The tax overhaul plan we’d like to see
The federal tax code is an unholy mess. It consumes 6 billion hours of Americans’ time each year. It coddles politically entrenched industries. And it burdens America’s blue-chip corporations in their bid to compete with overseas rivals.
No wonder that President Trump and Republicans in Congress are making a major effort this month to build support for a tax overhaul plan. So what should a suitable plan look like?
Well, it would look virtually nothing like the outline released in spring by the Trump administration, which called for a lower tax rate for many business owners than for their top employees. Rather, the ideal plan would radically simplify the tax code while retaining its progressivity.
Among the most important principles it should uphold is revenue neutrality, which means it should raise at least as much money as the current code. As lawmakers from neither party have shown the courage to control soaring spending on benefit programs, they should at least keep the $20 trillion national debt from spiraling even further out of control.
Some taxes should be cut. The corporate income tax of 35%, for instance, should be set at 20% or lower, with a lot fewer loopholes. The current rate gives an advantage to companies not headquar- tered in the United States. And its complexity encourages all manner of tax gamesmanship.
The corporate tax also hits the middle class hard. A family saving for retirement, for example, indirectly pays the same 35% as a billionaire with much larger holdings. And as for the very rich, many of them derive their income from sole proprietorships, partnerships, S corporations and other “pass-through” entities that don’t pay the corporate tax.
The hardest task will be fixing the individual code, which vexes everyday Americans and is how 95% of businesses pay their taxes. It is far too generous to some business interests, particularly in commercial real estate — as evidenced by the fact that Trump, who says he’s worth $10 billion, apparently paid no taxes for several years running. Of course, we don’t know for sure, because Trump won’t release his returns.
At the same time, taxpayers need to confront the fact that their rates are far higher than they need be thanks to massive — and highly popular — deductions for such expenditures as mortgage interest, health care, charitable gifts and state and local taxes.
Of these, only the charitable gifts break has a strong case for being left alone. The tax-free status of health plans needs a limit. The deductions for mortgage interest and state and local taxes should be gradually phased out or capped, as they have perverse effects. The former drives up housing costs, and the latter encourages states and localities to impose their own high taxes.
A revenue-neutral plan that cuts corporate rates while providing sanity and simplification to the individual code would not be an easy feat politically. But it would mean people and businesses could spend more time doing what they do best —and less time figuring and finagling their taxes.