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Ryan Ellis

100 Years of the Income Tax: Then and Now


Posted by Ryan Ellis on Friday, February 1st, 2013, 3:55 PM PERMALINK


The century-long history of the income tax has been marked by more and more taxpayers paying higher and higher amounts of tax. 

As Americans get ready for yet another tax filing season, let’s take a look at how the income tax became the raw deal it is today:

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Braces for the Kids Just Got More Expensive: Obamacare Tax Hike Case Study


Posted by Ryan Ellis, John Kartch on Friday, January 11th, 2013, 10:57 AM PERMALINK


As just one example, below are some of the taxes that will impact the purchase of dental braces:

Obamacare Medical Device Tax:  As of Jan.1, Obamacare imposes a new tax of 2.3 percent on medical device manufacturers, including those who make dental braces.  The tax is imposed on gross sales -- even if the company does not earn a profit in a given year.  While the tax will be paid to the IRS by the manufacturer, the tax will be passed along as a higher cost of the product, ultimately to be borne by the parent buying the braces for their child.  With the cost of braces being as high as $7,625 this new tax could raise the cost of these braces by $175.

Obamacare Flexible Spending Account Cap:  As of Jan. 1, the 30-35 million Americans who use a pre-tax Flexible Spending Account (FSA) at work to pay for their family’s basic medical needs face a new government cap of $2,500. This will squeeze $13 billion of tax money from Americans over the next ten years. (Before Obamacare, the accounts were unlimited under federal law, though employers were allowed to set a cap.) A parent looking to sock away extra money to pay for braces would find themselves quickly hitting this new cap, meaning they would have to pony up some or all of the cost with after-tax dollars.  Needless to say, this tax will especially impact middle class families.

Obamacare “Haircut” to the Medical Itemized Deduction:  Faced with higher prices for braces and a reduced ability to pay for them with their FSA, parents might decide to deduct the cost of braces on their tax returns.  Unfortunately, Obamacare makes this harder, too. 

Before Obamacare, Americans facing high medical and dental expenses were allowed a deduction to the extent that those expenses exceeded 7.5 percent of adjusted gross income (AGI).  As of Jan. 1, Obamacare imposes a threshold of 10 percent of AGI. Therefore, Obamacare not only makes it more difficult to claim this deduction, it widens the net of taxable income.

According to the IRS, 10 million families took advantage of this tax deduction in 2009, the latest year of available data. Almost all are middle class. The average taxpayer claiming this deduction earned just over $53,000 annually. ATR estimates that the average income tax increase for the average family claiming this tax benefit will be $200 - $400 per year. To learn more about this tax, click here.

This is just a small example of how a simple, everyday, kitchen table decision has been fundamentally altered by the tax hikes in Obamacare.  It does not even take into account the indirect effects of the rest of the tax hikes in the law, which will reduce family income and kill jobs. 

Follow the authors on Twitter @JohnKartch and @RyanLEllis

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2013: Obamacare "High Medical Bills Tax" to hit 10 Million Middle Class Families


Posted by Ryan Ellis, John Kartch on Friday, January 4th, 2013, 1:19 PM PERMALINK


The average family subject to this new tax makes just over $53,000 and will face an income tax increase of between $200 - $400 per year.

Background:  Americans have long been allowed to deduct out of pocket medical expenses as an itemized deduction on their taxes. They cannot have already benefited from other tax provisions for health care like tax-free employer-provided care or tax-free accounts like flexible spending accounts (FSAs) or health savings accounts (HSAs). A full list of qualified expenses can be found in IRS Publication 502.

After totaling all unreimbursed, out-of-pocket medical expenses, the taxpayer must then subtract from this figure an amount equal to 7.5 percent of the taxpayer's adjusted gross income (AGI). This subtraction amount is known commonly as a "haircut."

According to the IRS, 10 million families took advantage of this tax deduction in 2009, the latest year of available data. They deducted $80 billion in medical expenses after applying the “haircut.”  The Office of Management and Budget reports that this tax deduction saves these taxpayers upwards of $10 billion annually.

Obamacare's tax hike:  The Obamacare law made one change to this tax provision: it raised the "haircut" from 7.5 percent of AGI to 10 percent of AGI. Since virtually all taxpayers claiming this income tax deduction make less than $200,000 per year, the income tax hike falls almost exclusively on the middle class:

-Virtually every family taking this deduction made less than $200,000 in 2009. Over 90 percent earned less than $100,000.

-The average taxpayer claiming this deduction earns just over $53,000 annually.

