Ryan Ellis

All Capital Gains Should Work the Same as Like Kind Exchanges

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Posted by Ryan Ellis on Friday, April 17th, 2015, 8:32 PM PERMALINK


Congress is always on the hunt for "pay-fors"--tax increases and spending cuts which can be used to offset other tax increases or spending cuts.

Unfortunately, there's a treasure trove of tax increase "pay fors" in H.R. 1, the "Tax Reform Act of 2014," which was introduced last Congress by former Congressman and Ways and Means Chairman Dave Camp (R-Mich.) One of these tax hike pay-fors is an elimination of so-called "like-kind exchanges."

This was the wrong idea, since like-kind exchanges are actually a good model of capital gains tax reform, not a loophole to be closed.

What is a like-kind exchange?

Suppose you are a business owner.  You bought a bunch of widgets (business assets, not inventory) a few years back for $1000. You now want to sell these widgets, and have a buyer for $1500.  In the normal course of events, when you sell the widgets you would have a capital gain of $500 (the sales price of $1500 minus the purchase price of $1000), and you would pay tax on that capital gain.

But you, the business owner, don't want to cash out. You want to buy a fresh set of widgets with your $1500. The tax code has a way for you to do that and defer paying the capital gains tax from that first sale. It's called a "like-kind" exchange. You set up an intermediary trust, which receives the $1500 you get when you sell those widgets. You then have 180 days to purchase a fresh $1500 set of widgets with the money. Your basis in the second set of widgets is the same as your basis was in the first set of widgets.

You can do this as many times as you want, provided the set of widgets you are buying are of a like kind to the widgets you are selling, and provided that you're using all the proceeds every time to buy more widgets.

Only when you decide to sell out of the widget business and cash out do you actually have a capital gain.  The gain is the difference between the final sale amount and the original tranche of widget purchases. The capital gain is embedded over the years in the business, and it becomes due when the business activity effectively ends.

A model for capital gains

All capital gains should work this way. If you buy a stock for $100 and sell it for $150, you should be able to plow that $150 into new stock purchases without having to pay tax along the way. Ditto for any type of capital gain you might have.

You know who agreed with this concept? None other than current Ways and Means Chairman Congressman Paul Ryan (R-Wisc.) Back in 2007, he introduced H.R. 2796, the "Generate Retirement Ownership Through Long Term Holding (GROWTH) Act." It would have allowed something very much resembling a like kind exchange by default for capital gains generated within mutual funds.

When H.R. 1 decided to take away like kind exchanges (which would be a tax increase of over $40 billion over a decade), it implicitly labeled these sales as "tax loopholes." Nothing could be further from the truth. All capital gains should work this way, in fact. Imagine investors not having to report each and every stock and mutual fund transaction on their taxes every year, and instead having a deferred capital gain until sale, a kind of brokerage account version of an IRA.

That would not only simplify tax filing for millions of Americans, it also would make all capital markets--for everything--more efficient. Every time the government takes money out of the pool of capital investment, capital grows more slowly and we're all poorer than we otherwise would be. The key to wealth creation is to leave capital--unmolested by government--free to grow for as long as possible.

Congress should not be looking to restrict like kind exchange plans--they should be looking to do tax reform with them as a model.

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ATR Supports Small Business Taxpayer Bill of Rights


Posted by Ryan Ellis on Thursday, April 16th, 2015, 2:21 PM PERMALINK


The “Small Business Taxpayer Bill of Rights Act of 2015” was introduced yesterday by Senator John Cornyn (R-Texas) and Congressman Mac Thornberry (R-Texas). This legislation will reduce the burden placed on small business owners and strengthen taxpayer protections. ATR supports this legislation and urges all members of Congress to vote for, and otherwise support this legislation.

The Small Business Taxpayer Bill of Rights Act, S. 949 and H.R. 1828 in the Senate and House respectively, makes a number of important improvements to the complex and inefficient federal tax system. Specifically, this legislation lowers compliance burdens placed on taxpayers, provides compensation for taxpayers that experience IRS abuse, improves taxpayer’s access to the U.S. tax court system, and strengthens taxpayer protections. 

