The House Ways and Means Committee took another necessary step toward tax reform with a report requested from and issued through the Joint Committee on Taxation (JCT).
The report is a thorough reference guide for tax reform. The JCT should be commended for its impressive work. It is an important step forward because it gathers in one place important background research for tax reform’s eventual success.
The JTC Report and the Heritage Proposal
The report provides synopses of several tax reform plans put together by various groups. One of the tax reform plans is The Heritage Foundation’s New Flat Tax (page 479 of the JCT report). The New Flat Tax would replace nearly all other taxes collected by the federal government, including the payroll tax and the death tax. It has a single-rate tax for individuals that applies to income that is spent. The plan does not tax saving or the returns to saving, such as capital gains and dividends. Taxpayers pay tax only on what they spend, which may include the proceeds from selling their investments if the proceeds are not reinvested.
The New Flat Tax has just three deductions: for mortgage interest, charitable contributions, and higher education expenses. It keeps the Earned Income Tax Credit and creates a credit for families to buy health insurance to replace the employer-sponsored health insurance exemption.
It also reforms the taxation of businesses by using a single rate, allowing full expensing of capital purchases, removing tax from exports, and applying a territorial tax system. It is a tax on business cash flows.
The rate of the New Flat Tax is set to raise the historical average share of revenue, 18.5 percent of gross domestic product (GDP). Initially, the rate would be around 28 percent for all taxpayers, but it would fall over time as the economy grows. The initial 28 percent rate is much lower than the combined income and payroll tax rate that middle-class families pay now, which is over 40 percent. (continues below chart)
Next Steps for Congress
Now that the Ways and Means Committee has completed another necessary step for tax reform with the report, the 11 working groups established by committee chairman Dave Camp (R–MI) and ranking member Sandy Levin (D–MI) should set to work crafting draft legislation on their respective areas using the policy innovations listed in the report. Their drafts should follow the example of the draft reports that Camp has already released on international tax reform, taxation of financial products, and small business tax reform.
Another positive step the committee should take is identifying its overarching vision of tax reform and what it wants tax reform to achieve (e.g., stronger economic growth). Thus far, the committee has made excellent progress on specific and difficult issues, but there are limits to this approach pending the clear definition of a specific approach and set of goals. A clearly stated vision on tax reform would give a stronger sense of how all the important technical work that Ways and Means has done, and continues to do, will fit together in the final plan.