Column: Time to fix our broken tax code
After a frustrating summer and a much-talked-about recess, congressional lawmakers have returned to Washington, D.C. to find their to-do list has piled up.
They must address the skyrocketing federal debt, the broken Obamacare system, and the threats recently issued by North Korea — in addition to all of the other day-to-day nonsense going on in Washington.
While it’s often easy for lawmakers to brush aside, one thing in the congressional work queue should stand apart from the rest of these serious issues, because of the harm caused to countless everyday people in every legislative district: America’s outdated, broken federal tax code. Every day that goes by without a tax reform bill is a day in which hard work and savings are being punished and another day in which workers and entrepreneurs are discouraged.
Tax reform bills, like all legislation, must be written before they can be signed into law, but no one in Congress has yet to step forward with legislation that would institute the tax reforms the economy desperately needs.
In April, President Donald Trump’s advisers released a memorandum providing checkboxes for lawmakers to use when drafting proposals. One of those checkboxes is reducing the number of income tax brackets from seven to three, which is similar to how President Ronald Reagan’s Tax Reform Act of 1986 reduced the number of tax brackets from 15 to four.
Flattening the tax structure would ensure there are fewer effective penalties for being more successful and earning additional money. It would also reduce the number of increases in taxpayers’ effective marginal tax rate, the cost of earning one extra dollar.
In addition to flattening taxes, the Trump tax outline includes reducing tax rates, allowing people to keep more fruit of their labor. Most of the specifics of the three brackets have not yet been determined, but it is clear earners in the top bracket would pay 35 percent and lower-income earners would pay between 10 percent and 25 percent. By comparison, Reagan’s Tax Reform Act cut the top tax rate from 50 percent to 33 percent, allowing the prosperity of the 1990s and early 2000s to take root.
Focusing on tax reform now by reducing the top tax rate from its current 39.6 percent to the targeted 35 percent rate would realign the stars for economic prosperity. However, dithering and delaying on tax reform could impose substantial costs.
Because of how we currently tax multinational businesses’ profits, many organizations are incentivized to move their headquarters out of the United States, taking untold billions of dollars in tax revenue with them. Of the 34 nations participating in the Organisation for Economic Co-Operation and Development, the United States is one of the worst tax offenders, taking about 35 percent of businesses’ revenue.
The United States also taxes income earned in other countries, a silly, destructive policy only six other countries in the entire world have also adopted, and none of those six are considered economic world leaders in virtually any category.
The status quo encourages businesses to merge with competitors headquartered in other countries and move in with their new partners, a living arrangement best illustrated by American restaurant Burger King’s 2014 marriage with Canadian restaurant chain Tim Horton’s.Trump’s tax plan, as explained in the administration’s April memorandum, would only tax profits earned in the United States, and it would facilitate the “repatriation” of money stuck overseas using a one-time tax on homebound profits. After paying that tax, businesses would pay just 15 percent on profits earned domestically, incentivizing organizations to operate in and conduct additional business in America.
Under Trump’s plan, businesses won’t leave the United States in droves, as they have been. Instead, foreign businesses will choose to “marry” their American competitors and move to America, creating jobs and driving economic growth.
Now, not later, is the time for Congress to take action and turn bold promises into reality for American taxpayers.
Jesse Hathaway is a research fellow with The Heartland Institute.