My column for the Washington County Daily News is online. Here you go:
In an attempt to rise from the ashes of their failure to repeal Obamacare, the Republicans in Washington are forging ahead with an ambitious tax reform plan. While it remains to be seen if Congress can accomplish anything substantial under Republican management, this tax reform plan needs to get done.
There are substantial political obstacles for any real reform of the federal income tax system. The first political obstacle is that the United States’ federal income tax has become so progressive that any real reform of it will be lambasted by political opponents with the old tired rhetoric that it “benefits the rich more.” And that rhetoric will be largely true if the benefit is measures in real dollars.
As of the latest figures from the Tax Foundation, the so-called “rich” pay the vast majority of the taxes — and they pay a disproportionate amount of taxes compared to their share of income. The top 10 percent of income earners earn 47 percent of the aggregate adjusted gross income while they pay 71 percent of the overall income tax burden. The top 50 percent of income earners earn 89 percent of the aggregate adjusted gross income while they pay 97 percent of the overall income tax burden.
Looking at the numbers from the alternate perspective, the bottom 50 percent of income earners earn 11 percent of the aggregate adjusted gross income while they pay 2.75 percent of the overall income tax burden. Our federal income tax system is beyond progressive. It is redistributory. It is almost a mathematical impossibility to reform the federal income tax system without disproportionally benefitting the upper half of income earners.
The second political obstacle to tax reform is the throng of lobbyists and special interests in Washington who will fight against reform. While the average American and business owner yearns for a simple and fair tax system, the lobbyists and special interests thrive in the system’s complexity. For every tax exemption, loophole, credit, and shelter, there is a constituency that will fight tooth and nail to protect it. Any attempt at simplifying the tax code will run into a withering fire from K Street.
Despite the obvious political obstacles, the Republicans are seeking to simplify and flatten the tax code. There are many components to the plan, but the thrust is very straightforward and sensible. They want to lower the overall rates while removing almost all of the loopholes.
Under the plan, the individual income tax framework wouldbe reduced from the current seven tax brackets to just three brackets with rates of 12 percent, 25 percent and 35 percent. But while reducing the number of brackets and the rates, the plan would eliminate all tax exemptions except for those for home ownership, charitable giving, retirement savings and higher education. The plan would also increase the child tax credit and the standard deduction.
As a point of comparison, the current highest tax rate is 39.6 percent, but the effective average tax rate of the 1 percent is 27 percent after all of the deductions, credits, and loopholes. Under the plan, even though the highest rate would be lowered to 35 percent, the effective tax rate will most likely increase due to the elimination of most of those loopholes.
For business taxes, the Republicans’ plan would lower the corporate tax rate from a ridiculously high 35 percent to 20 percent — slightly below he world average. The plan would also eliminate almost all of the loopholes that corporations use to avoid paying income taxes.
Perhaps more importantly, the Republicans’ reform plan would decrease the top tax rate on small businesses from 39.6 percent to 25 percent. Since most businesses in America are small businesses whose profits are taxed at the individual tax rate of the owners, they are usually paying a much higher rate than corporations, although corporate profits are taxed twice.
Finally, the Republicans’ plan would switch to a territorial system for taxing overseas profits of American companies, which is more in line with the majority of industrial nations. This would encourage American companies to bring home and spend the estimated $2.6 trillion in cash that they are currently holding overseas to shield it from confiscatory taxation.
Year after year, Americans have clamored for a simpler, fairer, less burdensome tax system for our businesses and our own incomes. The Republicans’ tax reform plan would go a long way toward delivering that kind of system. It is also the Republicans’ last chance to deliver on one of their big promises before the next election. For the sake of the American people, let us hope that the Republicans can overcome the obstacles and pass their plan into law.