The House version of the Tax Cuts and Jobs Act is a long-awaited step toward updating America’s tax code.

If you’re a middle-class taxpayer, the bill is has a lot to like. Tax rates are lowered, the standard deduction is doubled, the child tax credit is increased to $1,600, and a parent and non-child dependent credit is added.

If you’re a working taxpayer, employed by a business, or the owner of your own business, there’s even more to like.

The corporate tax rate is cut from 35 percent—one of the highest rates in the world—to 20 percent, immediately. Family-owned and small businesses that pay their taxes as individuals will pay a maximum rate of 25 percent on certain business income.

All businesses will also be able to immediately write off the costs of new equipment for five years. This provision, called “expensing,” allows businesses to invest more in American workers, add new jobs, and raise wages.

According to the Tax Foundation, the House plan could boost the economy by 3.6 percent over the long term, raise average incomes by $2,500 (after taxes), and create hundreds of thousands of new jobs.

The Senate builds on the House’s momentum toward tax reform, and improves on the House bill in six important ways.

1. Lower tax rates at every level. 

The House plan reduces the number of tax brackets from the current seven down to four, but does not lower the current top tax bracket of 39.6 percent.

The plan actually raises marginal rates on some taxpayers making over $200,000 and includes a new “bubble tax rate” of 45.6 percent that is intended to take back the benefit of the lowest tax bracket for high-income earners.

The Senate bill improves the House bill by lowering marginal income tax rates for a larger share of Americans—most notably, reducing the current top 39.6 percent rate to 38.5 percent and doing away with the House’s bubble rate.

The benefits of lowering marginal rates for more Americans—increasing the incentive to work, save, and invest—outweigh the cost of the Senate not being able to consolidate any of the current seven tax brackets. Lower rates trump fewer tax brackets.

2. Full repeal of the state and local tax deduction.

Legislators from New York, New Jersey, and California have held the House tax-reform effort hostage, forcing the plan to retain a $10,000 property tax write-off—a subsidy for their wealthy constituents.

The Senate proposal improves on the House bill by fully repealing that property-tax deduction. Both bills repeal the state and local tax deductions for income and sales taxes.

3. Simpler treatment of business income.

The Senate bill simplifies the House’s complicated  treatment of businesses that file as individuals, or what are known as “pass-throughs.” The House includes a 25 percent maximum tax rate on business investment, but then includes a set of complicated rules to avoid the lower rate becoming a loophole.

The Senate forgoes multiple different tax rates in favor of a larger business deduction worth 17.4 percent of the businesses’ taxable income. The deduction lowers the effective top marginal tax rate for small and pass-through businesses to 31.8 percent.

This rate is roughly comparable to the total effective tax rate on business income earned through traditional corporations and paid out as dividends. The Senate treatment avoids complicated pass-through rules while moving toward treating all businesses equally.

4. Better treatment of investments.

Both the House and Senate bills allow five years of full expensing for new equipment, which if extended permanently could have a dramatic impact on investment and economic growth.

The Senate bill also shortens the write-off time for residential and nonresidential buildings to 25 years. This reform, although far from the ideal of full expensing, would significantly lower the cost of investing in buildings and increases the growth potential of the Senate tax bill over the House version.

5. Lower tax rate on overseas profits.

The House-proposed tax on overseas profits is set at 14 percent on overseas cash holdings and 7 percent on physical investments.

In an ideal world, this money should not be subject to U.S. taxes since it was earned abroad and in most instances already subject to taxes by another country. But, as a transition measure toward the new territorial tax system, a low tax rate is acceptable.

The Senate bill lowers the tax down to 10 percent on overseas cash holdings and 5 percent on physical investments. An even lower tax rate would be better.

6. Repeal of the individual mandate.

The Senate bill would also repeal the Obamacare individual mandate as part of tax reform. This would provide tax relief to millions of Americans who can’t afford the rising costs of Obamacare insurance and would otherwise be subject to the tax penalty.

The Congressional Budget Office estimates that over 10 years, repealing the mandate would increase federal revenue by $338 billion by reducing outlays on subsidies for people who would not have otherwise purchased the insurance. This additional revenue would help lower tax rates for all Americans and would make it easier for the bill to meet the Senate’s arcane budget rules.

Repealing the individual mandate is not only helpful for tax reform, it is also good health care policy. In a recent Daily Signal post, my colleagues explain that “the experience with Obamacare over the last four years shows that the individual mandate does not work” and is a burden on millions of middle-class Americans.

Far From Perfect

For all its improvements on the House plan, the Senate plan is far from perfect.

For one thing, it fails to repeal the estate or death tax. Not permanently repealing the death tax is economic malpractice, as it would forgo potential economic growth and likely make it harder to fully repeal the tax later on when those affected by it will be an even smaller minority of Americans.

The House bill would repeal the estate tax in 2024, while both bills would double the tax’s basic exclusion from its current $5.49 million per person.

The House bill includes two important simplifications to education policy that are left out of the Senate reform. The House consolidates seven different education tax incentives into the existing American Opportunity Tax Credit and makes it available for an additional year.

The bill also improves and simplifies education saving accounts by consolidating the current two programs into a more flexible and broadly available version of the current 529 college savings plan.

The House bill also removes a remarkable number of special-interest subsidies, taking a crack at draining the swamp in Washington. The plan eliminates tax credits for oil production and for green energy, deductions for medical expenses and for student loans, the credit for rehabilitation of historic buildings, and a “new markets” tax credit, just to name a few.

The Senate maintains each of these in the tax code and even adds in a new family-leave subsidy.

The passage of the House bill this week will be a big step forward for tax reform. Once the Senate has passed its version of the bill, Congress should seize the opportunity to combine the best components of the House and Senate bills to make tax reform of maximum benefit to all Americans.