Tax reform requires bipartisanship

Fortunately, after spending decades making the problem worse, a growing bipartisan coalition in Congress is pushing forward with a tax reform plan that will lower rates, simplify the tax code, increase revenues for deficit reduction, eliminate most of the market distortions, and once again make America the best place to start a business and create jobs.

When President Obama asked us to serve on the National Commission on Fiscal Responsibility and Reform (also known as the Simpson-Bowles Deficit Commission), one of our top priorities was to find a way to bring in additional revenues without harming the economy as part of a plan to close the budget shortfall. After months of being stuck in stale debates over which benchmark to measure off of and whether or not to extend the Bush tax cuts, we were able to break through the partisan logjam by putting forward the “Zero Plan,” which would dramatically lower tax rates – bringing marginal rates down to the lowest seen since the Reagan Administration – and reduce the deficit by eliminating tax expenditures.

The net effect of this tax reform would be that everyone would face lower marginal tax rates, and the tax code would no longer aid and abet hidden subsidies for the rich, powerful, and those who are politically connected. A simpler tax code would also mean American taxpayers would no longer need to master the often inscrutable rules for deductions, tax credits, and other tax incentives. They will save time and money wasted on tax preparation. But most important, because people would pay lower rates on the margins, the economic incentives would promote work and growth, not housing bubbles and spiraling health care costs. And despite the lower rates, those at the top who can afford to pay far more — people like us — would actually be asked to make greater sacrifices than those in the middle, since most of the tax breaks go to the highest earners who need them the least in the first place. In fact, the plan would help make the tax code far more progressive than current policy, with those in the lowest tax quintile getting a small tax cut.

While the Zero Plan starts by eliminating all tax expenditures and bringing the rates down to 8, 14, and 23 percent (while maintaining the standard deduction and personal exemptions), we recognized that some tax expenditures serve important functions that should be preserved, and that elimination or reforms of some tax expenditures should be phased in gradually to avoid adverse consequences. The Commission specifically recommended that Congress restore a small number of tax expenditures, including provisions providing support for low income workers and families. But even with some of these provisions added back, we could still bring the top rate down to 28 percent or lower, so long as the provisions were added back in a smaller and more sensible way.

Just as importantly, the Commission proposal would dramatically improve U.S. competitiveness. The plan reforms the corporate tax code by eliminating tax preferences that pick winners and losers through tax breaks that benefit some companies at the expense of others, establishing a single corporate rate as low as 26 percent – significantly lower than today’s top rate of 35 percent. Again, with a few provisions added back and, and with shifting to a competitive territorial system that will bring our tax code more in line with the rest of the world, we still got the rate down to 28 percent. Tax reform in this way would significantly improve U.S. competitiveness. And by making the corporate rate the same as the top individual, capital gains, and dividend rates, this plan will make tax arbitrage and gaming much more difficult.

Virtually no one disagrees that the U.S. tax code needs reform; the debate is over how to do it. With the close of another tax season, both political parties should enact tax reform this year and give Americans some real tax relief before Tax Day returns next year.

Dave Cote is Chairman and CEO of Honeywell International and Ann Fudge is former CEO of Young & Rubicam Brands. Both were members of the President’s bipartisan National Commission on Fiscal Responsibility and Reform.