With Comprehensive Tax Reform, America is Poised to Prosper

Ross Marchand

September 28, 2017

September 26 through October 1 is Tax Reform Week for the Taxpayers Protection Alliance (TPA).  Leading up to, and after our press conference with the National Taxpayers Union this morning at 10:15 am at the House Triangle (media advisory here), TPA will be highlighting the need for comprehensive tax reform.  Our third and final installment outlines the importance of comprehensive tax reform.

The tax code is a complete and utter mess. Individual tax reform is an absolute necessity.  The tax code is more than 4 million words, hopelessly stacking the deck against individuals trying to comply with the code.  The Taxpayer Advocate Service estimates that taxpayers spend more than 6 billion hours complying with the Tax Code. In estimating the value of that time, the National Taxpayers Union Foundation (NTUF) calculates that an astounding $262 billion is lost to tax compliance each year. In the absence of comprehensive tax reform, that figure will only increase year after year.

Many “individuals” shelling out taxes at the top rate of 39.6 percent are in fact small businesses who “pass through” their revenues into owners’ income. Despite the vital role that startups play in driving American entrepreneurship, many of these enterprises are paying nearly 45 percent of their income in taxes, once state and local levies are taken into account. While some relief can be obtained via carve outs like the state and local deduction, such provisions have the unintended consequence of fueling the growth of subnational governments across the country.

On the corporate side, a litany of deductions and special carve outs means that there’s a wide disparity in rates paid across industries. One prominent casualty is the health care industry, which, according to an analysis by The Institute on Taxation and Economic Policy (ITEP), pays the highest effective rates of any industry in the country. These costs are then passed along to customers in the form of double-digit premium increases. Large corporations with a treasure trove of lawyers and accountants regularly find ways to dodge onerous rates, including write-offs and inversions. Smaller businesses without access to these resources are force to pay the actual rates, with money that could’ve been used to hire workers and increase wages.

These myriad problems have been acknowledged by Administration after Administration, but to no avail. The last time comprehensive tax reform took place was in 1986, when fourteen brackets were reduced to two, and the top tax rate was slashed from 50 percent to 28 percent. The proposal released yesterday by the Congressional “Big Six” is similarly designed, with three brackets in place of seven and a lowering of the tax rate from 39.6 percent to 35 percent.

And in some ways, the proposed reforms overtake the ambitions of 1986. Small businesses passing through their income will pay no more than 25 percent, and corporations will face a new rate of 35 percent. These mammoth changes will turbocharge the America economy, resulting in multiple points of added gross domestic product (GDP) growth each and every year.