Small businesses are the backbone of the American economy, a key driver of economic growth, and a pillar of the American Dream. This legislation will provide important protections to small businesses and help reduce the burden that the federal government places on hard-working Americans. ATR fully supports this legislation and urges all members of the House and Senate to support this bill. 

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Top Ten Reasons the House Will Kill the Death Tax

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Posted by Ryan Ellis on Tuesday, April 14th, 2015, 5:50 PM PERMALINK


Update: The U.S. House of Representatives recently passed The Death Tax Repeal Act of 2015! Now the fight begins in the U.S. Senate. Want to abolish the Death Tax? Take action now!

For the first time in ten years, the U.S. House of Representatives this week will vote on a bill to kill the death tax once and for all. H.R. 1105, the “Death Tax Repeal Act of 2015″ is sponsored by Congressman Kevin Brady (R-Texas.) and notably features the co-sponsorship of Congressman Sanford Bishop (D-Ga.), a member of the Congressional Black Caucus. Earlier iterations of this bill have enjoyed the co-sponsorship of a majority of the chamber, so passage is not in doubt. Maybe that’s why 81 business and citizen grassroots organizations have signed a joint letter under the auspices of the Family Business Coalition urging Congress to kill the death tax.

With the fate of the bill a sure thing, let’s reflect on the top ten reasons the death tax deserves to die:

1. The death tax is not fair.  At a basic level, Americans know that the death tax is not fair. It’s not fair that you earn income all your life and pay heavy taxes on it. It’s not fair that you save your hard-earned money and pay taxes on what you make. It’s not fair that you build a small business and face exorbitantly high tax rates. But all of these unfairness taxes pale in comparison to the death tax. The death tax is a tax you pay on savings you have already paid taxes on at least once, and potentially more than once. It results in the liquidation of first and second generation farms and businesses just to pay the tax. Why should a business have to pay taxes again just because an owner has died?

2. The death tax is not popular with the American people.  In a 2009 Tax Foundation poll, the death tax was considered the “least fair” by the American people, even more unfair than the income tax. In poll after poll for decades now, the death tax has consistently been opposed by 60 to 70 percent of adults, registered voters, and likely voters. The results are in, and the intense opposition to the death tax is unquestionable.

3. The death tax collects almost no tax revenue.  According to both the Congressional Budget Office and the Office of Management and Budget, the death tax is expected to bring in about $20 billion in tax revenue this year. Now, in the real world that’s a lot of money. It’s not a lot of money by Beltway tax collection standards, though.

The federal government is anticipated to collect $3.2 trillion in tax revenue this year, according to CBO.  Do the math, and it will take about 55 hours–out of the whole year–to collect all the revenue from the death tax.  That’s 2 days out of 365 days in the year.

To put it another way, suppose all the revenue the federal government was going to collect this year was represented as $100.  In that case, the death tax would be about $0.63 out of that $100.

You get the picture.  

4. The death tax is a declining source of federal revenue.  As recently as 2000, the death tax wasn’t the joke of a revenue source it is today.  Back then, it raised a respectable 1.5 percent of all federal revenues. But today it’s less than half that. As time goes by, we should expect the death tax to continue to wither on the vine as a real revenue source, as it has for years. The true reason for collecting it is not to raise tax revenue, but it’s out of a misguided sense of class warfare ideology.

5. The truly rich don’t pay the death tax.  As our liberal friends at the Center for Budget and Policy Priorities have recently reminded us, “many wealthy estates employ teams of lawyers and accountants to develop and exploit loopholes in the estate tax that allow them to pass on large portions of their estates tax-free.  These strategies don’t benefit the broader economy; they only allow the wealthiest estates to avoid taxes.” I couldn’t have said it better myself. The uber-rich can afford these “teams of lawyers and accountants” to “develop and exploit loopholes” for their clients. First and second generation business owners and family farmers cannot.  As a result, Paris Hilton will be death tax free her whole life (and beyond), but startup business owners will either have to pay the death tax or funnel scarce capital into their own little army of tax nerds and lawyers.

