LAURENCE KOTLIKOFF: Tax Reform Passes The Fairness Test:

The GOP tax plan should do three things. It should expand the economy while raising wages. It should pay for itself. And it should be fair.

The new plan’s business-tax provisions will reduce the effective marginal tax rate on U.S. investments dramatically, from close to 35% to under 19%. Depending on the year in question, my global dynamic macroeconomic model predicts a 12% to 20% expansion in the U.S. capital stock, producing an average $3,500 real wage increase for each American working household. Moreover, economic growth spurred by the business-tax cuts will raise tax receipts enough to make the plan revenue-neutral.

That means the plan passes the first two tests. What about fairness? Using conventional methods for assessing fiscal fairness, government agencies and Beltway think tanks have declared the House bill a giveaway to the rich. But these methods were developed before the advent of computer modeling and big data. Their conclusions are unreliable.

Myopic conventional fairness measures consider only the current year’s net taxes—that is, taxes paid minus benefits received. They ignore net future taxes, making it impossible to account for phased-in reforms as well as consumption and estate taxes. Moreover, these methods understate the tax burden on the rich who save more relative to the nonrich and thus face higher relative taxes in the future based on their resulting taxable asset income.

Conventional measures also fail to account for the roughly 5.5% rise in pretax income I predict the tax plan will generate. Ultimately inequality is about relative spending, not relative taxes. And what we spend depends on what we earn, not just what share of our earnings we hand over to Uncle Sam. By lumping together people of all ages, conventional fairness measures compare apples and oranges: the young, most of whose taxes lie ahead, and the old, most of whose taxes have already been paid. . . .

There are many steps, like lifting the ceiling on Social Security taxable earnings, that could make the reform more progressive and produce badly needed revenue. But the new tax plan, while far from what I and other tax specialists would design, will boost the economy, generate more revenue, maintain fairness, and raise Americans’ living standards. It’s imperfect but worth passing.

Well, it won’t be perfect until it includes my Blog Tax Credit proposal.