Republican Budget Plan and Tax Reform Mystery

http://budget.house.gov/UploadedFiles/PathToProsperityFY2012.pdf

 The House Budget Committee released the Republican Budget plan this week. It addresses tax reform as described in this summary from their report:

"Prevents President’s tax increases; Reforms broken tax code to make it simple, fair, and competitive; clears out special interest loopholes and lowers everybody’s tax rates to promote growth."

What does that mean? Well, there are a few more details on page 15of the report - The Path to Prosperity:

"5. Enact Pro-Growth Tax Reform

This budget recognizes that the nation’s fiscal health requires a vibrant, growing private sector. It charts a prosperous path forward by reforming a tax code that is overly complex and unfair.

Individual tax reform: The current code for individuals is too complicated, with high marginal rates that discourage hard work and entrepreneurship. This budget embraces the widely acknowledged principles of pro‐growth tax reform by proposing to consolidate tax brackets and lower tax rates, with just two rates of 10 and 25 percent, while clearing out the burdensome tangle of loopholes that distort economic activity.

Corporate tax reform: American businesses are overburdened by one of the highest corporate income tax rates in the developed world. The perverse incentives created by the corporate income tax do a lot of damage to both workers and investors, yet the tax itself raises relatively little revenue. This budget improves incentives for job creators to work, invest, and innovate in the United States by lowering the corporate rate from 35 percent to a much more competitive 25 percent and by shifting to a territorial system that will ensure a level playing field for American businesses."

There is a tax reform chapter starting at page 57.  But, still not many details.  The report does say that the tax system should be changed from a worldwide to territorial system, and AMT would be repealed. on page 67 it says that tax subsidies should be eliminated.The report correctly labels the subsidies as spending through the tax law.

It is difficult to really know what all of this means because there are few specifics and it makes reference to "loopholes" when the author likely really means special tax rules that are being used as intended, such as the home mortgage deduction, child credit and exclusion for employer-provided health insurance.

We should be asking questions when such general proposals are offered without sufficient detail to know who total revenue collections will change, how tax burden among different income groups would change, how different types of business entities and different types of income will be taxed, and what happens to federal taxes other than the income tax. What tax subsidies will be eliminated?  Many people aren't even aware of most of them, such as the exclusion for employer-provided health insurance, the imputed value of owner-occupied housing (including in the Administration's list of tax expenditures), fringe benefits, charitable contributions, state income and property taxes, and more.

It is important to read the few words used carefully. For example, the statement towards the start of this post says everyone's rates will be lowered. That is not the same as everyone's taxes will be lowered. Many individuals will have a tax increase because even with a lower rate (perhaps), your taxable income will be higher due to the removal of all or some significant number of tax breaks. I am not saying that is a bad thing, just pointing out the difference between a lower rate and lower taxes.

I think the big idea is good - a tax system with a broad base and low rates is more likely to meet principles of good tax policy, but I am concerned that the real action will be delayed because of the lack of specifics and insufficient effort to help the public understand today's tax system including its 250 tax expenditures (special tax rules). I hope lawmakers are working on legislative language so we can get a better sense of what the changes are. Ideally, it would be best to start with specific goals for the reform so there is something to measure the proposals against.

What do you think?