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The Shape of US Tax Reform

CAMBRIDGE – Major tax reform is high on the agenda for the United States in 2017. The Republican-controlled House of Representatives has been preparing for this for years, creating detailed plans for overhauling how corporate and personal income are taxed. Now, with a Republican majority in the Senate and a Republican president in the White House, those plans can provide the basis for legislative action.

The proposed corporate tax reform is especially significant. I believe it will have a highly favorable impact on business investment, raising productivity and overall economic growth. The new tax rules will also have significant effects on foreign economies.

Although none of the proposed changes is guaranteed, the likely shape of the proposed tax package is becoming clear. It includes four major components.

A lower tax rate on corporate profits. The current 35% rate is the highest rate among all industrial countries. The House Republicans and the Trump administration have both proposed halving that rate, which would cause capital to shift to corporate investment from real estate, unincorporated businesses, and foreign holdings.