Tax Reform
Rep. Tom Petri has long believed that we ought to - and can - collect tax revenue without making American taxpayers spend incredible amounts of time and money. Fundamental tax reform can be difficult to achieve, but focusing on the goals of fairness, simplicity, and economic efficiency will put us on a path toward success.
The last comprehensive tax reform, the Tax Reform Act of 1986, was signed into law by President Ronald Reagan on October 20, 1986. That Act was a complete revision of the federal tax code, and stands as a significant achievement.
After a lengthy review of the federal tax system, including extensive public debate and discussion, it was determined that only a thorough rewrite of the tax code could realize the recognized goals of fairness, simplicity, and economic efficiency.
In fairness, Congress sought a system where taxpayers of similar incomes would pay similar taxes. For simplicity, marginal tax rates were lowered and various tax preferences, both individual and corporate, were eliminated or limited significantly. To gain greater efficiency, the 1986 tax reform sought to remove questions of tax benefit from fundamental economic decisions, thus allowing capital to flow to its best and most productive use.
Many tax bills have been enacted since 1986 and the original clarity of that Act has been clouded by the addition of new tax preferences and the expansion of the number of marginal tax rates. At the same time, the tax code has become comprised of nearly 200 "temporary" provisions requiring "extensions" just to keep it constant. These developments have taken their toll on the fairness, simplicity, and efficiency of our tax system, and Congress, once again, is faced with issues similar to those addressed in 1986.
Tax Reform: Commission on Deficit Reduction and Fiscal Responsibility
In 2010, President Obama, by executive order, established the National Commission on Fiscal Responsibility and Reform. This Commission was charged with examining all aspects of the federal budget, including spending and revenue issues, and voting on a plan to reduce the current deficits and put federal budgeting back onto a sustainable path. Under the terms of the executive order, votes from 14 of the 18 Commission members were required in order for the proposal to be forwarded to Congress. While the two co-chairs of the Commission produced a draft proposal, it failed to reach the specified level of support and was not considered further.
Despite the failure of the report to achieve a favorable vote by the Commission, the proposal attracted considerable attention and discussion. As part of this report, the Commission offered the outline of a tax reform plan. The co-chair's plan represents one of the more thorough tax reform initiatives in recent years, and it continues to be part of the tax reform conversation.
For individual taxpayers, the Commission proposal includes substantially lower marginal tax rates combined with the elimination or modification of a wide variety of tax preferences, sometimes called tax expenditures, which reduce federal revenue by up to $1.1 trillion each year. To be sure, many of these tax preferences are popular, particularly those supporting home ownership, health care, savings, and work. Recognizing that many of these will be retained, the Commission suggests targeting the preferences more carefully and adjusting tax rates up from a theoretical minimum to maintain progress toward a specified revenue goal. An important eliminate of this proposal is that it is not revenue neutral.
The plan proposes reform of the corporate income tax as well. The report proposes a single-bracket tax rate of 28 percent (today's top rate is 35 percent), eliminating various general and specific business tax credits, and a switch in the basis of the corporate tax from worldwide income to territorial income alone. It is anticipated that such changes would encourage economic growth and foster job creation.
Tax reform, according to co-chairs' report, should provide additional revenue for deficit reduction. According to the report, these reforms would produce $80 billion in new revenue within three years and $180 billion by 2020. These new revenues would be directed to deficit reduction. Finally, the report includes a call to cap federal revenues at 21 percent of GDP, a portion that's notably higher than the percentage of GDP collected under our current tax system.
Tax Reform and the House-Passed Budget Resolution
On April 15, 2011, the House approved H.Con.Res. 34, a resolution to establish a federal government budget for fiscal year 2012 and provide a spending framework for the next ten years. As part of this plan, H.Con.Res. 34 anticipates enactment of a pro-growth tax reform plan which, like the 1986 tax reform plan, seeks simplicity, fairness, and efficiency. While a budget resolution does not include specifics, it does provide a general policy outline to justify the financial projections it includes. This budget was adopted in the House, with Rep. Petri's support, by a vote of 235 - 193.
