Now that President Trump and GOP congressional leaders have decided to defer action on the Affordable Care Act, legislative attention is turning to tax reform. Many believe there is a much greater possibility of achieving bipartisan support for tax reform even though the last comprehensive tax reform occurred in 1986.
There is considerable support in both Houses of Congress for pro-growth tax reform that will make our overly complex tax system simpler, fairer and more competitive. The need to do so exists both in connection with corporate and individual tax reform. After all, many small and medium sized businesses are taxed at the individual level.
While many people claim to support the need for comprehensive tax reform, the devil is in the details. Every major tax preference has its own constituency and tax preferences amounted to over $1.2 trillion in fiscal 2016, according to the Joint Committee on Taxation and the Congressional Budget Office.
On the corporate side, the U.S. has the highest statutory corporate tax rate of any industrialized nation. This combined with the fact that the U.S. taxes on a global rather than territorial basis, puts us at a major competitive disadvantage to other major industrialized nations.
While some have argued for a temporary repatriation tax relief bill as a means to help fund needed infrastructure improvements, the time has come to engage in much more dramatic and comprehensive tax reform. Some of the additional types of reforms that should be considered include: significantly reducing the statutory corporate tax rate to 20 percent to 25 percent in exchange for fewer tax preferences. The U.S. should also tax on a territorial versus global basis. Three tax preferences that should be retained are: reasonable depreciation rules for major capital expenditures; a responsible tax credit for basic versus applied research, and; a deduction for dividends distributed. This later and new preference would eliminate double taxation of dividends. It would also serve to encourage company boards to either invest excess cash for growth within the company or distribute the excess cash for investment or consumption by others.
With regard to the individual taxes, we need to make our system much simpler. In my view, a laudable goal would be to shoot for a system whereby 90 percent of individuals would be able to prepare their taxes with a one page form, although it might have to be printed on both sides of the page.
Some of the types of individual tax reforms that should be considered include: reducing the number of tax brackets to three with a top marginal tax rate of 25 percent to 28 percent; taxing capital gains at the same rate as earned income unless the investment is held for at least three to five years, and; treating "carried interest" as ordinary income.
Individuals should be able to: claim a deduction for interest paid on a primary residence loan for a loan amount up to the maximum conforming loan in the respective geographic area; save a reasonable amount on a tax favored basis for retirement and health care costs, and; take deductions for bona fide charitable contributions. After all, over time, government is likely to do less directly due to fiscal pressures. As a result, non-profits and individuals should be encouraged to do more.
As part of the Comeback America Intiative, we presented the corporate and individual reform packages noted above to representative groups of voters in Ohio and Virginia in 2012. The respective tax packages received over 80 percent support but Washington has yet to act.
Figuring out what to do is one thing but as President Trump discovered in connection with the American Health Care Act, figuring out how to get it done is very important too! Now that President Trump has expressed an interest in pursuing more bipartisan legislative reform approaches, it seems appropriate for the president to reach out to the Problem Solvers Caucus. This bipartisan group of legislators has already expressed an interest in working together and with the administration in pursuing tax, infrastructure and other reforms of mutual interest. The caucus is supported by No Labels, the bipartisan group for which I am a national co-founder. Both the caucus and No Labels believe in progress rather than partisanship and results over rhetoric.
The above actions could be coupled with some targeted infrastructure investments and possible even some incremental reforms of the ACA as part of the budget reconciliation process. We need to break the gridlock in Washington. In doing so, we should not be moving left or right, we should be moving forward in order to create a better future for our country and families.
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