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Thursday, February 28, 2013

H.R. 1 - Tax Reform in the 113th Congress

House Majority Leader John Boehner has announced that H.R. 1 is being reserved for tax reform legislation (see 2/26/13 Ways & Means website).  Apparently this means it is a key agenda item for House Republicans.

A 2/28/13 article in the Wall Street Journal, "The GOP Takes Back Tax Reform," notes that House leaders want tax reform to be revenue neutral and to address both corporate and individual taxes.

I think this is all good news.  Tax reform is needed to reduce the complexity of the federal income tax that is bogged down with over 200 special rules many of which do not need to be there. A tax system with a broader base and lower rates is more likely to meet the principles of good tax policy such as equity, certainty, neutrality, transparency, minimum tax gap and simplicity.

It is also good for reform to cover all aspects of income taxes - those relevant to corporations and other taxpayers. For example, if only the corporate base were broadened and the rate lowered, most businesses would still face a complex system and a higher tax. There are advantages to the system of having the top income rate be the same for individuals and businesses. That is not entirely possible though due to the Section 1411 Medicare tax of 3.8% that applies to high-income individuals and differences in the tax structure and timing for net capital gains.

It won't be easy though. Revenue neutral tax reform, which is a good thing (rather than deficit enlarging tax reform), means cutting back and eliminating special tax rules ("tax expenditures"). These rules are mostly like spending, only buried in the tax law.  For example, instead of giving a family a child credit or a business an energy credit, a government agency could just write these taxpayer a check. The effect to the government fisc is the same.  However, this tax system spending goes unchecked and isn't subject to spending cuts. For example, the sequestration that will kick in on March 1 which means spending cuts, won't cut back the spending in the tax law. It should though because it is all some type of spending.

We'll see how the House Republicans expect to lower the corporate rate to their desired 25% rate and how they expect to lower the individual tax rate as well.

What would you suggest?

1 comment:

Anonymous said...

I would suggest The Neutral Tax ( It permanently eliminates all "tax expenditures" from the federal tax code and gives states the power (and incentive) to make the necessary reforms, both now and over time, to keep the tax code in check.