Making the tax code more fair

03/06/2014 5:09 PM

03/06/2014 5:10 PM

House Ways and Means Committee Chairman Dave Camp, R-Mich., recently jump-started the tax reform debate. It’s about time.

The tax code stables in Washington haven’t been cleaned out since 1986 — more than a quarter century ago, when Ronald Reagan was president.

Since then, year after year, the tax code gets engrafted with more special-interest loopholes, credits and carve-outs. Not only is this unfair to those without lobbyists, it makes the tax code mindlessly complex, a job-security program for tax lawyers and accountants.

Worse still, back in the 1980s the United States had among the lowest income tax rates on businesses in the world. Today, our small and large businesses pay among the highest rates.

Our corporate tax rate is the highest in the industrialized world at 35 percent. Almost all other nations have slashed their business taxes to attract jobs and businesses.

This high corporate rate in practice acts as a tariff on the goods and services we produce in the United States.

Analysts at The Heritage Foundation found that this lowers wages of American workers. Want to give U.S. workers a raise? Cut the tax rates on businesses so they invest more here.

Camp aims to rewrite the tax code, and he starts by lowering tax rates across the board and eliminating loopholes.

He would shrink the current seven income tax brackets to three: 10 percent, 25 percent, and 35 percent for those families with incomes above $450,000. That highest rate of 35 percent is still too high and an unnecessary nod to the class warriors on the left, but it would be an improvement on the current rate of more than 40 percent.

The corporate tax rate would fall from 35 percent to 25 percent, which is at least closer to the world average. Camp would also allow companies to bring capital stored abroad back into America at a tax rate of less than 10 percent, which will mean more investment and insourcing of jobs on these shores — as well as more revenue for the Treasury.

Camp’s plan also simplifies the tax code by allowing millions of tax filers a larger standard deduction, which means they can forgo the hassle of itemizing deductions and go straight to the EZ form. For those who do itemize deductions, many of the carve-outs will be gone — but not the mortgage or charity write-offs.

History shows that lower tax rates are usually associated with higher overall tax receipts. In the 1980s after two rounds of Reagan tax rate reductions, income tax receipts doubled.

Congressional revenue estimators are using “dynamic scoring” to estimate what happens to the economy and revenues if the new plan is implemented. This yields a “growth dividend” for the economy of at least $700 billion, our sources tell us.

The U.S economy has slogged along at just a little over 2 percent growth during this recovery — and last year, less than that. Imagine 4 percent growth for the next decade, and you’ve added nearly $2 trillion more in tax revenues to pay the government’s bills.

I’d prefer something closer to a pure flat tax with one tax rate, a postcard-size return, and no double tax on saving and investment. And there are some bad ideas buried in the Camp plan, such as a tax on the assets of big banks that received bailout funds in 2008-09.

But on balance, this is a gutsy first attempt to take on the beehive of special interests in Washington.

Stephen Moore is chief economist at The Heritage Foundation. www.heritage.org

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