-ATR estimates that the average income tax increase for the average family claiming this tax benefit will be $200 - $400 per year.

-This income tax increase is focused on families with the largest medical bills that weren't covered by insurance. So the target population is low- and middle-income families with debilitating medical costs. That's a good definition of the opposite of “affordable” or “caring.”

According to the Joint Tax Committee, this tax increase is scheduled to raise between $2 billion and $3 billion annually. That may be a drop in the bucket in Washington DC, but try telling that to the $53,000 family with high medical bills that just saw a tax increase.  

The tax is a clear violation of President Obama's "firm pledge" in 2008 to not enact "any form of tax increase" on these families.

President Obama and his Democrat congressional allies have some explaining to do.

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No Pledge Signer Voted to Raise Taxes in Fiscal Cliff Bill


Posted by Ryan Ellis on Wednesday, January 2nd, 2013, 4:06 PM PERMALINK


No Taxpayer Protection Pledge signer voted for a tax increase this week.  No one—except President Obama—has broken their tax pledge to their constituents.  President Obama is wrong to say that Republicans voted for a tax increase.

As December 31, 2012 became January 1, 2013, taxes went up automatically on every American.  The top marginal income tax rate rose from 35 to 39.6%.  The death tax rate rose from 35 to 55%, with an exemption of $1 million.  The capital gains rate rose from 15 to 23.8%.  The dividends rate rose from 15 to 43.8%.  $1 trillion in Obamacare tax increases went into effect.  The 2 percentage point payroll tax rebate expired.  This was a permanent change in tax law, and a permanent tax hike on the American people.

This tax increase did not happen because of Republican Pledge signers.  The House, for example, voted to make all income tax rates permanent as part of the House budget, and also in H.R. 8 in July 2012.  Senate Republicans repeatedly emphasized that their goal was to avoid income tax increases on any American. This happened because President Obama wanted it to happen - if the President wanted to extend tax relief for middle class Americans, he would have done so when his party controlled both the White House and Congress in 2009 and 2010.  He would have campaigned in 2012 on more than a one-year tax hike reprieve for families making less than $250,000 per year.  The President wanted taxes to go up on New Years Eve, and they did.  They rose for each and every American family and small business.

Because of this tax increase, Congress’s job after that was to cut taxes for the American people, and that’s exactly what lawmakers did.

On New Years Day, the Senate and House voted on a bill to cut taxes by $3.7 trillion over the next decade.  The American people deserved a bigger tax cut; they deserved a cut that made permanent the levels in place from 2003 through 2012.  But there is good news.  This tax cut bill permanently secures tax relief for 99% of Americans.  It sets a tax rate schedule permanently.  It patches the AMT permanently.  It cuts the dividend tax rate permanently.  Importantly, income tax bills for those making less than $250,000 per year will not rise from 2012 levels, ever.  As House Ways and Means Committee Chairman Dave Camp (R-Mich.) said on the House floor last night, this tax bill “settles the level of revenue Washington should bring in.”  For the first time in a long time, the tax revenue baseline is permanent.

Because this bill was clearly a tax cut (to say otherwise is to pretend that the Obama tax increase never happened), there were no Taxpayer Protection Pledge implications to this vote.  This bill was a tax relief bill.  No Pledge signer is obligated to support tax relief, so those who voted against this bill weren’t violating their Pledge, either.  Going forward, with the specter of automatic tax increases effectively eliminated, tax increases will be clear and obvious, and questions about the Pledge will be less difficult.  If, as is anticipated, Obama presses for tax increases this year, Pledge signers will stop him cold.

Now the focus turns to the real problem: spending.  Over the next 90 days, Congress will have three opportunities to cut spending: during debate regarding the sequester, the continuing resolution, and the debt ceiling.  These are all opportunities to extract real spending cuts and entitlement reforms out of Washington.  The U.S. House won’t be voting for any tax hikes, since (as Chairman Camp put it), the revenue level is now settled.

The House can also turn to fundamental tax reform.  As it has done for the past two years, we expect the House to endorse comprehensive tax reform with the new permanent revenue baseline as part of the budget.  Chairman Camp has indicated he will produce a revenue-neutral tax reform bill this year.
ATR looks forward to continuing to work with lawmakers to enact spending cuts and oppose tax hikes.
 