6. Chances are, you don’t live in a state with a death tax. While Congress has been sitting on their hands for ten years not repealing the death tax, states have been doing their “laboratories of democracy” thing.  Non-death tax states now outnumber death tax states about 30-20, and those dwindling number of states which still have a death tax are either looking to scrap it or are greatly increasing their state death tax’s “standard deduction.” It’s not a good revenue source, and states know it.

7. Most countries have a death tax rate far lower than our own, and many have no death tax at all.  The United States, with its gut-punching 40 percent federal death tax rate plus the various state rates, has the fourth-highest death tax rate in the world.  We’re only ahead of Japan, South Korea, and France.  Many familiar countries–Australia, Canada, Israel, and even Sweden–have no death tax at all. In a world where capital is mobile and global, this matters a lot. People don’t have to die in the United States.

8. The death tax is bad for jobs and killing it would give you a raise. Again according to the Tax Foundation (they’ve done some great work in this field) the death tax is an economy killer. They have a macroeconomic “dynamic” model to see what killing the death tax would do to the job market. It projects that killing the death tax would create 139,000 jobs, increase private business hours by 0.1 percent, and increase wages by 0.7 percent.

9. The death tax is bad for economic growth and repeal literally pays for itself. The same Tax Foundation report says that the death tax would increase the economy by 0.8 percent (or $137 billion in today’s dollars).

Because this additional economic growth would be subject to taxation all its own, it would more than make up for the revenue lost by repealing the death tax–it would make up the $20 billion per year, plus yield an extra $8 billion per year on top of that.  You heard that right–we’d actually collect more tax revenue if we stopped collecting the death tax.

10. The death tax is even bad for the environment. A recent study by Brian Seasholes at Reason shows that the death tax leads to the subdivision of many large, privately owned land tracts.  That’s because heirs–land rich but cash poor and in need of money to pay the death tax–sell off parcels of land in order to satisfy Uncle Sam. This leads to development of land which would never have been developed except for the death tax.

Do you agree with Ryan that the Death Tax should be repealed? Urge your senators to kill the death tax right now! 

Photo Credit: 
Keeva999 https://www.flickr.com/people/54159370@N08/

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Doctor Evil

Yup. True story. I recall because the left had a fit about George Steinbrenner's estate paying zero tax. From Forbes...

What’s also ridiculous is that the timing of Steinbrenner’s death makes such a difference to his heirs. I’m sure if you asked any of them, they’d give anything for one more hour of light. But I’m also sure that they won’t complain that their inheritances will be much larger because Steinbrenner died this year and not a year earlier or later. You see, 2010 is that magical year when, for one year only, the estate tax disappears. Had Steinbrenner died in 2009 when the estate tax was 45 percent on wealth over $3.5 million, the New York Times estimates his heirs would’ve lost about $500 million to federal taxes on an estate estimated by Forbes to be worth $1.1 billion.

So much blood shot out of Communist's eyes that day.

Doctor Evil

He skillfully spewed out a lot baloney disguised as food for thought as well as any politician. I think he scored lots of debate points. He's a good little statist.

NicholasBourbaki

" Налоговых льгот для меня извлечь пользу сокращения для тебя . » - 4:20 Павел ( Ryan )


ATR Supports Legislation to Repeal the Death Tax


Posted by Ryan Ellis on Thursday, April 9th, 2015, 3:07 PM PERMALINK


Next Thursday, the US House of Representatives will vote on H.R. 1105, the “Death Tax Repeal Act of 2015,” sponsored by Congressman Kevin Brady (R-Tex.). This legislation will put an end to the immoral practice of the federal government demanding hard-earned taxpayer money after a family loses a loved one. ATR supports this bill and urges all Members of Congress to vote for it.

 

H.R. 1105 will kill the Death Tax once and for all. The Death Tax has a top federal rate of 40 percent on estates and the tax is a major reason that Americans are unable to pass along farms and small businesses to the next generation.

The Death Tax makes up a miniscule sliver of federal revenue and so repealing the tax will have an almost unnoticeable effect on the federal budget. In addition, a study by the Joint Economic Committee found that the Death Tax hurts economic growth and discourages savings and small business growth. 


