of the Trump administration and House GOP plans but is far closer to revenue, distributional, and economic neutrality than either of those plans. The illustrative neutral plan has two main elements: (1) reform of the income taxation of business entities and investors, with a 15 percent rate on business entities, repeal of the 3.8 percent tax on net investment income, and integration of business and equity investor taxes; and (2) adoption of a 7.5 percent business-level consumption tax, combined with repeal of employee Medicare and all employer payroll taxes.