Columnist: Thought of the Day — Looking closer at the Bush tax plan
Published 12:00 am Monday, September 21, 2015
“You’re damned if you do and damned if you don’t.” That must sum up the way Jeb Bush felt after releasing his detailed tax plan.
Serious voters want specifics of candidate’s proposals. An obsequious press is less interested in disseminating news than in taking sides — flattering their favorites and condemning their opponents.
An example was a headline in last week’s New York Times, a paper that thinks of itself as the nation’s newspaper: “Jeb Bush’s Plan is a Large Tax Cut for the Wealthiest.” The headline was misleading. The largest percent decrease in taxes would accrue to the median taxpayer; the lowest to those in the highest bracket.
It is not my purpose to defend Mr. Bush’s proposal, or to argue that it is the best alternative. It is to point out that it is a serious proposal and more important than listening to the antics of Mr. Trump and Ms. Clinton.
The plan reduces the number of brackets and limits deductions; it addresses behavior the current system encourages. It is detailed. Other candidates should follow suit.
Keep in mind, taxes affect behavior. Yet most analysts, when measuring the impact of a tax change, wrongly use static (as opposed to dynamic) accounting to calculate the effect
In respect to the current tax system, it is not that the wealthy do not pay their “fair” share; it is that the system is too cumbersome. It favors those who thrive on complexity and it encourages non-economic behavior.
In terms of “fairness,” according to a Pew Research study using 2014 data from the IRS, the top 2.4 percent of all income tax filers (those earning above $250,000) paid 48.9 percent of all federal income taxes, while the bottom 45.9 percent of tax filers (those earning less than $30,000) paid 1.7 percent.
Special exceptions, allowances and exemptions for favored individuals and businesses abet the cronyism that is rampant in Washington. A 70,000-page tax code guarantees full employment to tax lawyers and accountants.
The code is loved by those who benefit from its complexity, but it is a nightmare to the majority of Americans who must navigate its illegible tables and indecipherable language.
In terms of Mr. Bush’s plan, on the corporate side, it would reduce the stated corporate tax from 35 percent to 20 percent. (Keep in mind, the effective tax rate on profitable U.S. corporations, according to Americans for Tax Fairness, was 12.6 percent in 2010.)
Complexities serve the wants of large businesses and wealthy individuals. Simplicity is the enemy of tax attorneys.
Bush’s plan would eliminate interest payments as an expensed item, which favors debt versus equity financing. It would allow for the expensing of capital investing, which should encourage economic growth. S-Corporations, LLCs and partnerships would continue to pay taxes under the personal tax code.
However, the passthrough rate would drop from 39.6 percent to 28 percent. The corporate AMT (Alternate Minimum Tax), which requires calculating tax liability under two sets of rules, would be eliminated.
The plan would impose a one-time tax of 8.75 percent, payable over 10 years, on the $2.1 trillion stashed overseas, which would allow those funds to be brought back to be invested in U.S. projects. And, to discourage “corporate inversions,” the plan would no longer tax corporations’ international profits, placing U.S. businesses on a footing equal to their international competitors.
As mentioned, complexity favor large companies. Small businesses, historically the life-blood of job growth in the U.S., do not have the same ability to reduce taxes as do large ones. Additionally, many pay a higher nominal rate, as they file under the individual code.
According to the Citizens for Tax Justice, 15 Fortune 500 companies paid no tax in 2014, despite generating $23 billion in profits. While I cannot vouch for those numbers, thousands of lawyers and accountants work to ensure the limiting of tax obligations.
The current system has not worked. Data from the Bureau of Economic Analysis (BEA) suggests that in 2014 corporate taxes (excluding payroll taxes) accounted for 10.6 percent of federal tax revenues. In the 1950s that number ranged between a quarter and a third of all federal tax revenues.
A report from the Bureau of Economic Analysis (BEA) shows that inflation-adjusted GDP, since 1980, has risen 149 percent, while inflation-adjusted corporate tax receipts were higher by 84.5 percent.
On the individual side, Mr. Bush’s plan would take the seven tax brackets and reduce them to three: 10 percent, 25 percent and 28 percent. Married couples with two children, with incomes below $38,600, would pay no tax.
The plan proposes some radical changes. State and local taxes would no longer be deductible. The deductibility of state and local taxes means that low-or-no-income tax states like Texas, New Hampshire and Florida subsidize high-income-taxed states like New York, California, Connecticut and New Jersey. Why should they?
Mr. Bush would eliminate the favorable treatment of “carried interest,” a benefit to a small number of highly compensated private equity and hedge fund managers. The personal exemption phase-out (PEP) would be eliminated and the standard deduction would be raised, in the case of married filers, to $22,600 from $12,600.
Pease, or the limit on itemized deductions for high-income tax payers, would also be eliminated. It would be replaced with a limit on the value of all itemized deductions, with the exception of charitable gifts, to 2 percent of adjusted gross income. The AMT, a bane to taxpayers and a boon to tax preparers, would be eliminated.
The Bush plan is a step toward addressing a corrupt agency, as well as resolving an unnecessarily complex system. It would boost economic growth.
Not everything in the plan is to my liking. I would prefer a simpler system — a flat tax, with no deductions, including charitable gifts. The American people are generous, and I suspect most charitable groups would survive.
On the other hand, as has been revealed by the exposure of “charitable” organizations like the Clinton Foundation and Super PACs, some are fronts to maintain a lifestyle or to promote self-serving and/or political causes. The inheritance tax would disappear.
The Bush proposal would reduce rates on investment income. In my opinion, since capital investments were taxed when they were income, it is wrong to tax their fruits.
Mr. Bush would eliminate the requirement of seniors paying their share of the payroll tax. I would not. Social Security is bankrupt, or close to it. I would prefer to see the payroll tax extended — albeit at a lower rate — on all income.
Government spending represents about 22 percent of GDP. Financing that spending is the obligation of the American taxpayer. The collection agency is the IRS.
As we learned in the Lois Lerner saga, the agency has become corrupted for political purposes. Learning the specifics as to how each candidate plans to finance his or her government should be a primary focus of the campaigns.
Mr. Bush has made a start; it is a plan worth debating. The others should follow.