Wyden-Gregg tax reform: A small step in the right direction

It’s not a flat tax, but my initial impression of the tax reform plan introduced by Sens. Judd Gregg (R., N.H.) and Ron Wyden (D., Ore.) is that it’s a small step in the right direction.

Eliminating the alternative minimum tax is a winner. What’s more, income tax brackets would become flatter: Still not a single rate, but with just three rates (15 percent, 25 percent and 35 percent) the income tax would be as flat as it’s ever been. Some exemptions would remain — and my general preference is to have as broad and loophole-free a tax code, with the lowest rates, as possible — but thousands of exemptions would be eliminated.

Perhaps most important, the corporate tax rate would be slashed to 24 percent from 35 percent, bringing the U.S. more in line with the rest of the industrialized world. Currently, our corporate rate is a high-tax outlier compared with the vast majority of our competitors in Europe and the Pacific Rim. We would remain on the high side, but this would be a significant move toward the middle of the pack — and one of the best things the feds could do to encourage job creation.

There are some problems, most notably that capital gains tax rates would be higher under this plan than even under President Obama’s plan. The rates would rise not only above George W. Bush-era levels, but above (post-1997) Clinton-era levels as well. That’s a disincentive for job creators.

Another negative: The definition of “rich,” if by that term we mean “the people in the highest tax bracket,” would be expanded dramatically. The top bracket would start at just $140,000 for a married couple rather the current $373,650 (the standard deduction would increase to offset this somewhat).

More analysis is needed, and here’s a reminder that bipartisan reforms sometimes meld the worst instincts of the two major parties, not the best ones. But this bill deserves a serious look.

41 comments Add your comment

CJ

February 23rd, 2010
4:31 pm

CBO – “Corporate Income Tax Rates: International Comparisons” (pdf)

Currently, our corporate rate is a high-tax outlier compared with the vast majority of our competitors in Europe and the Pacific Rim.

Actually, although our statutory corporate tax rates are high, our effective corporate tax rate, the rate that is based on actual taxes paid, is comparable with our competitors (due to the large amount of loopholes/deductions). Also, as a percentage of GDP, our corporate income taxes are among the lowest of our competitors.

The bottom line is, contrary to Kyle’s assertion, when it comes to corporate taxes, the U.S. is in line with the rest of the industrialized world–if not lower.

dewstarpath

February 23rd, 2010
4:31 pm

Kyle –

I would appreciate it if you would stop using my handle
to warn other posters about arguing.

Another unnamed poster on this blog (who shall remain
nameless) has been ranting ever since your warning,
while my posts have been “awaiting moderation”.
(I acknowledge that my posts w/o insults have been
posted w/o moderation).

You just gave another warning to that same unnamed
commenter. I would appreciate some fairness.

Churchill's MOM

February 23rd, 2010
4:33 pm

The only person who loves our current tax code are the LOBBYIST that get rich carrying water for their clients. I really hope this works but most corporations have a large investment in the current mess. Here is a good quick read about corporate effective tax rates.

http://www.smartmoney.com/investing/economy/high-corporate-tax-rate-is-misleading-22463/

CJ

February 23rd, 2010
4:46 pm

There are some problems, most notably that capital gains tax rates would be higher under this plan than even under President Obama’s plan. The rates would rise not only above George W. Bush-era levels, but above (post-1997) Clinton-era levels as well. That’s a disincentive for job creators.

Bookman reminded us that Abraham Lincoln said: “Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration.”

Kyle, on the other hand, implies that capital is superior to labor when he proposes that capital gains taxes should be lower than taxes on earned income (i.e., labor). But the investments of “job creators” won’t go very far without somebody to do the work.

Capital gains taxes should not be lower (or higher) than earned income taxes. They should be taxed at the same rates.

Kyle Wingfield

February 23rd, 2010
5:08 pm

Those data are from 2003, CJ. Most European countries have cut their rates, some of them by several percentage points, since then. Here is a more recent estimate of effective corporate tax rates: http://tr.im/PvVC

As for the Lincoln quote, do you think anything in the capital-labor relationship has changed in the last 150 years?

The 2008-09 recession owed in large part to the sudden shrinkage of the credit markets, i.e. capital. How well has that been working out for workers? Would you say there’s more capital in search of workers or workers in search of capital right now?