The Death Tax places an unfair and unnecessary burden on American families in the event of a tragedy.  H.R. 1105 will repeal this ridiculous tax and help provide families peace of mind in a difficult time.

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Senate Should Pass H.R. 2, Medicare Reform Bill

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Posted by Ryan Ellis on Tuesday, April 7th, 2015, 9:01 PM PERMALINK


Why does an entry about a Medicare reform bill feature two preschoolers in the photo?  Because H.R. 2, the bill the Senate will vote on next week, is about these kids' Medicare benefit, and their share of the national debt.

Before the Easter recess, the U.S. House passed H.R. 2, a bill that combines the end of the annual "doc fix" charade with real, structural reforms to the Medicare system.  With nearly 400 "aye" votes out of a possible 435, H.R. 2 was a rare example of a legislative juggernaut.  

The Senate will take up the bill early next week, and ATR urges the upper chamber to pass this bill quickly and proudly, with lots of conservative support.

If you want to learn more about this bill, I would urge you to read my op-ed in National Review Online, or one by Grace-Marie Turner in Forbes, or a post by former CBO Director Doug Holtz-Eakin.  They all explain in detail why H.R. 2 is good, conservative policy.  They aren't alone among conservatives (even the godfather of "Cut, Cap, and Balance" has endorsed it), though there are others who have their doubts.

Some in the Senate are concerned that the bill doesn't save enough money with the structural reforms in order to justify ending the impending spending cut called "SGR."  

They lament that the wrong baseline was used (in fact, it's the baseline everyone uses for Medicare reform, or did before a month ago).

They say that the structural reforms don't create savings fast enough, too. It's this latter point I want to address.

The most important structural reform in the bill is to increase means testing in Medicare.  Already, Medicare has means testing in Parts B (doctor visits) and D (prescription drugs).  H.R. 2 makes those means tests stronger.  That means that, over time, more and more seniors of the future will be paying more and more of their own money for their own Medicare benefit.

We won't know for sure until next spring when the Medicare Actuaries report is released, but this deeper means test should reduce the unfunded liabilities of the program by a lot.  You see, the means test is indexed for inflation, but seniors' income grows faster than that.  If inflation grows at 2 percent per year, and your income grows by 5 percent per year, your income even after inflation will double every 25 years.  It's simple math.

The same will apply to this means test.  

Social Security initial benefits are wage-indexed, meaning they grow faster than prices (about 3 percent per year after inflation).  Social Security initial benefits will outpace the growth of inflation greatly over this century.

Pensions and other retirement savings grow far faster than inflation (most pension actuaries use 5 percent annual after-inflation growth as a solid predictor). Dividends tend to grow at the same rate as other retirement savings.  That means all the money piling up in 401(k)s and IRAs will eventually push up the real income of seniors of the future.

These key components of income for the "seniors" you see in the picture will grow far faster than inflation over the course of this century.  It's a very reasonable expectation that the little girl getting her tonsils examined by her sister will pay for most of her own Medicare benefit, when she's ready to retire in 60 or so years.  So will her friends, and they will think of that as perfectly normal and fair.

By then, H.R. 2 will be an historical footnote of ancient memory.  But the structural reforms H.R. 2 brought about will pay dividends for taxpayers long after we're gone.

Is there more to be done?  Absolutely.  Does H.R. 2 solve the Medicare crisis?  Of course not.  But it's a very solid down payment on doing so, it points the way forward for even further reforms, and it continues the process of shifting the Medicare program to the fully-funded, debt-free, and free market system we all want to move toward.

The Senate should pass H.R. 2 without delay.

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Senate Should Reject Tax Hike to Benefit Trial Lawyers


Posted by Ryan Ellis on Thursday, March 26th, 2015, 8:33 PM PERMALINK


This week, the U.S. Senate will vote on an amendment (#587, introduced by Senator Leahy) to the budget resolution. This amendment is a clear payoff to trial lawyers in the form of a brand new tax hike.

