America's tax code is broken. American families and businesses spend more than 6 billion hours and hundreds of billions of dollars each year attempting to comply with the filing requirements of our nation's increasingly complex tax code.1 One study estimates that annual tax compliance costs will reach $483 billion by 2015 if no fundamental reforms are made to the tax code.2 The Internal Revenue Service's (IRS) own Taxpayer Advocate Service testified before Congress that the current tax code imposes excessive compliance burdens, is filled with special tax breaks, creates opportunities for abuse, and promotes non-compliance. Over the last decade the federal tax code has been changed 4,428 times -- an average of more than once a day -- including 579 new changes in 2010 alone.3 The current tax code is more than 3 million words long; the mere instructions accompanying the 1040 form exceed 100 pages.4
Economy Plan: 60%It is no wonder that 60 percent of all individual income tax filers are forced to hire professional tax preparers to help them navigate the tax code.5 But unfortunately for the individual taxpayers being represented, the professional tax preparers even have issues: a Government Accountability Office (GAO) on-site investigation of professional preparers found evidence that the professionals did not always know what they were doing either.6 "Tax payers relying on paid preparers to provide them with accurate, complete, and fully compliant tax returns may not get what they pay for," GAO wrote.7 "Nearly all of the returns prepared for us were incorrect to some degree, and several of the preparers gave us very bad tax advice[.]"
Innocent taxpayers are being held hostage by a monstrous system of taxation that only grows worse with each passing year. American families deserve a system that is low, flat and fair. They should be able to file their taxes on a postcard instead of a massive novel-length document.
Changes are also needed for the nation's corporate tax system to make America once again the best place in the world to start and grow a business. At 39.2%, the combined federal-state corporate tax rate in the U.S. is the second-highest overall rate in the world among OECD nations.8 And while statutory rates have been falling worldwide for the past two decades, corporate tax rates in the U.S. have not, as 2011 marks the twentieth straight year in which the U.S. corporate tax rate has exceeded the average of other OECD nations.9 The disparity in corporate tax rates between the U.S. and the rest of the world has put the U.S. at a distinct competitive disadvantage. Because the higher tax rates increase the cost of capital and required return on new investments, many corporations choose to invest elsewhere, costing the U.S. valuable jobs and revenue.10 America needs to send the message to the rest of the world that the U.S. is open for business.
Compliance Costs Broken Status Quo
The corporate tax code is also riddled with loopholes and special-interest tax breaks that are not available to hard-working individual taxpayers. While many families struggle to pay their tax bills, some billion-dollar corporations find a way to avoid paying any federal taxes at all. While individual Americans struggle every year with tax compliance, large companies spend billions on tax avoidance. Special-interest corporate tax breaks and loopholes need to be eliminated so that small businesses and large corporations can compete on a level playing field.
Tax complexity also makes it possible for some individuals and businesses to entirely avoid paying taxes they owe. The National Taxpayer Advocate testified that reducing complexity and simplifying the tax would "improve compliance by taxpayers" and that "complexity creates opportunities for abuse that can be exploited by those who want to avoid their tax obligations."11 The gap between what is owed and what is collected in tax revenue could be as high as $345 billion each year.12 Non-compliance by some individuals and businesses increases the tax burden on the millions of Americans who jump through hoops to follow the law and pay their taxes on time.
The American tax code is too big, too complicated, and too riddled with loopholes and special interest tax breaks that increase compliance costs and impede economic growth. Tinkering around the edges of the code will do nothing to provide families and job creators with the long-term certainty they need to make new investments or hire new workers.
High Cost of Tax Code Compliance
Implementing a simple flat tax plan that protects lower- and middle-income families and eliminates special-interest corporate tax breaks is the best way unleash economic growth and free the country's entrepreneurs and job creators from the shackles of an incomprehensible tax code.
Institute Individual Flat Income Tax Rate of 20%
By implementing a simple and optional flat tax that will allow Americans to file their taxes on a postcard, up to $483 billion a year could be saved by American families and businesses in reduced compliance costs alone.13 A simpler, flatter tax code -- free from the dozens of individual carve-outs that make the code so incomprehensible -- will remove the disincentives to work, entrepreneurial risk-taking, and investment that form the foundation of a strong and vibrant economy.
Lower- and middle-income families will be able to take advantage of an optional 20% flat tax rate that includes generous standard exemptions of $12,500 for individuals and their dependents, as well as deductions for mortgage interest, charitable contributions, and state and local taxes.