And that’s not even to get into the fact that, in many if not most cases, capital gains represent investments made from income that has already been taxed at least once.

Hal

February 23rd, 2010
5:09 pm

CJ et al: Another reason the US effective rate is in line with other nations is that US multinationals grow operations overseas (via direct investment and acquisitions) to avoid the high tax rate ON DOMESTIC INCOME that would occur on similar investments made domestically. Because foreign profits are not taxed currently by the US (subject to exceptions beyond the scope of this blog), US firms expand internationally where tax rates are much lower (or labor costs are lower, i.e. India, but that’s a different conversation). It produces the highest return on investment and is the most efficient use of their capital. Corps have a duty to their shareholders (and their employees worldwide) to utilize capital in the most efficient way possible.

It’s not always the industry specific “loopholes” that allow companies to get down to the lower rates. No domestic company (outside of a few industry specific exceptions) will have an effective rate in the mid-twenties. Unless of course one considers deferral of US tax on foreign earnings a loophole but the repeal of that rule would put us so out of line with the rest of the world the economic consequences would be crushing to the US economy.

My point is that lowering the US corporate rate would likely NOT reduce corporate tax revenues to the US Treasury and would at the same time unwind the economic distortion that retards job and wealth growth in the US.

As a side bar, Mr. Obama showed his gross ignorance of US tax policy in his first weeks in office when he railed against companies moving jobs to India to save taxes. LOL. The Indian tax rate is 33.99%. Had he mentioned Lux, Pays-Bas (that one’s for you Kyle), Ireland, or others the tax policy experts and lobbyists may have been able to contain their laughter.

LA

February 23rd, 2010
5:25 pm

“You just gave another warning to that same unnamed
commenter. I would appreciate some fairness.”

Calm down.

Jefferson

February 23rd, 2010
5:29 pm

Over 500k in income should be a 50 fed tax rate.

LA

February 23rd, 2010
5:30 pm

The liberal meltdown continues…. Hope and change has gone………..

A failure of White House leadership

http://voices.washingtonpost.com/ezra-klein/2010/02/a_failure_of_white_house_leade.html

CNN Poll on Americas’ mood

What is your take on America’s mood?

Pessimistic 71% 19404

Optimistic 29% 7987

LA

February 23rd, 2010
5:32 pm

Obama’s home state is about to go bust….

Expect a MASS exodus of Illinois residents.

Doomsday Predictions Tax Illinois

State watchdog group calls for ‘historical’ increase in personal income tax

http://www.nbcchicago.com/news/politics/Doomsday-Taxes-State-of-Illinois-84947527.html

Jefferson

February 23rd, 2010
5:32 pm

71% are babies, 29% accept reality.

LA

February 23rd, 2010
5:34 pm

dewstarpath

Another blogger came in and called me a few names. GASP! I didn’t retaliate!

Anyhoo, I used Kyle’s warming to the both of us to warn that blogger.

Werd

LA

February 23rd, 2010
5:34 pm

“71% are babies, 29% accept reality.”

Yep, when the numbers are not in liberals favor, they name call…..

LA

February 23rd, 2010
5:36 pm

More Dope and Chains…..

Yep, that stimulus package REALLY worked!!!!

US Jan mass layoffs edge up on weak manufacturing

The number of mass layoffs by U.S. employers edged up in January as manufacturers stepped up job cuts, data showed on Tuesday, but probably not enough to alter views that the economy is on the brink of creating jobs.

LAST LINE: PROBABLY NOT ENOUGH TO ALTER VIEWS THAT THE ECONOMY IS ON THE BRING OF CREATING JOBS.

http://www.reuters.com/article/idUSN239866720100223?type=marketsNews

dewstarpath

February 23rd, 2010
5:38 pm

LA – I was talking to Kyle.

LA

February 23rd, 2010
5:39 pm

“I was talking to Kyle.”

Ok, but when you said “unmentionable blogger” I figured you were referring to me.

Matt

February 23rd, 2010
6:00 pm

You failed to mention that the first 35% of capital gains would be exempted and that the highest effective cap gains rate of 22.75 would presumably only begin with total income of $140,000 or above. Conversely, it could be as low as 9.75% if income doesn’t exceed the 15% bracket.

dewstarpath

February 23rd, 2010
6:07 pm

OK. No offense intended.

