As Congress turns its attention to tax reform, there is a clear bipartisan consensus on the fundamental principles to employ, see here, here, here, and here.
For example:
- Promote growth and increase wages for working families
- Modernize our outdated business and international tax system.
- Rely on reasonable economic assumptions
- Make sure that any rewrite of the tax code is revenue neutral
The Tax Foundation has outlined several different approaches to tax reform which meet the above guidelines. Their Option A is especially attractive:
- The corporate tax is reduced to 22.5% and full expensing for business investment is allowed.
- GDP increases by 7.1% long term which translates to a .7% increase per year for ten years, which is substantial economic growth.
- All income groups, except for the top 1%, will see an after-tax increase in income.
- Individual Tax brackets are consolidated into the three rates of 12%, 20.5% and 37% and the standard deduction is nearly doubled (from $6350 to $12,000).
- All itemized deductions are eliminated except for home mortgage interest (limited to $500,000) and charitable contributions.
- Capital gains and dividends are taxed as ordinary income with individuals being allowed to deduct 40% of qualified dividends and long-term capital gains.
- The estate tax is eliminated.
- This tax plan is revenue neutral on a static basis.
Conclusion. There are many attractive features in this plan. Being revenue neutral, with strong economic growth, means that the increase in tax revenue will shrink our huge current annual deficits. Only the very wealthy top 1% of taxpayers will see their income (slightly) decreased. The substantial decrease in the corporate tax rate will incentivize multinational corporations to bring their overseas profits back home for reinvestment.
It Does Not Add Up 
The only problem is that is it too easy to understand and communicate. Its simplicity might imply that the Congressional logjam is not longer sustainable. Wouldn’t that qualify as a political miracle?
I’m not holding my breath that the congressional logjam will be broken! That would just take too much common sense.
Jack,
I face much confusion here with this tax bill. For instance, I don’t understand the subjective concept of “revenue neutral”. Does that mean the status quo for all citizens to be treated equally? If so, where is there any diminishing between the most and least wealthy?
I am also lost about trying to put a percentage to corporate investments when so much investment is international rather than national. Which working classes might benefit from these investments and where?
And finally, at least for now, where is there any discussion on infrastructure investments?
This plan seems like old liquor in new bottles to me.
Doug
Revenue neutral simply means that tax rate reductions (which lose revenue) are offset by eliminating deductions (which increases revenue). After all, we are already short on federal tax revenue to pay the bills and can’t afford to have less revenue as a result of tax reform.
Lowering the corporate tax rate will make the U.S. more competitive with other countries (which have lower corporate tax rates) and thereby incentivize multi-national corporations to shift fewer operations overseas and also bring their profits back to the U.S. for reinvestment here. This will provide more jobs and better paying jobs for American workers.
Frankly, I think American infrastructure is in good shape and doesn’t need an added boost from the federal government.
If we had a flat tax, I would advocate a rate of 10% on everything. Capital gains, corporate profits and personal income. All deductions would be scrapped with the exception of charitable donations. Everything else goes.
The only way to make a flat tax fair, i.e. progressive, is to have a significant floor of say $40,000 or so which would mean that the higher the income, the higher the (effective) tax rate.
What are your thoughts about the idea of a flat tax system that taxes labor and investment equally, only disqualifying people who don’t make enough money to pay federal income taxes from paying them? Would that be viable in your opinion?
My ideal plan would be to repeal corporate taxes and then tax capital gains and dividends the same as regular (earned) income. This would avoid double taxation on corporations and it would be more fair to tax all income the same anyway.
Jack Heidel, let’s say that the first $60, 000.00 is exempt from federal income tax with 10% on everything above that. and capital gains tax exempts the first $1, 000, 000.00, with a 10% tax rate on anything above that. Would that be fair in your opinion, along with getting rid of all the loopholes and deductions, preserving the deductibility of business expenses, home mortgage interest and charitable contributions?
This sounds like a fair system but would it produce enough tax revenue to pay our bills? A 10% tax rate is not vey high even if all or almost all loopholes and deductions are eliminated.
Jack Heidel, you make valid points. The only deductions I would keep are the mortgage interest deduction, deductions for business purchases and charitable deductions. Everything else goes. No deductibility for state and local taxes. All income treated the same, if you are an investor or if you work a traditional job. I see no problem with treating income from investment and income from labor the same. Are you familiar with the writings of Thomas Sowell, F.A. Hayek or Milton Friedman? If so, what are your thoughts?
I would remove the mortgage interest deduction as well. It only helps the very well off, who don’t need help.
I’m aware of the writers you mention but not in any detail. I mainly just think intuitively and logically about these things.