A couple of weeks ago, Jeb Bush—one of the leading Republican candidates for President of the United States—released a tax proposal that if elected, he will present to Congress and plan on signing into law. He claims his tax proposal will stimulate four percent yearly GDP growth, but even if it doesn’t meet that high bar, the plan goes a long way in reducing and simplifying the mess that the American tax code has become.
The tax code currently stands at 80,000 pages. It is a mistake to assume that something is bad just because it is complex. But the tax code has grown more and more convoluted year after year because special interests—be they large corporations or small interest groups—are able to pressure Congressmen into adding exemptions or special provisions that are then never taken out. Because the tax code is so complex and so full of specific exceptions, it has created an unequal field for companies to do business in. A complex tax code pits the small businessman against the large corporation and the middle class against the wealthy. It pits industry against industry by blessing some of them as preferred and leaving others out to dry—increasing the benefit and importance of lobbyists. Wealthy individuals, companies and powerful organizations can hire lobbyists and tax specialists to make certain that they are paying the lowest amount possible while the less fortunate and smaller businesses can’t afford that luxury. A simpler tax code that eliminates loopholes in exchange for lower rates would level the playing field and potentially raise more revenue. While not perfect, Jeb Bush’s plan is the most comprehensive and thought out plan aimed towards overhauling the tax code.
The plan starts by reducing the current seven tax brackets into three. The three tax brackets would pay a rate of 28 percent for the top bracket, 25 percent for the middle bracket and 10 percent for the bottom bracket. It would also lower the income bar needed to be in the top bracket. It is currently $465,000 for a married couple and Mr. Bush would lower it $141,000 for married couples and $85,750 for singles. This would have the effect of raising the average income 3.3 percent of the bat. Maybe the best thing is the removal of the Alternative Minimum Tax (AMT). The AMT is a complicated measure that the Federal government introduced to offset the effect of all the exemptions that Congress was putting into the tax code. Every single year Americans must pay the higher of the two, their regular federal income tax or the AMT. But different industries and companies can all do things to manipulate and adjust the AMT, essentially making it a convoluted, mini version of the tax code. Removing the AMT and the deductions would lead to a simple tax code where everyone has an idea of what they have to pay.
The last big changes are targeted at making America a more competitive place to do business. The plan would reduce the current 35 percent tax on corporate profits—currently the highest in the industrial world—to 20 percent. Even though America has the highest rate on paper, the effective rate is actually much lower. Lowering the official rate to a more reasonable place while simultaneously removing the deductions that drop the effective rate would level the playing field for small vs. large businesses and raise more revenue. Jeb would end the policy of worldwide taxation of United States businesses. It is this policy that has led to the practice of “inversions.” Inversions are where small companies based in foreign countries with low tax obligations buy much larger American companies. This lets American companies pay the lower foreign rate and it is also the cause of the $2 trillion in cash that American companies are currently stashing abroad. They can’t bring back this cash that they have paid foreign taxes on—without being taxed again at the very high American tax rate. Bush would offer a one time 8.75 percent tax payable over ten years to American companies that bring this money back.
Besides that, the plan would end the marriage penalty, expand the Earned Income Tax Credit, end the death tax and end the employees’ contribution to Social Security for employees over 67. Roughly 15 million Americans will no longer bear any federal income tax liability. The plan does have issues. It essentially erases the charitable and mortgage deduction for most Americans. But it is the first real stab at tackling a tax plan that has gotten way too convoluted.