CJ

February 23rd, 2010
6:12 pm

Kyle,

Of course, the Great Recession didn’t work out well for either workers or investors. And the shrinkage of the credit markets had nothing to do with taxes on capital gains being too high. It had to do with so-called professionals making investments and taking risks that almost sunk us (e.g., mortgage-backed securities, credit default swaps) and the subsequent hoarding that has resulted after the TARP bailouts (not to mention the significant drop in private sector demand). Not a strong argument for shifting the tax burden away from investment income.

With regard to double taxation argument on capital gains income, all forms of income (and spending) is taxed at several transaction points as it flows through the economy. That’s how we share the pain. Isolating two transaction points in the cycle and hollering “double taxation” doesn’t change the fact that there is no anomaly here.

The money in my paycheck has already been taxed at least once (i.e., the customers who purchased my employer’s goods and services). In addition, the sales taxes I pay at the cash register are paid on income that has already been taxed at least once. I should point out that, unlike with sales taxes, the same entity or individual is never taxed twice with capital gains taxes, since the tax is only on any profit made–not the original investment.

Incidentally, I was limiting my comments above to the subject corporate income taxes since that what you addressed in your post (and is addressed the in Wyden-Gregg)–not corporate income taxes plus undefined “capital related taxes” that the Cato Institute is using in their calculations. (Cato indicates that the effective corporate tax rate in the U.S. is 36 percent when the corporate income tax rate is actually 35 percent—how odd.)

Kyle Wingfield

February 23rd, 2010
6:14 pm

You’re right about that, Matt. And as I said, those rates are higher than the ones that prevailed under Clinton after 1997 and still apply through the end of this year.

A couple making $140,000 or more today would pay 15 percent (if the investment is held at least a year) versus 22.75 percent under Wyden-Gregg. A couple making $60,000 today would pay zero on the same investment versus 9.75 percent under Wyden-Gregg.

See the chart here: http://tr.im/Pwj8

Jess

February 23rd, 2010
6:17 pm

It’ not clear from the information here, so I will ask a question.

Doe this plan tax all wage earners, or is there still a group at the lower end who pay no tax? More importantly, does this do away with earned income credits?

Although I think the capital gains provision is anti productived, if it did tax everyone, and eliminate earned income credits, I could get behind it, although personally I also like the idea of a consumption tax rather than an income tax.

Kyle Wingfield

February 23rd, 2010
6:17 pm

That’s the chart for current and historical cap gains rates, not for Wyden-Gregg…sorry for any confusion.

Kyle Wingfield

February 23rd, 2010
6:20 pm

Jess: I haven’t seen a really detailed proposal, but the standard deduction would be tripled so I suppose that would exempt income up to roughly $30,000. The earned income credit would stay.

Presidential Material

February 23rd, 2010
6:30 pm

Can we worry about taxing the economy after we shed the Bush/Cheney depression? Some conservatives can’t face the damage that conservatism has done to this economy. If an ideology doesn’t work, then it doesn’t work. Let it go. Living in the GOP fantasy world is extracting a very heavy price on the Republican Party.

Obama is the greatest president the American People have elected since F.Roosevelt. He is actually facing and dealing and confronting and working with reality in the United States of America. He’s the first president to do that in generations.

He is the best man we could have elected in the whole country, certainly he’s the best citizen and he knows his civic duty. He didn’t come with a lot of baggage. Nobody tried to kill his dad. There’s no country that he can’t stand to see at peace. I like the future of the USA with this really great prez.

The era of the GOP circus, the Pee-Tardies in the Tea Party, the yellow snow job of militarism for militarism’s sake is over. The era of justice for all is here.

Get used to it, or go join Al Queda and spelunk for the jihad, but get lost one way or the other. When the Pea-tards of the Tea Party hang Obama in effigy, the terrorists win.

Reagan said it best: “There’s no room for the haters.”

CJ

February 23rd, 2010
6:49 pm

I’m sorry Kyle, but the more I look at the Cato Institute numbers, the less helpful that data becomes. 79 countries? Nigeria? Bolivia? If you find any more recent OECD data, then I’d like to see it.

