Tax Reform
The issue of Tax Reform affects all of us and dealing with it is an important part of my work in Congress.
INCOME TAX REFORM
First, I want to make something clear. In Congress, we only address federal taxes. There are many. It is not just income that is taxed. For example, the Federal Government taxes gasoline, plane tickets, cell phones, internet access, and payroll. There are death taxes, capital gains taxes and there is, unfortunately, a marriage tax penalty. In addition, there are many "user fees" which are also taxes, but directed at specific groups. These can include fees to use a federal park, a patent application fee, or a hunting fee, etc. We tend to focus only on the Federal income tax, but in fairness to the U.S. taxpayer, we need to acknowledge that there are many taxes being paid. And, we need to keep in mind that the state, municipal and county governments all typically impose taxes of some kind, including property and sales taxes. The U.S. tax code is both complex and confusing. Needlessly so in my view on both counts. Moreover, higher taxes place a growing burden on families. It is my mission in Congress to obtain some type of tax reform that is fair, and simplifies the process. It is a poor reflection on the current state of affairs that small businesses have to hire attorneys and CPA's just to figure their taxes.
Many people do understand that the Federal Government cannot create wealth. It cannot compel prosperity. It can do nothing but take property, money and assets from the people. Or, it can borrow money, and then saddle people with the burden of paying it back. It is now generally accepted by most critical thinkers that the Federal government cannot "create" jobs. It can only spend the money it takes or borrows. True job creation comes from the private sector. Taxes take money that, for many families struggling to get by, puts food on the table and keeps a roof over their heads. We simply cannot afford to take more money out of the economy and out of the pockets of any Americans during a recession only to put that money in the hands of a federal bureaucrat.
Nor is it appropriate to engage in class warfare. We are all Americans. Everyone living under the blanket of liberty in this country owes the government a fair tax for the legitimate services provided by this nation. We all will accept some tax progression, but the effort to demonize those blessed with good fortune to create a successful business or have skills and talent that are rewarded in the market place is short sighted and wrong. There are a handful of bills relating to income tax reform before the House of Representatives. The two most widely known proposals are the FairTax and the Flat Tax.
The “Fair Tax Act of 2011,” also known as the FairTax or H.R. 25, was introduced in the 112th Congress by Congressman Rob Woodall (R-GA). This legislation would repeal all corporate and individual income taxes, payroll taxes, self-employment taxes, capital gains taxes, estate taxes and gift taxes. The FairTax would replace the previous list of taxes with a revenue-neutral national sales tax on all new goods and services at the point of final purchase for consumption. Business-to-business transactions and used products (which have already been taxed) are not subject to the sales tax.
The “Freedom Flat Tax Act,” or H.R. 1040, was introduced by Congressman Michael Burgess (R-TX). It proposes to amend the Internal Revenue Code to authorize an individual or a person engaged in business activity to make an irrevocable election to be subject to a flat tax (in lieu of the existing tax provisions) of 19% for the first two years after an election is made, and 17% thereafter. It calculates taxable income for individual taxpayers by subtracting a basic standard deduction and an additional standard deduction for each dependent from the total of wages, retirement distributions, and unemployment compensation. It also imposes an employer tax on the value of excludable compensation provided to employees not engaged in business activity of 19% for the first two years after an election is made under this Act and 17% thereafter. Finally, it repeals the estate, gift, and generation-skipping transfer taxes.
I am closely reviewing these proposals and appreciate your input. I intend to support thoughtful efforts to reduce the size and complexity of the ridiculously large 17,000-page tax code. I firmly believe tax reform is needed and will continue to advocate for such reform in Congress. Rest assured that I will keep your thoughts in mind as the different options are discussed and I would appreciate any additional input you want to give.
CORPORATE TAXES
The current corporate tax structure was enacted in 1986. Since then, it has become apparent that the United States has the second highest corporate tax structure in the world. The exceptionally high tax rate in the United States has hurt our global competitiveness. We have known for some time that high taxes are a disincentive to investment. Rather than building new factories and businesses here, because of the high tax rate, many companies have chosen instead to locate in countries with more rational tax rates.
In 2008, some in Congress started to focus their attention to remedy this problem. All reforms, on both sides of the aisle, include reducing the corporate tax rate. Some have proposed a five percent decrease, from 35% to 30.5%. Others have proposed lowering the corporate tax rate to 25%.
