After months of meetings and discussions, GOP leaders have released their tax reform proposal, called the “Unified Framework for Fixing Our Broken Tax Code.” It’s a winner. The question is, will it survive the legislative sausage-making as it winds its way through multiple committee markup sessions, amendments, floor votes, and conference reports?
Let’s start with some basics about the need for tax reform.
The U.S. tax code is now more than 75,000 pages long, and the Internal Revenue Service has more than 2,000 different forms and instructions. American citizens spend more than 6,000,000,000 hours (that’s six billion hours) preparing their tax returns every year, and more than $400 billion to ensure they’ve complied with the law.
{mosads}Other than ensuring jobs for employees of TurboTax and H&R Block, that time and money is wasted. That’s time and money that could be better spent paying down the national debt, or “paying for” tax relief, or any number of other productive uses.
So even if the GOP proposal didn’t reduce the level of taxation one penny, reforming the code to make it simpler would still be a worthwhile endeavor.
But the Unified Framework goes further. It’s not just tax reform, it’s a tax cut.
On the corporate side, it proposes to slash the rate from 35 percent to 20 percent, which would, overnight, make the U.S. a more attractive place for business investment from both home and abroad.
And the plan proposes to cut the rate on so-called “pass through” income – the income generated by small businesses that file via their owners’ personal returns – from 39.6 percent down to 25 percent. Given that, according to the Small Business Administration, small businesses generate 64 percent of the new jobs in this country, and are responsible for 49 percent of private-sector employment, this will help unleash the kind of job growth we have not seen in a decade or more.
Further, the plan proposes to allow businesses to write off 100 percent of the value of certain investments in the year in which the investment was made, rather than requiring them to write off the expense over a number of years. That will lead to a jump in investment.
On the individual side, it shrinks the current seven brackets to just three, and it reduces the top marginal rate from 39.6 percent to 35 percent – though it leaves open the possibility of a fourth bracket for those on the uppermost end of the upper end.
The plan also proposes a virtual doubling of the standard deduction, raising it to $12,000 for individuals and $24,000 for married taxpayers filing jointly.
Further, the plan proposes elimination of the death tax, the alternative minimum tax, and the generation-skipping transfer tax.
As in any tax reform proposal, the general idea is simple: eliminate or reduce the value of individual deductions (loopholes) so you can subject more income to taxation, matched against lower rates. So the proposal also includes elimination of most itemized deductions, except for the mortgage interest and charitable contribution deductions, and repeal of the personal and dependent exemptions.
An initial analysis by the Committee for a Responsible Federal Budget projects that over a decade, the plan would generate $5.8 trillion in tax cuts, against $3.6 trillion in new revenues flowing in as a result of eliminating or reducing deductions and broadening the tax base, thereby yielding a net $2.2 trillion tax cut.
Of course, that study is based on a static analysis of the proposal, and does not take into account the revenue-inflow-growing aspects of new economic activity and the more and better-paying jobs that will result.
Remember, the difference between two percent annual GDP growth and four percent annual GDP growth is an additional $5 trillion flowing to the federal treasury over ten years. In other words, if the tax reform is enacted, and the result is the kind of economic boom we’ve seen before, we could generate more than enough to “pay for” the tax cut AND leave an even larger amount to pay down the debt.
The plan cuts taxes, simplifies the system, and could generate enough new economic activity to more than pay for itself AND help pay down the national debt. This is the kind of tax reform America needs, and conservatives will push hard for its enactment.
Jenny Beth Martin (@JennyBethM) is president and co-founder of Tea Party Patriots.