I know I’m running on, but I need to point out two things: First, the CBO report indicates that the evidence is that if we lower our corporate tax rates, then our competitors are likely to lower theirs–leaving us right where we started. It’s also important to note that there are numerous factors that go into investment decisions of which corporate tax rates are only one (e.g., infrastructure, health care costs, education system, economic stability of host country…).

In fact, Toyota recently chose to locate a new plant in Ontario over the U.S. (and subsequently decided to move some existing U.S. operations to that plant), despite higher corporate taxes, partly because the costs to Toyota for expenses related to health care were comparatively low enough in Canada to offset the higher taxes.

Ace

February 23rd, 2010
9:08 pm

Where are they going to get the money to pay the bills and the credit card bill ?

Captain America

February 23rd, 2010
9:18 pm

Kyle,
This
“And that’s not even to get into the fact that, in many if not most cases, capital gains represent investments made from income that has already been taxed at least once.”
deserves a big “so what!”
As CJ pointed out, the already taxed investment money is NOT taxed again by the capital gains tax, only the profit (or gain) is taxed.
Let me get this straight. If a person buys a watch and re-sells it for a higher price, it’s okay for him to be taxed at his marginal rates on his profit, but if a person buys a stock and re-sells it for a higher price, it’s somehow bad to tax his profits at his marginal rates? Since (unlike wages which are taxed multiple times before they even hit your bank account) there is no double taxation here, what logic justifies this special low investment taxation?

Rafe Hollister

February 23rd, 2010
9:18 pm

PM, you are being sarcastic, I hope. If not tell us how great Jimma Carter was.

Captain America

February 23rd, 2010
9:23 pm

And congrats on your blog, Kyle. I have yet to see it devolve into the “Obama is a doo-doo head.” “Well Bush was a bigger doo-doo head” nonsense that I see on Jay’s and Cynthia’s pages all the time.

Jess

February 23rd, 2010
10:05 pm

Tee Hee. Captain said doo-doo.

J-Bird

February 23rd, 2010
10:14 pm

Tax code is intentionally hard to understand and neither party is ready to do anything about it, regardless of what this bill says.

If they wanted to make it easy, Fair Tax would be on the table but we all know that ain’t going to happen.

We’re taxed on our incomes, taxed on our investments, taxed when we buy something…our money is taxed so many times it makes my head spin.

Apparently, some people think that raising taxes on wealthy (aka job creators) won’t affect them. Those tax increases are passed on to the consumer via higher prices for goods, less benefits or even a smaller work force so yeah, “so what”.

Greg in the Highlands

February 24th, 2010
2:28 am

Its sad statement that Kyle has to go back more than 246 years to find an intelligent quote from a politican.

Production vs Consumption

February 24th, 2010
7:24 am

I think we can all agree that if you tax something, the market produces less of it; and it you subsidize it, you get more. As it stands now, our tax system is biased toward consumption because most of the taxes are paid on productivity — wages, profits, interest income, etc. One consequence of this has been an economy increasingly dependent on and driven by consumption — thus soaring debt, import imbalance, etc. Our economy is desperately in need of growth in productive capacity — jobs. We can’t all just work retail.

Whether you like it or not — and there are plenty of reasons not to — the Fair Tax moves the tax burden and it’s depression of activity from Production to Consumption. This will have a very immediate effect on the balance between the two.

One other bonus is that it allows us to capture taxes on imports. If the Chinese/Germans manufacture a product at a profit and send it to the US, they capture the tax and we only get state sales tax. With a consumption tax, the US gets a significant revenue stream from imports. When imports constituted a very small percentage of our economy, this was not really an issue. It is now.

Oh, and services really under-contribute to the treasury. Lawyers should be taxed on their billing. We are, in effect, subsidizing the single most destructive segment of our economy.

Gerald West

February 24th, 2010
7:55 am

The federal tax code, 7500 pages long, loaded with favors, exemptions, and irrelevancies, has been rightly called a disgrace to democratic government. It doesn’t even serve the major purpose of a tax code: it doesn’t raise enough tax revenue! Tweaking it with another 1000 pages to adjust the tax rate on individuals and businesses is not worth the effort.

