Tax day is approaching! If you haven’t filed your taxes yet, you better do so by April 17th, this year's extended deadline. In honor of tax day, I wanted to explain why we absolutely need fundamental tax reform and what my plan for would look like.
Last week, I was asked to write an article comparing the Buffett Rule and the Romney Rule. In that article I explained what the two rules were and why if I had to pick one, I would pick the Buffett Rule. Keep in mind the Buffett Rule is nothing more than Obama saving face trying to make the tax code seem more 'fair.' The Buffett Rule barely raises revenue because the effective tax rate of the top 1% is already close to 30%. All it does is make things look a little better.
Althought the Buffett rule doesn't raise substantial new revenues, it sets fundamentally different principle for our current tax code. Instead of setting a marginal rate high and then allowing unlimited deductions to reduce your tax rate, the Buffett Rule sets a minimum tax rate regardless of deductions (like the Alternative Minimum Tax). In addition, the Buffett Rule treats income as income. That means investment income is taxed at the same rate as ordinary income. The problem is it only affects people making over $1 million dollars a year.
My tax reform proposal builds on the concept of a minimum tax rate, but applies it across the board. Under this proposal, there would be three tax brackets at 10%, 20%, and 35%. Deductions and tax credits would be reduced substantially, but some would remain. This system would allow deductions up to a maximum of 5% total of your total effective rate. That means at minimum, the effective tax brackets would be set at 5%, 15%, and 30%. No one would pay less than 5% in income taxes and the maximum anyone would pay is 35%. All income would be treated the same, so investment income will be taxed at the same rate as ordinary income.
The same system would be setup for corporate taxes. The corporate tax rate would be set between 15% and 20% with the same 5% cap for deductions. That would lower corporate taxes from 35% and substantially boost investment in this country. No longer could GE reduce their taxes to zero. They would at minimum pay 10% to 15% depending on where the corporate rate is set.
This overhaul would eliminate most deductions across the board. No longer will people and businesses be able to reduce their effective rates substantially below their income's marginal tax rate.
By simplifying the tax code tremendously and increasing confidence in our tax rates, the economy would prosper. This system would be more transparent, easier to implement, and would appear more 'fair.' The simplification would lead to widespread investment in the economy and allow the U.S. to make a credible budgetary plan to reducit the deficit. We need this to happen to get us on the right track! We need fundamental tax reform now!
What do you think about this tax reform proposal? What about this proposal do you think will work and what do you think will not work?