Economy-Boosting Tax Reform May Finally Be In Sight
After a nearly six-week recess, Congress returned this week for a brief lame-duck session to wrap up final legislative items on its plate before adjourning for the year. The top priority will be to pass a government funding bill, although whether to do so through an omnibus spending bill or yet another continuing resolution remains up in the air. The inclination appears to favor the latter, expedient course. If that is the case, lawmakers would do well to listen to Senator Pat Roberts (R-KS) and keep such a continuing resolution "as clean as possible."
Talk has been heard of extending various renewable energy tax credits left out of last December's $680 million revenue package. Doing so simply would open up a Pandora's Box, with members debating over an untold number of other expiring tax provisions. That discussion has its place, but it's not with a funding bill that must pass to avoid a government shutdown; it belongs in the context of comprehensive tax reform.
Momentum grew throughout this election cycle to at long last fix our complex tax code that burdens individuals and businesses alike, not to mention the nation's economy. Now with a President-elect Trump and Republicans controlling both the Senate and House, it appears almost certain that tax reform will happen in 2017 - and likely will be a priority for the Trump White House and the congressional leadership.
Indeed, post-election, House Ways and Means Committee Chairman Kevin Brady (R-TX) has announced his intention to move tax reform legislation within the new administration's first 100 days, telling the Wall Street Journal that he's "confident that this blueprint will grow the economy significantly, simplify the tax code for families and lower their tax burden and bust up the IRS, redesign[ing] it so it's focused on customer service."
Earlier this spring, House Speaker Paul Ryan (R-WI) and Chairman Brady introduced that blueprint - "A Better Way for Tax Reform" - which would consolidate the individual income tax brackets down to three, with the top tax rate at 33 percent, and lower the sky-high corporate tax rate to 20 percent. President-elect Trump's tax reform plan has much in common with that of Speaker Ryan and Chairman Brady, although his lowers the top corporate tax rate all the way down to 15 percent.
This is good news because it's clear that piecemeal efforts, such as tax extenders and Treasury regulations, aren't going to solve the problems of so-called "inversions." A complete overhaul of a tax code that hasn't seen reform since 1986 is in order and long overdue.
According to the Tax Foundation, the Internal Revenue Code ran to 409,000 words in 1955; it now has grown to 2.4 million words, requiring Americans this year to spend over 8.9 billion hours complying with tax filing requirements. All of this comes at a significant cost: $409 billion annually in lost productivity, more than the combined gross products of 36 states.
The Tax Foundation laid it out thus, "Individuals and businesses need to devote resources to complying with the tax code instead of doing other productive activities. For example, a business owner who needs to file a complex tax return each year may hire an accountant or tax lawyer to do it. This tax professional may cost $70,000 a year or more. This is $70,000 that this business owner cannot devote to purchasing equipment or hiring workers. Economists refer to this as an opportunity cost, and it results in lost productivity."
Comprehensive tax reform that follows along the lines of the GOP's plan will spur much-needed economic growth by simplifying the tax code for individuals and providing a more tax-friendly environment for American businesses, resulting in additional jobs and investment. Such tax reform will help spur economic growth further if lawmakers avoid a tendency to, at the behest of special interests, impose punitive taxes on certain sectors of the economy. One good example is the current administration's pattern of proposing to rescind IRS Code Section 199's Manufacturer's Deduction, but only for the traditional oil and gas sector, permitting virtually all other manufacturers to claim it.
No one outside Washington's Beltway has to be told that the U.S. tax code is a drag on the economy, but relief may be in sight.