Nearly two dozen countries worldwide have adopted flat tax systems, with thirteen of them transitioning to the new system within the last decade.14 Estimates by the non-partisan Tax Foundation show significant taxpayer savings from reduced compliance costs alone. If given the option of a simple, postcard-sized tax return, individual taxpayers could save thousands of dollars each year in tax compliance costs.15 And by removing the myriad distortions in the current tax code that impede the efficient allocation of capital, economic growth will be unleashed across the country, creating new jobs and higher incomes for all Americans.
America's High Costs of Tax Compliance
The new flat individual income tax system will be designed so that federal individual income tax receipts will be equal to approximately 8% of the country's gross domestic product (GDP), in line with the historical share of federal individual income tax revenue relative to the size of the economy 16 The cumulative tax changes proposed, including those to the corporate income tax system, will be designed so that total federal revenues average 18% of GDP, the 50-year U.S. average for federal tax receipts.17 The federal payroll tax will not be affected by the new flat tax system.
Allow Individuals to Choose Between Existing Tax Code or New Flat Tax System
Under the new flat tax system, taxpayers will have the ability to opt-in to the new system or remain under the existing tax code. Those families or small business owners who made investment decisions years ago based upon the structure of the existing tax code will have the freedom to remain in the current system if they so choose. And taxpayers who desire a simpler, less expensive system are free to move into the optional new flat tax system and take advantage of a postcard-sized tax return that could be filled out in minutes.
Overwhelmed and Overburdened
Preserve Deductions for Mortgage Interest, Charity, and State/Local Taxes
Although the proposed flat tax system will not include most special tax credits or deductions embedded within the existing system, families and business that made investment decisions years ago based on the existence of those deductions or credits will still have the option to take advantage of those deductions and credits by remaining within the existing tax system. However, the new optional flat tax system will also include deductions for mortgage interest, charitable contributions, and state and local taxes.
Eliminating the deduction for mortgage interest payments could potentially drive housing prices down even further, while eliminating the deduction for charitable contributions could potentially reduce private funding for non-profits that provide vital services to the less fortunate in the midst of a severe economic downturn. And because interest expenses are taxable when received by the lender, the mortgage interest deduction at the personal level maintains overall tax neutrality for the expenditure. Federal taxpayers should also not be punished for tax decisions imposed on them by their state or local governments. Since families are never able to actually use the income they pay in taxes to state and local governments, it makes sense to also retain the deduction for state and local tax payments.
Eliminate Tax on Social Security Benefits
Because the Social Security system is structured as a pay-as-you-go system where current workers largely provide benefits to current retirees, it makes little sense to tax the benefits of current retirees in order to provide benefits to current retirees. Approximately 17 million Social Security beneficiaries, the vast majority of whom make less than $50,000 each year, are currently forced to pay income taxes on their benefits.18 Today's senior citizens who paid into the Social Security system for generations should not be taxed yet again on their Social Security benefits. For over 40 years Social Security income was earned-tax free; it was not until 1983 that Congress changed the law and explicitly authorized a new tax on Social Security benefits.19 Under the optional flat tax system, the original tax treatment of Social Security benefits will be restored Social Security income will again be tax-free.
No Federal Sales Tax or Value-Added Tax
The new flat tax system will have no federal sales tax or business value-added tax (VAT). When added to existing federal income taxes and state and local income sales taxes, a national sales tax would be highly regressive. Low-income families spend a much higher percentage of their incomes on food and gas than do those with considerable wealth. For example, a household earning $25,000 each year would spend roughly 40% of its income on food, utilities, and health care, while a household earning $130,000 each year would pay less than 15% of its income on those three items.20
The federal sales tax and the VAT also obscure the true costs of federal taxes by embedding them in the prices of every day goods. When the true cost of taxation is hidden from the taxpayer, it becomes easier for politicians to raise taxes. "[I]n practice the VAT has rarely replaced the income tax, or even resulted in a lower income-tax rate," the Wall Street Journal noted on tax day in 2010.21 "Of the 10 major OECD nations with VATs or national sales taxes, only Canada has lowered its rate." For example, although Denmark originally initiated a VAT rate of only 9%, its rate today is 25%.22
Administrative and compliance costs would also increase under a VAT. According to the Tax Policy Center, "Adding a VAT on top of the existing income tax system would add to total costs of administration for the entire system because businesses would face additional reporting requirements and the IRS would have to administer an entire new tax, without shedding responsibility for other taxes."23
Americas Historical Tax Revenues
Eliminate Tax on Qualified Dividends and Long-Term Capital Gains
America's Built In Tax DisadvantageThe quickest way to spur economic growth is to leave money in the hands of the American people and to encourage the movement of capital. Eliminating the tax on qualified dividends and long term capital gains will free up literally hundreds of millions of dollars the American people currently are sitting on to avoid a tax on the gain -- a tax that is a "second" tax on their money. Between the economic recession, housing market collapse, and decline of the stock market in recent years, American families have lost trillions of dollars worth of their hard-earned savings. As big banks received billions in taxpayer bailouts and watched their profits soar, working Americans watched helplessly as the value of their homes, retirement accounts, and stock portfolios dwindled. By eliminating the tax on qualified dividends and long-term capital gains, entrepreneurs and small business owners can unleash capital to spur economic activity and the growth of the American economy.