The entire tax code needs to be replaced by a 5-page (max) document that specifies what is to be taxed, at what rate. There should be no exemptions; projects and circumstances that merit special support should be subsidized directly, not through the tax system. Working persons should not be taxed at all on income below the subsistence level. The wealthy should be taxed heavily and creatively to encourage them to plow their proceeds back into expanding or creating commercial and charitable enterprises, rather than gambling on exotic investment paper or turning their money over to Bernie Madden characters. Corporations should be taxed on the value added to the goods and services sold, rather than allowed to escape taxes by clever deductions and deceptive business losses. Unearned income, gifts, gambling proceeds, and capital gains on investments other than “at-risk” ownership shares should be taxed at the same rate, or higher, than earned income.

Gray areas should not be detailed in the tax code, but left to the interpretation of the tax collector and the courts. Attempts to make law more specific always open loopholes through which billions of dollar pour. Those who wish to explore the gray areas of the tax law should be disciplined by the risk involved.

There are many myths about who and what is taxed, based on reading the existing tax code. Kyle, you mention that American industry is more heavily taxed than other developed nations. That is so if you look only at the specified tax rate. In practice, big corporations manage to manipulate income and expenses, and shuffle proceeds between international branches, to avoid paying much tax. Small businesses are limited to petty cheating on business expenses.

The professed “horror” at a high rate of taxation on upper income brackets is based on the false assumption that the excess income of the wealthy is the primary source of investment capital. Actually, the wealthy are sensible enough to put their excess income in whatever offers the best and safest rate of return; for the last 20 years that has not been American commerce and industry, but exotic paper that no has basis of ownership and risk in commercial enterprise. It’s no coincidence that the upper individual tax bracket was 90% during the most expansive years since the Second World War.

The basic notion that the income an individual receives is just reward for his endeavors is also false. The difference between the income an American receives and what he would receive for similar endeavors if he were Afghan or Somali is due to his luck in being a part of American society. He owes the difference to the society, which includes the government. Philanthropists like Bill Gates are meeting their obligations to society; the greedy fat cats in the banking and insurance businesses are not.

Kyle, let’s not be led to believe that the problems of our country can be fixed by tweaking our present ways. The American economy is broken and needs major overhaul. American government, politics, industry, agriculture, infrastructure, law and justice, health care, and primary education are all failing.

“We’re falling behind and falling apart!”

Morrus

February 24th, 2010
8:18 am

Vote out the incumbents and start over

Potstirrer

February 24th, 2010
8:39 am

HELLO! All you need is the following:http://www.fairtax.org/site/PageServer

A Realist

February 24th, 2010
8:49 am

Obama is a “Doo Doo Head……there, it’s been said and I truly mean it.

LA

February 24th, 2010
9:00 am

Looks like unions are driving businesses out of Ohio and straight to Georgia. Hmmmmmmm

Ohio’s pain is Atlanta’s gain

http://www.ajc.com/business/ohio-s-pain-is-321987.html

Swede Atlanta

February 24th, 2010
9:27 am

I have no problem with reducing the corporate statutory tax rate provided that we eliminate the loopholes. One reason why businesses say they need the loopholes and deductions are to be competitive. If we bring the statutory rate down then they don’t need the loopholes and deductions. But be prepared for a fight. The corporations will want not only a lower statutory rate but also to keep all the goodies in the existing system.

The other reason why our corporations are not among the highest taxed business entities in the world is the corporate welfare that is fed out at the Congressional trough. For example, not allowing the Federal Government to negotiate the price of prescription drugs as part of the Medicare Rx program was a big giveaway to that lobby. All of those programs must be eliminated.

If businesses want a level playing field from a tax perspective then they have to be prepared to compete without corporate welfare.

Hillbilly Deluxe

February 24th, 2010
2:33 pm

The devil is, of course, in the details but it’s an interesting idea. If the corporate tax rate is to be dropped, a cut should come with a corresponding cut in tax breaks and subsidies.

It’ll be interesting to see if this goes anywhere but I’d expect lawyers and accountants to fight it tooth and nail. A simplified tax code isn’t to many of them’s best interest.

dylandawg

March 1st, 2010
11:57 am

Kyle, I have never understood the double taxation arguement and CJ seems to refute it. Could you please make it clear as to why it is double-taxation. Thanks.