- The Foundry: Conservative Policy News from The Heritage Foundation - http://blog.heritage.org -

New Bill Would Make Long-Overdue Changes to Tax Code

Posted By Curtis Dubay On May 4, 2010 @ 4:00 pm In Economics | Comments Disabled

US Capitol [1]

With all the damaging bills coming out of Congress today, and promises of more to come, it is easy to lose sight of necessary positive policy changes that Congress should be making to improve the tax code and increase economic growth.

Representatives Jim Jordan (R-OH) and Jason Chaffetz (R-UT) look to fix that by proposing a series of changes to the tax code that will finally make those long-needed advancements.

Their bill, H.R. 5029 [2], proposes the following:

1) Eliminate the tax on capital gains. The current tax code taxes capital heavily because of the capital gains tax, taxes on dividends, and through taxes on business income and the corporate income tax–especially because businesses cannot deduct the full cost of the capital they buy but must depreciate it over several years at a lower real value. This reduces the amount of capital in the economy and therefore destroys jobs and lowers wages. As such, taxes on capital should be minimal or nonexistent. Eliminating the capital gains tax completely is a long-overdue step that will reduce the tax burden on capital.

2) Reduce corporate income tax to 12.5 percent. The corporate income tax in the United States is 35 percent. When combined with state taxes, the top rate is the second highest in the world, behind only Japan. The rate is far above the 25 percent average rate of other industrialized countries. The high rate in the United States is a major factor driving jobs to other countries. A reduction in the rate is badly needed to keep jobs in the United States. Reducing the rate to 12.5 percent would be a boon to job creation and American international businesses.

3) Kill the death tax. The death tax [3] is a plague on family-owned businesses and a weight around the economy’s neck. The 2001 and 2003 tax cuts actually abolished the death tax for 2010, but if Congress does nothing this year, under law it comes back to life in full force in 2011. Abolishing the death tax would create jobs and help the ailing economy.

4)  Immediate Expensing of Business Expenses: As explained above, one of the factors driving up the cost of capital is that businesses cannot deduct the full cost of the capital they buy but must depreciate it over several years. Providing immediate expensing would solve this problem and create jobs and increase wages in the process.

5) Reduce payroll tax by half for 2010. Although this proposal would reduce taxes, it would not have the stimulus effect the authors of the bill envision. Businesses and individuals make decisions about how much to work, save, invest, and whether or not to take on new risk based on long-term economic considerations. Reducing marginal tax rates on all businesses would have more simulative impact [4]. A better alternative would be to permanently extend the tax rate reductions in the 2001 and 2003 tax cuts [5] for all taxpayers, not just those making less then $250,000 a year as proposed by President Obama.

Combined these provisions would reduce tax revenue significantly. In order to partially make up for the lost revenues, the bill would rescind all unspent revenues from the TARP program and the stimulus package. It would also require the Treasury Department to sell all shares and warrants it holds in businesses as a result of the TARP program. These necessary measures would blunt the impact the tax cuts would have on the deficit temporarily. In the long-run, the combined tax cuts would no doubt add considerably to the deficit.

In the current political and budgetary environment, any bill that increases the deficit in future years is likely a non-starter. Nevertheless, the tax cuts proposed in Jordan-Chaffetz bill would be perfect as part of a larger revenue-neutral tax reform effort that made the tax code more efficient.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2010/05/04/new-bill-would-make-long-overdue-changes-to-tax-code/

URLs in this post:

[1] Image: http://www.foundry.org/wp-content/uploads/2009/10/capitol1.gif

[2] H.R. 5029: http://thomas.loc.gov/cgi-bin/query/z?c111:H.R.5029:

[3] The death tax: http://www.heritage.org/Issues/Taxes/Death-Taxes

[4] Reducing marginal tax rates on all businesses would have more simulative impact: http://www.heritage.org/Research/Reports/2008/12/Permanent-Tax-Relief-Not-Tax-Holidays-Stimulates-Economic-Growth

[5] permanently extend the tax rate reductions in the 2001 and 2003 tax cuts: http://www.heritage.org/Research/Reports/2009/01/Economic-Recovery-How-Best-to-End-the-Recession

Copyright © 2011 The Heritage Foundation. All rights reserved.