Tax Reform and America’s Financial Death Spiral
Tax reform is about to be debated in Washington—and not a moment too soon.
America’s finances are in a death spiral. Similar to a heroin addict that has reached the point where ever-larger doses are necessary to get a desired “high,” federal tax rates are at a point that discourages businesses from investing in job-producing activities in America, and penalizes individuals who seek to grow their income. Continuing the current system and rates (or increasing them) to address the near-$20 trillion national debt and the annual deficits that add to it won’t cure the problem; it will kill the patient.
Washington is certainly collecting a great deal of revenue. The U.S. Treasury has disclosed that during the first six months of the current fiscal year, it has pulled in a record haul of $695,391,000,000 in individual income taxes. This was in addition to $547,491,000,000 in Social Security and other payroll taxes. The Tax Foundation gave a bad mark to the United States in individual income taxes, ranking it behind 24 other developed nations in ease of burden of this type of levy.
The Congressional Budget Office describes how the current tax system discourages incentive:
When workers’ earnings rise but their after-tax income rises less—because of increases in their income and payroll taxes or declines in their benefits from government programs—their incentive to work typically declines.
Despite the record intake from individual income taxes, the federal government still ran a $526,855,000,000 deficit. Even with that vast intake from the Individual Income Tax and all that deficit spending, crucial needs, including an underfunded national defense, a crumbling infrastructure, and a social security system headed for insolvency all remained unresolved.
In fact, total federal tax collections declined because of lower returns from the corporate income tax. America’s uncompetitive corporate tax rates discourage business survival, growth and job creation within the nations’ borders.
The Tax Foundation notes that The United States has the third highest general top marginal corporate income tax rate in the world, at 38.92 percent. The U.S. rate is exceeded only by the United Arab Emirates and Puerto Rico. The worldwide average top corporate income tax rate, across 188 countries and tax jurisdictions, is 22.5 percent. Forbes found that America has the highest statutory corporate income tax rate of any Organization for Economic Cooperation and Development (OECD) nation.
The OECD also reports that the tax-to-GDP ratio in the United States increased by 0.5 percentage points, from 25.9% in 2014 to 26.4% in 2015. The corresponding figures for the OECD average were an increase of 0.1 percentage point from 34.2% to 34.3% over the same period.
High rates, combined with an extraordinarily complex code, serves as a significant drag on the national economy. Americans for Tax Reform notes,
…the U.S. has one of the most complex, internationally uncompetitive tax codes and double taxes income earned abroad. As a result, this money is unable to be reinvested back into the [U.S.] economy.
Former NY lt. Governor Betsy McCaughey, writing in the NY Post has suggested cutting corporate tax rates to 20%, and candidate Donald Trump had suggested reducing the rate to 15%.
Lowering taxes was a major plank in President Trump’s campaign platform.
President Trump is promising “the biggest tax cut in history,” in a bid to jump-start the sluggish American economy, improve a weak job market, and restore stability to the nation’s middle class.
Specifics appear to include reducing business taxes, currently the highest in the developed world, to 15%, doubling the individual income standard tax deduction and simplifying individual tax returns.
Additional details were not available at the time this report was prepared.
The GOP plan prepared by a “Tax Reform Task Force” began to take shape last June. It established its’ central logic:
The United States stands at a pivotal moment. Today’s policy decisions will have a lasting effect on future generations – for better or worse. If we stay within the bounds of the current tax discussion, we have only three choices for the path forward:
- We can do nothing, leaving our children with the responsibility to clean up the tax code and its ruinous effects.
- We can raise taxes under the existing system, which would levy harsher penalties on hard work, savings, and entrepreneurship.
- We can tinker around with little tax changes while the sun sinks ever lower on the age of American excellence.
The Tax Reform Task Force rejects these false choices and believes it is time to go in a completely new direction. Today we have a once-in-a-generation opportunity to move forward with bold, pro-growth tax reform. As the Task Force worked to develop smart reforms, we asked ourselves two questions about each policy or provision: ‘Will this policy reform grow our economy?’ and ‘Is it worth raising taxes on everyone else to include this provision?’ We are committed to growing our economy without increasing the deficit – taking into account the increased Federal revenues that result from economic growth.
In its essence, the GOP plan combines lower rates for both companies and individuals, along with a far simpler tax code—including a goal of making the annual individual income tax filing as simple as filing out a single sheet of paper.
Originally published on the New York Analysis of Policy and Government.