The measure would permanently deny employers the ability to deduct punitive damage assessments from lawsuits as a business expense.​

It is not tax reform.  It is a permanent new tax increase.  Taking away this legitimate deduction results in higher taxes.  If it's not canceled out by equal or greater tax relief elsewhere, this income tax increase violates the Taxpayer Protection Pledge.

Businesses can deduct all “ordinary and necessary business expenses” under tax law.  This has always included punitive damage costs.  To deny this well-grounded deduction to employers is arbitrary and clearly intended to benefit a constituency.

Since settlements out of court are still deductible under this tax law change, trial lawyers will be empowered to file junk lawsuits (hoping that employers will choose to settle rather than risk a punitive damage award with no tax benefits). When a lawsuit is settled rather than challenged, the trial lawyer gets a guaranteed win.​

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U.S. Senate Should Reject Price Controls in "Vote-a-Rama"


Posted by Ryan Ellis on Thursday, March 26th, 2015, 10:09 AM PERMALINK


The Senate this week may be voting on a pair of amendments to the budget resolution pertaining to government price controls on prescription medicines.  The Senate should reject any and all such efforts.  They are bad health care policy, they are even worse trade policy, and they're not a free market solution.

Importing Foreign Government Price Controls

One amendment in question would allow Americans to purchase prescription medicines from Canada.  On its face, this is a pro-free market amendment.  Why should the government prevent people from buying goods or services from anywhere they want to, especially from a developed nation like Canada?

The free market answer is that consumers would often not be importing just the medicine, but also the price control.  In most countries, the prescription drug industry labors under burdensome government-imposed price controls.  These price controls allow politicians to give voters seemingly-cheap medicines, but there's a heavy price.  Since the drug companies are left with little or negative profit, there is virtually no money left over to finance the next generation of drug research and development.

One of the only countries left that allows drug prices to be (mostly) set by the free market is the United States.  The profits made here finance the next generation of life-saving and life-improving prescription medicines.  If the U.S. market suddenly gets flooded with price-distorted drugs from all around the world (they only need to make their way to Canada first), our drug market will be permanently-damaged by price controls in other countries.

Think about it this way: suppose you are taking a blood pressure medication that costs you $50 per dose.  This amendment passes, and you start to purchase a medicine from Canada (really, from anywhere) that only costs $20 per dose, thanks to the price control in the other country.  You would be a fool not to take that deal.  Millions of other Americans do the same, and suddenly no one is buying the $50 version of the drug anymore.  No new drugs have entered the country--it's the exact same medicine whether it's a market-set $50 or a government-set $20.  But price controls dictated by foreign bureaucrats have entered the country, totally distorting our drug market.  By importing price controls today, the miracle drugs of the future are strangled in the crib.  All the capital for future R&D is gone.

This type of amendment would be a good idea in a world free of market-distorting price controls.  Free trade is a good thing.  But free trade requires transparent, signal-setting prices set by markets, not by governments.

Price Controls from Our Own Government

A related amendment may also seek to impose price controls on prescription medicines from our own government.  There are already government price controls on medicines purchased in the Medicaid system.  Congressional Democrats would like to expand this price control regime to also include medicines purchased in the Medicare system.  

Doing so is the opposite of a free market solution.  Prices send signals.  If prices are distorted by governments, they can't do their vital job of regulating supply and demand.  

Furthermore, artificially lowering the price of anything--life saving medicines especially included--steals the capital needed to finance the next generation of that good or service.  Government imposed low prices today mean the miracle cures of tomorrow simply never happen.

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ATR Supports Tax Simplification for Seniors


Posted by Ryan Ellis on Thursday, March 19th, 2015, 3:22 PM PERMALINK


Earlier this week, the “Senior Tax Simplification Act” was introduced in both the U.S. House of Representatives and U.S. Senate. Complying with the U.S. tax code costs Americans six billion hours and $168 billion each year.  This legislation will simplify tax compliance for those who need it most – our seniors. ATR supports this legislation and urges all Congressmen and Senators to vote for and otherwise support this bill.

