Editor's Note: This is the first of a three part series on U.S. tax reform.
As the United States slogs through its worst post-recession recovery in history, Americans are left wondering if our best days are over. We’re suffering from a lack of confidence, certainty, and optimism. Unemployment remains stubbornly high while more people give up looking for work and switch over to dependence on government assistance to make ends meet. Is this the best Washington can offer us when it comes to opportunity and independence? President Barack Obama’s original campaign message of “hope and change” is now turning into one of lowering expectations.
Americans are also increasingly frustrated with the extreme partisanship in Washington that paralyzes the ability of politicians to solve problems. The leadership of the parties is at polar opposite ends with their reform-minded solutions leaving very little common ground left for both sides of the aisle to work with.
However, there is one area that provides a golden opportunity for bipartisan cooperation between the parties and would restore confidence, certainty, and optimism in our economy: pro-growth tax reform.
Pro-growth tax reform, as illustrated in the bipartisan 1986 Tax Reform Act, closes loopholes that allow for overseas tax shelters as well as special interest subsidies in order to collect on revenue more efficiently while cutting tax rates across the board at the same time to incentivize businesses to keep money and jobs here instead of overseas, thus broadening the tax base.
Our corporate tax code is a mess. Our 35% rate (39.2% when including state and local taxes) puts us at the top of the list for highest in the world, leaving us with a huge disadvantage competitively in the age of outsourcing and globalization. At the same time, our corporate tax code is riddled with loopholes and special interest subsidies, making the revenue we collect on our corporate taxes far less than where the rate is set. In other words, we’re not incentivizing global businesses to keep jobs and money here, while those who do lobby Washington for corporate tax exemptions.
Both parties are aware of this which is why several members of both parties understand that pro-growth tax reform is the only way to solve the problems inherent in our current tax code. Thirty-six Democrat, Republican, and Independent senators, 100 Republican and Democrat congressmen, the bipartisan “Gang of Six” plan, and the president’s own Simpson-Bowles debt commission have all come out in strong support of pro-growth tax reform. It has more support among both parties than any other tax reform proposal, including raising tax rates on wage earners and employers even higher.
All the 2012 presidential candidates are aware of this and have now released their plans to reform the corporate tax code in accordance with pro-growth policy.
Obama has introduced a corporate tax reform package that would lower the rate from 35% to 28%, in addition to closing loopholes and some subsidies. But his package is still saturated with special interest toss outs like granting manufacturing businesses an extra 3% cut in their corporate tax rate as well as continuing to subsidize green energy companies. He also doesn’t cut any spending and proposes to pay for it all by passing yet another tax hike – the “millionaire tax.”
Mitt Romney, however, has a corporate tax reform package that is more even and fair for all businesses and individuals. He lowers the corporate tax rate from 35% to 25% across the board and eliminates all loopholes and subsidies. He also cuts everyone’s income tax rates by 20% (which we’ll explore more in depth in the 2nd part of this series), and best of all, pays for all of it by returning levels of federal spending to 20% of GDP (the historical average throughout the 20th century) by 2016.
Rick Santorum, Ron Paul, and Newt Gingrich have introduced their corporate tax reform proposals as well, seeking to lower the rate from 35% to 17.5%, 15%, and 12.5%, respectively. How they expect to craft a realistic, practical path to implementing cuts that deep outside of a supermajority Republican Congress is beyond me.
But pro-growth tax reform comes with several challenges for all parties. Whenever there is talk of closing tax loopholes and eliminating subsidies, Washington is barraged by an army of lobbyists and attorneys seeking to keep these very things in place. There has to be enough politicians on both sides of the aisle willing to ignore these efforts and follow through on closing them. It’s not impossible. We did it in 1986, which led to 20 years of prosperity for America, and we can do it again if there are enough public officials willing to do what’s right for the country and put aside partisan politics.
We will explore income tax reform in the second part of this series next week.
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