Don’t Reopen Tax Loopholes

The 2017 Tax Cuts and Jobs Act has been very effective so far, judging by low unemployment rates and strong rates of economic and wage growth. But why did it work?

The answer is it closed loopholes in the tax code and lowered everyone’s tax rate. Simple tax codes with low rates are the best. As we explained at the time, the Trump tax bill changed important incentives, especially for corporations but also for individuals, that reward hard work and investment instead of rewarding clever accounting and gimmicks.

Under a warped tax code full of loopholes, corporations and, to a lesser extent, individuals have an incentive to spend their time and effort on otherwise irrational behavior, the sole purpose of which is to take advantage of tax loopholes. Because loopholes result in tax-free windfalls for firms and individuals using them, they can in some cases provide a more powerful incentive at the margin than the profit motive and its inducement toward productive business activity, risk, and investment.