H.R. 1397, introduced by Congressman John Fleming (R-La) and S. 716, introduced by Senator Marco Rubio (R-Fla) would instruct the IRS to create a new 1040 tax form specifically for senior citizens. The form would simplify the process of filing taxes and include information for the most common types of income reported by seniors - interest, dividends, capital gains, Social Security benefits, pension payments, IRA distributions, wages, and unemployment compensation.  

Each year, 21 million returns are filed in households where the primary taxpayer is over 65. The creation of a streamlined tax form will make life easier for these millions of households and lead to a more efficient system.
A similar form already exists for young taxpayers, the 1040-EZ. This form is used by almost 5 million households each year. Given the success of this form in simplifying the tax code for younger workers, there is no reason that seniors should not be given this same assistance.

The Senior Tax Implication Act will provide much needed clarity and grant seniors a more efficient and streamlined process.

 

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ATR Supports Debt and Taxation Transparency for Taxpayers


Posted by Ryan Ellis on Wednesday, March 18th, 2015, 4:43 PM PERMALINK


Senator John Cornyn (R-Texas) introduced S. 745, the “Debt and Taxation Transparency Act of 2015” (DTTA) earlier this week. ATR supports this legislation and urges all Senators to vote for and otherwise support this bill.

Since 2009, the national debt has increased by 70 percent. Taxpayers deserve to know how this unsustainable runaway spending could impact their standard of living and economic well-being.

S. 745 will provide taxpayers with a better understanding of how Washington’s reckless spending affects them.

Specifically, the DTTA ensures that taxpayers will receive a “taxpayer financial statement” which will provide taxpayers with a calculation of their share of the federal government’s financial obligations.

S.745 will provide other important information to taxpayers including a 30-year projection of the increase in federal income tax rates necessary to completely finance the current fiscal path of the federal government, without running a budget deficit, and an estimate of income & payroll tax liability to taxpayers under this 30 year projection.

In addition, DTTA will provide taxpayers with a summary of the most recent Financial Report of the United States, including the long-term fiscal position of the Federal Government.

Taxpayers deserve the truth from Washington about the state of federal finances. This legislation will provide taxpayers with a more complete picture of long-term fiscal conditions. ATR Supports the Debt and Taxation Transparency Act and urges all Senators to support this bill. 

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Double Taxation on Corporate Profits Hurting U.S. Competitiveness

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Posted by Ryan Ellis on Friday, March 13th, 2015, 4:06 PM PERMALINK


A report compiled by Ernst & Young comparing U.S. corporate tax rates to the rest of the developed world has found that America’s inefficient corporate tax regime is hurting U.S. competitiveness – namely through double taxation on economic decision making.

According to the report, the U.S. has the second highest top integrated tax rates amongst 38 developed countries, including the 34 members of the Organisation for Economic Development (OECD) along with Brazil, Russia, India, and China (BRIC). The report calculates integrated tax rates by combining corporate-level taxes with investor-level taxes on dividends and capital gains at national and subnational level.

Most developed countries (but not the U.S.) provide some form of relief from double taxation on corporate profits. Double taxation is a drag on the economy because it distorts important economic decisions, including discouraging capital investment which can lead to the misallocation of resources. It also encourages firms to favor debt over equity financing which can leave them vulnerable during periods of economic weakness.

The 2001/2003 Bush Tax cuts were designed to lessen the impact of double taxation in the U.S. through reduced dividend and capital gains rates and put the U.S. on nearly equal footing with competing nations. Since then, other nations have further decreased their tax burden on businesses, while the 2012 fiscal cliff tax hikes resulted in the US integrated tax rate reaching second highest amongst developed nations.

Several reforms have been proposed to reduce the dividend and capital gains tax burden including a 2014 proposal by Former House Ways and Means Committee Chairman Dave Camp and the White House Budget for FY 2016. Unfortunately, none of these proposals would reduce integrated tax rates to levels below the average among OECD and BRIC countries.

The recently released Rubio-Lee tax plan would go some way to placing the U.S. at the forefront of international competiveness. Not only would this plan implement a zero percent tax rate on capital gains, dividends, and interest, it would also reduce the corporate tax rate to 25 percent. In today’s globalized economy, it is vital that a tax code is internationally competitive and this reform would help achieve that.​​

Photo Credit: 
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