When you average the national tax rate with the average state corporate tax rate, the average combined federal and state corporate tax rate in the U.S. is 39.3%, second among the Organisation for Economic Co-operation and Development (OECD) member countries only to Japan's combined rate of 39.5%. This is not a wise strategy if we want to encourage business growth here in America.
I believe we need to reform our corporate tax policy and make our country more competitive. To be among the highest globally is not an honor, it is a deterrent. It is poor public policy that directly impacts the growth of new and existing business in the United States. If we are to make the U.S. corporate tax system more competitive internationally, corporate tax rates will have to be reduced not only in Washington at the federal level, but we must also address state tax rates.
"TAX HAVENS"
Many experts are unable to define what a “tax haven” country is with specificity. In addition, all nations are independent and sovereign, and are thus able to establish their own policies, including tax policies. Thus, the issue of addressing any reforms is particularly complex. Many nations legitimately establish favorable tax policies to attract foreign investment. Even the United States has created tax incentives to induce foreign investment in this country. But generally, a tax haven is considered to exist where the tax structure as a whole was established deliberately to exploit a demand for tax avoidance opportunities. The U.S. Government Accountability Office (GAO) was unable to find a satisfactory definition of a tax haven but concluded that a questionable tax haven is one where there are no or very low taxes, little or no transparency of financial and tax transactions, little or no transparency in legislating or governing tax laws, allowance of taxing authority with no physical presence, and self-promotion globally as a tax financial center.
According the Congressional Research Service, the federal government loses both individual and corporate income tax revenue from the shifting of profits and income into low-tax countries. It was noted that the revenue losses are difficult to estimate, but rough estimates approach $100 billion in 2009.
Complicating this is the fact that many corporations doing business in the United States are legitimate multi-national corporations. With global operations, such companies may be able to shift profits into low-tax foreign subsidiaries. The Organisation for Economic Co-operation and Development (OECD) and the G-20 industrialized nations have targeted tax haven countries, focusing primarily on evasion issues. Congress has periodically addressed this, including the Senate Finance Committee. Some ideas to address individual tax avoidance include increased information reporting as well as provisions to increase enforcement—such as shifting the burden of proof to the taxpayer, increased penalties, and increased resources. At this time, we will continue to monitor this issue. Tax reform in general is something I remain concerned with, and if the House is able to address comprehensive tax reform, then abusive tax practices will likely be addressed.
WITHHOLDING TAXES
As you may know, the American Recovery and Reinvestment Act of 2009, or “Stimulus” bill, contained a variety of spending projects as well as temporary changes to tax law. One of the provisions included in the Stimulus was the “Making Work Pay” tax credit. After the law’s enactment in February 2009, the Making Work Pay credit allowed eligible taxpayers to receive up to $400 for individuals or $800 for couples filing their tax returns. Individuals had to have an earned income and valid a Social Security number to qualify.
The temporary Making Work Pay credit was set to expire after roughly two years, on December 31, 2010, prior to my entering Congress. Since the credit has expired, federal income tax withholding has returned to its pre-2009 levels for the 51 million taxpayers who qualified. Assuming that their incomes remain the same in 2011 as they were in 2010, these taxpayers will see higher federal withholding taxes from their incomes. When it comes to tax policy, consistency, simplicity and fairness are fundamental. As you have seen, when the withholdings levels change every two years, the policy lacks consistency. I am devoted to reforming the tax system so it is more fair, more consistent and easier to understand. More critically, I will not be supporting massive tax increases as some propose. I find our current level of taxation to be more than enough and to be onerous when you add in local property taxes, local and state sales taxes, various government “user fees” and special taxes such as airport TSA fees, rental car fees and cell phone fees. We are taxed at almost every opportunity. That is why I have maintained that we do not have a tax shortage, we have a spending problem.
Congress must remember that real people and their livelihoods are at stake. If Congress wishes to help the American people, it must bear in mind that Washington does not have all of the answers. The federal government does not earn the money it takes in taxes; it is hard-working Americans who earn it. If we fail to make the tough choices about our addiction to spending, we are merely fostering a tax-and-spend culture that demands you, the hard-working Arizonan, to pay a greater sacrifice in your earnings. Strengthening the American workforce will help ultimately to restore confidence in the American dream. We can restore our workforce by reforming our unfair tax laws.
For more information concerning my work and views on the issue of Tax Reform, please contact my Washington, DC office.
I look forward to your feedback.
Thank you.