This post is work in progress. Please use the comments at the end of the post to provide your thoughts and suggestions.
2012 January 24
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These are the views of one citizen who is concerned about the lack of progress in Congress on deficit and debt challenges. They are intended to contribute to the needed dialogue. Because our country needs fiscal reform — not because 2012 is an election year — Congress has the opportunity and obligation to address issues that cannot wait. Principal among them is a major reform in the personal income tax code. A suggested objective for a member of Congress might be:
"Recognizing
the ongoing budget deficits, the increasing national debt and their
effects on jobs and the economy, I am committed to a moderate ongoing
annual
reduction in the budget deficit, and then to a
moderate annual surplus to pay down the national debt."
This post is concerned primarily with major reform in the personal income tax code, but recognizes three related needs:
- Changes to the corporate tax code that interrelate with the personal tax reform. Tax policy to help create a competitive business environment may contribute to income inequality (basic unfairness).
- Approve a budget resolution for the longer term that provides for moderate annual reductions in the deficit consistent with the "super committee" commitment to cut at least $1.2 trillion (about 8% of GDP) from the deficit over 10 years with significant cuts in the early years. While insufficient to address the forecasted mounting debt (See Figure 1-2 below.), the commitment is needed to provide an important aspect of stability to aid citizens, business and other planners.
- Approve a longer-term infrastructure (roads and bridges) appropriation consistent with the above. This would provide the states with the commitments needed for their planning.
Other opportunities for Congress in 2012 are discussed in
Appendix A.
To maintain or increase tax revenue, key concepts in the reform include: broaden the tax base by eliminating loopholes, tax incentives, and tax preferences; lower marginal tax rates with the broader tax base; no standard deduction; elimination of special tax rate for capital gains; and no forgiveness of taxes. Both Democrats and Republicans agree on the need and some of the general content. The Simpson-Bowles proposal contains many of
the areas of agreement, as does the proposal by the Senate's "Gang of Six". Some of the general provisions are described in the section, General Content of the Tax Reform, in the continuation of this post.
Since some of the changes may have large effects, they should be phased in gradually (say over 5 years), thus giving citizens and the economy time to make adjustments. Gradual changes provide definition of future taxes to provide a foundation for planning.
While the reason for the major reform of the personal tax code is to enhance the public interests, good reform can also create a political advantage for the Republicans. The tax reform could take away the rhetoric of "fair", "fair share", "wealthy pay their fair share", "Warren Buffett pays a lower tax rate than his secretary.", etc. With a tax reform bill passed by the House based on common interests for the country, the pressure would be on the Democratic-controlled Senate to also pass the tax reform. Many tax issues including the termination of the Bush tax cuts will occur at the end of the year if no action is taken. If the Senate fails to act on the House-developed reform, it should be obvious that the Senate is the intransigent body.
The House Republicans have the opportunity to take the leadership position. But the House can have the high road only if the bill is devoted to an objective similar to the suggested above objective and not promote pet-Republican policies that may lack strong economic support, and would provide opponents a source of viable criticism. House Republicans already support the "fairness" message. Passing legislation that has no chance of being approved by the Senate is not progress.
This analysis indicates that almost all tax reductions and
spending increases create only small increases in GDP. If so, other factors such as improving confidence may be the most
important.
The
continuation of this post provides further description and support for the ideas.
Don Nordeen
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On the Agenda for Congress: Tax Reform Plus.
- Key Words:_ national debt, budget deficit, tax reform, fair, fairness, capital gains, marginal tax rates
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