In an effort to develop the foundation for tax reform legislation, senators Baucus and Hatch called on all senators to submit legislative language or detailed proposals for what tax expenditures and other provisions should be added back to a reformed code. The senators stressed tax expenditures and other provisions should be added back only if they help grow the economy, make the tax code fairer or effectively promote other important policy objectives. Senators had until July 26 to submit their proposals.
To help inform submissions, the senators have had the nonpartisan Joint Committee on Taxation (JCT) and their staffs analyze the relationship between tax expenditures and the current tax rates if the current level of progressivity is roughly maintained. The amount of rate reduction would depend on how much revenue was reserved for deficit reduction, if any, and from which income groups.
However, JCT and Finance Committee staff determined that every $2 trillion of individual tax expenditures that are added back would, on average, raise each of the seven individual income tax brackets by between 1.3 and 2.2 percentage points from what they would be under the blank slate.
Likewise, every $200 billion of corporate tax expenditures that are added back would, on average, raise the top corporate income tax rate by 1.5 percentage points from what it would be under the blank slate. Senators Baucus and Hatch have said the JCT report demonstrates that the more tax expenditures allowed in the tax code, the less revenue available to reduce tax rates or reduce the deficit.
Their strategy is sure to encounter opposition from both sides of the aisles who would rather cut tax breaks they don’t like rather than defend tax provisions they support. If you can remember the report that was issued by Erskine Bowles and Alan Simpson, co-chairs of President Obama’s Deficit Commission, some of this same rationale was used in that report known as the Zero Plan. Here are just a few of the highlights of the Zero Plan that I am sure will come up if the senators can move forward on this concept:
▶ Eliminate the alternative minimum tax (AMT).
▶ Eliminate the phaseout of personal exemptions and the limitation of itemized deductions.
▶ Replace the current six-bracket individual tax rate schedule with a three-bracket schedule with rates of 9, 15 and 24%.
▶ Tax capital gains and dividends as ordinary income.
▶ Index tax parameters using the chained Consumer Price Index.
▶ Increase the Social Security wage base by 2% per year more than the growth in the average wage (making the FICA cap $140,100 in 2015).
▶ Phase in an increase in the federal excise tax on gasoline of 15 cents per gallon (13.5 cents per gallon on average in 2015).
▶ Eliminate corporate tax expenditures and reduce the corporate tax rate to 26%.
In response to this “clean slate” proposal, NAEDA and other organizations have joined together to form a new coalition called the Coalition for Fair Effective Tax Rates. This once-in-a-generation opportunity has inspired this group to encourage and help these courageous lawmakers.
The reason: Real reform, which would lower tax rates and broaden the tax base, would spur economic growth, create jobs, improve America’s international competitiveness and create a fairer tax system.
The mission of the coalition is straightforward, and that is to educate Congress and key stakeholders that tax reform should be viewed through the lens of effective tax rates—the amount of taxes businesses actually pay.
To accomplish this, the coalition will:
▶ Establish effective tax rate fairness as the best metric to make meaningful comparisons among policy choices and how they would impact different business types and industries.
▶ Use this metric to bolster the supporters of comprehensive tax reform that broadens the tax base while lowering tax rates for corporations, pass-through businesses and individuals alike.
▶ Impress upon lawmakers and key stakeholders the negative impact that high effective tax rates have on job creation, economic growth and the competitiveness of American businesses.
The chairmen of the congressional tax-writing committees have made it clear that they are determined to pass tax reform. Their task is enormous, but if they succeed, businesses that pay more than their fair share of the business tax burden will finally get some relief.
We, you, the coalition all must encourage and help these courageous lawmakers. It is not the coalition’s intention to enter the debate at the micro level. Instead, the coalition will concentrate on alerting policymakers at every possible turn how their decisions—whatever they may be—impact the effective tax rates paid by the many businesses we represent. We hope this will keep their efforts focused on lowering the high effective tax rates our members currently pay.
NAEDA, as a member of the coalition’s steering committee, will meet periodically to exchange views with key congressional and administration representatives, and help coordinate and strengthen the coalition’s grassroots efforts.
MIKE WILLIAMS is vice president for government relations for NAEDA. He can be contacted at email@example.com
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