Suggestions for Tax Code Improvement
November 15, 2013
The U.S. tax system has become less and less competitive as the rest of the world works to reform their tax codes. If the United States is to regain its standing and return to robust economic growth, it will need to first acknowledge the areas of the tax code that are the least competitive and most problematic in terms of complexity. The following are twelve steps that should be taken toward a simpler, pro-growth tax code, says the Tax Foundation's Chief Economist William McBride.
- Cut the Federal Corporate Tax Rate: The United States has the highest corporate tax rate in the developed world and will need to drop it 15 points to match the average developed country and probably more to match the ongoing efforts abroad to lower the corporate tax burden.
- Improve Capital Allowances: Businesses must write capital investments off over years or even decades. Stretching out these deductions reduces the incentive to invest. The solution is to shorten asset lives so that businesses are free to grow and invest.
- Move to a Territorial Tax System: Companies based in other countries only pay tax where the profits are earned, while U.S. companies must also pay an additional tax if they bring their profits home.
- Reduce Shareholder Taxes: Shareholder taxes on capital gains and dividends are a double tax on corporate profits, and the United States has some of the highest shareholder taxes in the developed world.
- Lower Tax Rates on Pass-Through Business Forms and other High-Income Filers: In the United States, more than half of all business income is taxed under the individual income tax code, not the corporate code. Further, most pass-through business income is taxed at the top marginal tax rate, which is nearly 50 percent. This reduces the incentive for these businesses to invest in the United States.
- Eliminate Estate Taxes: Full repeal of estate taxes at the federal and state level would boost saving and investment and add some clarity, certainty and fairness to the tax code.
- Eliminate the Alternative Minimum Tax (AMT): It raises little revenue relative to the compliance costs it creates. Insteads reduce the unjustified tax preferences in the regular code that allow so much variation in tax rates across filers.
- Eliminate the Personal Exemption Phaseout and Limitation on Itemized Deduction (Pease): These provisions can effectively add 6 percentage points or more to the top marginal tax rate, resulting in a variable and difficult to predict penalty on work and investment.
- Eliminate ObamaCare Taxes: ObamaCare was supposed to be a health care system, but it became a vehicle for taxing particular industries, favoring others, while hurting incentives to save and invest.
- Eliminate Corporate Welfare in the Tax Code: The tax code is littered with numerous corporate welfare programs meant to spur certain industries or activities. These carve-outs cost roughly $38 billion per year, in terms of lost income tax revenue, but this does not count the cost of complexity and compliance, which favors businesses with large tax departments.
- Eliminate Refundable Tax Credits: Refundable tax credits, tax credits that exceed the recipient's income tax liability, are the fastest growing tax breaks in the federal tax code. These tax credits discourage work and saving at the margin for millions of workers.
- Maintain or Improve Other Provisions that Protect Savings and Investment: There are a number of provisions that fundamentally move the tax code in the direction of a saving-consumption neutral tax base. These include widely used retirement account vehicles such as 401(k)s and IRAs, which were created to eliminate the double taxation of retirement savings. All savings should receive such treatment.
All together, these reforms would simplify the tax code, boost investment and make the United States more competitive. The ensuing economic growth would generate substantial tax revenue as well, mainly from the growth of individual incomes.
Source: William McBride, "Twelve Steps Toward a Simpler, Pro-Growth Tax Code," Tax Foundation, October 30, 2013.
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