Eliminate the Death Tax
The federal estate tax is defined by the Internal Revenue Service as "a tax on your right to transfer property at your death." Under current law, the tax is temporarily set at the rate of 35 percent with an exemption of $5 million. On January 1, 2013 the estate tax is set to return at a top marginal rate of 55 percent (with an additional 5% surtax for certain estates) on all assets above a $1 million exemption amount. The estate tax is paid by the recipients of an inheritance and is due within 9 months of the decedent's death. If the heirs do not have sufficient cash, personal property and business assets must be sold to pay the tax. In the case of family business owners and farmers, the tax often exceeds the ability of the family to pay. These heirs are consequently forced to sell off part, if not all, of their enterprise in order to pay the tax. Eliminating the death tax is necessary to protect family businesses, farms and jobs.
Eliminate Corporate Loopholes and Special-Interest Tax Breaks
Many Americans are rightly outraged by news stories that corporations like GE somehow pay nothing in taxes after earning more than $14 billion in profits.24 Due to the mind-boggling complexity of the tax code, large corporations can implement the most effective tax avoidance strategies money can buy, while American taxpayers are forced to send thousands of dollars to the federal government instead of spending it on their families. And unlike small businesses that cannot afford to house an army of lawyers and tax accountants, large and sophisticated corporations have the means to find and use every tax avoidance strategy that lies buried in the tax code. The myriad tax breaks, loopholes, and so-called tax expenditures available within the corporate tax code need to be phased out over time to ensure a level playing field for family-owned small businesses and multi-national corporations.
Reduce Corporate Income Tax Rate to 20% to Enhance American Competitiveness
The U.S. has the second-highest corporate tax rate in the developed world. Over the past 13 years, 30 countries within the OECD have lowered their corporate tax rates to increase their global competitiveness, while the U.S. corporate tax rate remained unchanged.25 According to aggregates of more than a dozen estimates of effective tax rates across the world, the U.S. effective corporate tax rate of 28% exceeds the average rate of most other nations by nearly 8%. Bringing the U.S. tax rate more in line with America's global competitors will increase incentives for companies to locate their new factors or hire new employees in the U.S.
Enhance American Competitiveness by Transitioning to a Territorial Tax System
The current "worldwide system" of corporate taxation used by the U.S. creates significant incentives for American companies with foreign subsidiaries to leave profits overseas instead of investing them in the U.S. The worldwide system of taxation taxes overseas income first at the tax rate in the country where the income is earned and then a second time when profits are brought back to the U.S. In essence, income earned in a foreign tax jurisdiction can be tax-deferred until it is brought back to the U.S. Under a territorial system, corporate profits would be taxed only once -- in the country where the income is earned. When combined with a lower corporate tax rate, transitioning to a territorial system of taxation would make the U.S. far more competitive with other countries, increasing economic growth and creating more jobs for American workers.
Allow Locked-Up Overseas Capital to be Brought Back to the U.S. at a Reduced Tax Rate
More than $1 trillion in income is stuck overseas due to the current complicated U.S. treatment of foreign-earned corporate income according to numerous studies from researchers on both sides of the political divide. Although a territorial system of taxation eliminates the issue of locked-up overseas income going forward, a reduced tax rate on repatriated earnings can help attract capital that has been left overseas since the most recent repatriation holiday in 2004.
A study conducted for the U.S. Chamber of Commerce by former CBO director Douglas Holtz-Eakin estimated that a one-time repatriation tax rate of 5.25% would bring over $1 trillion in capital back to the U.S., creating up to 2.9 million new jobs and $360 billion in increased economic output.26 Laura Tyson, the former head of the White House Council of Economic advisers for President Clinton, authored a study for the New America Foundation that found a reduced repatriation rate would increase GDP by up to $336 billion, create between 1.3 million to 2.5 million new jobs, and increase tax revenue by $36 billion.27