Like the tax proposal in the Deficit Commission report, this plan features lower rates and a broader tax base. The plan envisions lowering the top individual income tax rate from its current 35 percent (39.6 percent if certain "temporary" provisions are allowed to expire) to 25 percent. Tax preferences would become more targeted allowing a greater portion of income to be exposed to the lower tax rates. This plan has much in common with that produced by the National Commission on Deficit Reduction. The biggest difference, however, is that the House-passed plan does not anticipate a tax increase – it's designed to keep tax revenues at their historic share of our economy, between 18 and 19 percent of GDP.
The plan also looks to change for corporate taxpayers as well. Its major reforms include a lower corporate tax rate. At present, the U.S. top rate of 35 percent is one of the highest in the industrialized world. Under this plan, it would be lowered to a more competitive 25 percent. As with the individual income tax code, deductions would be modified or eliminated and credits and special interest provisions would be reduced, resulting in a more equitable distribution of the tax burden for America's corporate taxpayers.
Ways and Means Committee Begins Work on Tax Reform
While the House-passed budget resolution makes long-term projections based upon its call for fundamental tax reform, the initial details of that reform will be left to those members of the House responsible for crafting tax policies. Since the opening of the 112th Congress, the House Committee on Ways and Means, under the direction of Chairman Dave Camp, has been laying the groundwork for a comprehensive tax reform package.
In April 2011, the Committee held a hearing to examine some of the difficulties that individuals and families face in navigating the current tax code, including both compliance burdens and complications in making long-term financial decisions when confronted with confusing, overlapping, and temporary income tax provisions.
A second hearing followed on May 12. This session examined the impact of tax laws on U.S.- based companies operating internationally. This discussion focused on structural inefficiencies adopted for revenue purposes that might hinder job creation at home. Later in May, another hearing studied the corporate tax systems in place in other countries to learn how those nations have used their tax code to allow their domestic firms to become more competitive in the global marketplace. Raising revenue for government operations is an important goal of any tax scheme, but it is necessary that tax writers understand that bad tax policies can produce poor choices that have a negative impact across our economy. This idea was pursued in a June 2 hearing looking at tax reform's role in domestic job creation.
To date, a specific proposal has not emerged from the Committee. While others have produced broad outlines for tax reform, the Committee on Ways and Means will have to consider a wide variety of issues and concerns as it works to turn an outline into a highly detailed tax proposal for consideration by the full House of Representatives.
H.R. 25 – The Fair Tax
Another tax reform proposal that has received some attention, and one that takes a notably different path toward reform, has been introduced as H.R. 25, the Fair Tax Act of 2011.
This proposal would repeal the individual income tax, the corporate income tax, all payroll taxes, the self-employment tax, and the estate and gift taxes and levy a 23 percent (tax-inclusive) national retail sales tax as a replacement. The tax-inclusive retail sales tax would equal 23 percent of the sum of the sales price of an item and the amount of the retail sales tax.
Every family would receive a rebate of the sales tax paid on spending amounts up to the federal poverty level (plus an extra amount to prevent any marriage penalty). The Social Security Administration would administer the provision of a monthly sales tax rebate to registered qualified families. The 23 percent national retail sales would not be levied on exports.
Social Security and Medicare benefits would remain the same, with payroll tax revenue replaced by some of the revenue from the retail sales tax. States could elect to collect the national retail sales tax on behalf of the federal government in exchange for a fee. Taxpayer rights provisions are incorporated into the bill. The sales tax would sunset at the end of a seven-year period beginning on the enactment of the legislation if the Sixteenth Amendment, authorizing the federal government to impose a tax on incomes, is not repealed. Many see the repeal of the Sixteenth Amendment as a necessary precursor to enactment of a sales tax-based system to prevent double taxation through both income and sales taxes.