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September 30, 2014

A Plan to Reduce the Tax Burden for Everyone

Too many American are unable to access enormous potential without reform.

Republican Senators Mike Lee (UT) and Marco Rubio (FL) announced a proposal for a major tax overhaul they believe will address fundamental changes in the American economy so far unrecognized by the federal tax code. Writing in The Wall Street Journal, Lee and Rubio note old industries have disappeared and new ones have taken their place, requiring higher skill levels.

The U.S. must acknowledge an increasingly competitive global business climate. “Despite these dramatic changes, the policies and practices of Washington remain stuck in the 20th century,” the senators argue, “leaving too many Americans unable to access the enormous potential of this new era.”

Their proposal calls for creating two basic tax rates of 15% and 35%, while reducing or eliminating a number of tax breaks and deductions currently benefiting only wealthier individuals. The plan would eliminate the so-called marriage penalty, which imposes higher taxes on married couples than if the same two people had filed individually. The proposal would raise the child tax credit to $3,500 to offset the fact that parents pay taxes to cover federal entitlement programs while also paying the cost of raising their own children. Lee and Rubio contend this double burden often keeps many low- and middle-income families from getting ahead.

The plan also addresses the crippling 35% corporate tax rate (not counting state and local burdens), calling for a drastic reduction in the amount of federal taxes businesses pay to make them more competitive in the global market. The current rate is the highest in the developed world, compelling businesses to move out of the country while stifling economic growth here at home. Lee and Rubio have yet to specify the exact amount of the cut pending further study, but they do outline a plan for businesses to be taxed only in the country where income is actually earned.

Lee and Rubio’s plan will face a heap of criticism from Democrats and even some other Republicans. For one thing, cutting taxes is anathema for Democrats, and statists will insist it cuts into current tax revenue, even though lower tax rates (to a point) lead to increased revenue. For the Right, the plan maybe doesn’t go far enough and is still too vague on some points.

Earlier this year, House Ways and Means Committee Chairman Dave Camp (R-MI) released his own tax reform proposal that he spent three years developing. Camp’s plan called for a 25% corporate tax rate. His base individual rates were lower – 10% and 25% – but he proposed an unnecessary 10% surtax on joint filers above $450,000, most likely an attempt to get Democrat support.

The one virtue Camp’s reform proposal shares with Lee’s and Rubio’s is limiting the political manipulation of the tax code to reward constituencies and punish hard work and investment. The current code is often used as a bludgeon to force individuals and businesses to engage in behavior favorable to whoever is in power in Washington. Real tax reform should reward hard work, allow individuals and families an opportunity to improve themselves economically, and create a favorable business climate that will improve the economy and make America more competitive in the global marketplace.

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