Tax Reform

Tax reform is one of those issues where real reform would benefit the nation on multiple fronts. A large source of the power of the lobbyists is their ability gain tax favors for their special interests. Tax reform could drastically reduce lobbyist strength in Washington, DC by eliminating their ability to gain advantages through tax deductions and credits. Tax reform could make us more competitive as an exporting nation, and could make the tax system more efficient and fair. America needs a true economic and political game changer---a new tax system.

History

In 1980, our national debt was only about $1 Trillion or 33% of Gross Domestic Product (GDP). By the end of the George W. Bush administration our national debt was 10.6 Trillion or 70% of GDP. This path of “charge and spend” began with the conservative, republican metaphor of “starve the beast” in the 1980’s, when they cut taxes in order to reduce government. But the republicans never had the political will to cut spending and government spending actually increased under Presidents Reagan and George W. Bush. Some groups even advocate drowning the government in debt in order to reduce its influence. Since 1993, not a single Republican member of the House or Senate has voted for a tax increase despite the necessity to do so at times.

One active group is Grover Norquists’ Americans for Tax Reform. Howard Coble has signed Norquists’ Taxpayer Protection Pledge. By signing this pledge officeholders limit themselves to the fiscally unsound path of voting for wars, Wall Street bailouts, and tax deductions for corporations, as long as they do it with borrowed money and don’t raise taxes. The Pledge and its signers are more than any other factor, responsible for America’s huge federal debt.

Principled change

Six basic principles should guide any tax reform. The first principle is that any new system should raise sufficient revenue to fund America’s current and future expected expenditures. The second principle is that the tax base should be as broad as possible, which helps minimize overall tax rates. This is a matter of fairness because all Americans benefit from a strong prosperous nation so everyone should contribute financially to the common good no matter how small their contribution. The third principle is that reform should improve compliance rates by reducing tax preferences, complexity and increasing transparency. Reducing loopholes and simplifying the code will make collections easier, cheating more difficult and reduce the cost of compliance. The fourth principle is to the extent that equity and simplicity allow, the tax system should aim for neutrality by not favoring some income groups and businesses over others. Congress began favoring Wall Street over manufacturing 30 years ago resulting in the deindustrialization of America. The current tax code also favors the rich over the middle class, which widens the disparity in wealth and income. The fifth principle is that there must be a clear transition timetable to the new tax system. This allows time to educate business and individuals on the new approach. The sixth principle is any new tax system must be trade compatible and support our exports.

Flat Tax

I support a move to the flat tax in the United States. Everyone would pay a specific rate such as 17 percent of what is left from their personal income from all sources after subtracting a personal allowance, Social Security taxes and Medicare taxes. There would be only four allowances: $23,200 for couples filing jointly, $14,850 for single heads of households, $ 11,600 for singles, and $5,300 for each dependent child. The entire tax form would be a single postcard. A family of four making $50,000 under the flat tax would pay about an effective rate of 6 percent, and a family making $200,000 would be taxed at an effective rate of 14 percent.

Value Added Tax (VAT)

The current corporate income tax would be replaced with an 8% VAT. The current corporate income tax is so full of loopholes many corporations don’t pay even a reasonable amount of tax. This is evidenced by the fact corporations are paying about half the taxes they were paying in the 1950’s as a percentage of GDP. Companies like General Electric (GE) have an uncanny ability to lose money in the US, and make lots of money overseas. In 2009, GE had generated $10.3 billion in pretax income but actually received a tax benefit of $1.1 Billion. Exxon made $35 Billion in 2009 and paid no income taxes. Corporations do this using various loopholes and by sheltering profits overseas.

Our current corporate income tax system also rewards corporations for moving production overseas. If a company moves overseas it pays no VAT there on exports to the US. In our corporate income tax structure we allow US corporations to defer taxes on their foreign profits. So production moved to China pays very little tax there, and the taxes owed here are deferred. Periodically, lobbyists get Congress to pass legislation to allow the multinational corporations to bring their profits back to the US at extremely low tax rates. This last happened in 2005 and the tax rate was 5.25% on foreign profits brought into the US.

A VAT would also have the added benefit of adding an additional tax on imports that is World Trade Organization (WTO) compliant. Furthermore, we as a nation can waive the VAT on exports from the US under WTO rules. This is an extremely important export incentive we are unable to provide now for our manufacturers.

Even though a VAT is fairer and less cumbersome the large corporations will fight it. This is because they have built export platforms in China and other countries to manufacture products for export to the US. These are highly profitable installations for these corporations under the current tax structure. A VAT would immediately slash the value of their Chinese investments.

Summary

The incumbent politicians will just try to confuse you on subjects like taxes. By using false logic they will convince you that you’ll be harmed by any changes to the tax system. But they are only trying to maintain the status quo to retain the power they wield through the tax system. A flat tax combined with a VAT will remove the power of Congress to pick winners and losers through tax loopholes. It will be more fair, easier to collect and enforce, and will increase the competitiveness of our exports. As a new member of Congress, I will work towards tax reform as a matter of principle.

For a more detailed discussion of the ideas presented above please refer to Chapter Two of the book Saving Capitalism by Pat Choate.

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