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ATR Statement on "Plan B" Tax Plan


Posted by Ryan Ellis on Wednesday, December 19th, 2012, 11:53 AM PERMALINK


ATR has consistently maintained that individual Members of Congress make a pledge to their constituents to oppose and vote against tax increases.  The House this week will vote on a tax bill.  This legislation—popularly known as “Plan B”--permanently prevents a tax increase on families making less than $1 million per year.  Republicans supporting this bill are this week affirming to their constituents in writing that this bill—the sole purpose of which is to prevent tax increases—is consistent with the pledge they made to them.  In ATR’s analysis, it is extremely difficult—if not impossible—to fault these Republicans’ assertion.

In particular, in this Congress the House has already voted twice to prevent any tax increases on any American.  When viewed with this in mind, and considering this tax bill contains no tax increases of any kind—in fact, it permanently prevents them—matters become more clear.  Having finally seen actual legislation in writing, ATR is now able to make its determination about a legislative proposal related to the fiscal cliff. ATR will not consider a vote for this measure a violation of the Taxpayer Protection Pledge.

UPDATE: Despite inaccurate press reports, the statement above is not to be misconstrued as an endorsement of any legislation.

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Dividend Tax Rate to Triple in 2013


Posted by Ryan Ellis on Friday, December 14th, 2012, 3:38 PM PERMALINK


As part of the fiscal cliff, the top tax rate on dividends is scheduled to nearly triple in 2013.  Here are some questions you might have:

What is a dividend?  A dividend is a cash payment that a company makes to shareholders.  Typically, it's expressed as a certain number of cents per share.  This also allows you to express the dividend in terms of a "dividend yield."  For example, a stock trading at $10.00 per share and issuing a dividend yearly of $0.25 per share has a dividend yield of 2.5% (that is, $0.25 divided by $10.00).

According to the latest IRS data, 25.4 million families receive "qualified" (stock-derived) dividends annually.  In 2009, this totaled $124 billion.  The total amount of dividends issued is far greater than this, since this only accounts for dividends flowing to individuals' taxable brokerage accounts.  A February 2011 study by JP Morgan estimates that total dividend payouts look more like $700 billion.

What type of people receive dividends?  Almost everyone benefits from dividends.  If you are covered by a traditional pension or 401(k) plan at work, you almost certainly own dividend-paying stocks and mutual funds that own dividend-paying stocks.  Ditto for your IRA or Roth IRA.  Additionally, the IRS data cited above shows that over 25 million American families choose to receive dividends directly.

According to the Tax Foundation, the lion's share of dividends are earned in senior households (65 years and older).  One-third of all households receiving dividends are senior households, and nearly half of dividend income is earned by seniors.

Aren't dividends just for wealthy people?  Traditional pensions, 401(k)s, and IRAs are accounts for middle class Americans, not rich people.  That's where many dividends end up.  Additionally, nearly 23 million out of the 25 million American families that get paid dividends directly earn less than $200,000 per year.  Over 40 percent of all taxable dividends are earned in these households.

How are dividends currently taxed?  Dividends are not deductible to the company issuing them.  Thus, they are drawn from after-tax corporate profits.  When a dividend is received by an individual in a taxable brokerage account, he typically faces a tax rate of 15% federally--the same as the long-term capital gains tax rate.

How should dividends be taxed?  Because dividends are derived from corporate income which has already been subject to tax, there should not be an additional tax assessed on the dividend recipient.  To do so is to introduce a cascaded double tax.  When put together with the 35 percent corporate income tax rate, the current integrated double-tax on dividends amounts to 44.75 percent federally.  The proper tax rate on qualified dividends should be "zero."

How will the fiscal cliff increase taxes on dividends?  There are two tax increases on dividends happening at the same time as part of the fiscal cliff.  The first is that dividends will no longer be taxed at the same rate as long-term capital gains, but will revert back to their pre-2003 treatment and be taxed as ordinary income.  In addition, Obamacare imposes a new 3.8 percent "surtax" on investment income for families making more than $250,000 beginning in 2013.  When combined, these two tax increases result in a near-tripling of the top dividends tax rate from 15 percent today to 43.4 percent in 2013.  The integrated top double-tax rate on dividends rises from 44.75 percent today to 63.21 percent in 2013:

  Dividend Only Rate Double Tax Rate
2012 15% 44.75%
2013 43.4% 63.21%


What will this tax increase do for shareholders?  Efficient stock markets must price in changes to the tax rate on stocks.  All things being equal, a higher dividend tax rate should result in a fall in company dividend yields, since dividends will be a less attractive return on investment.  Historically, dividends represent about one-fifth of the total return on stocks.  This suggests that the after-tax total return on stocks will become depressed as a result of a hike in the dividend tax rate.

What if I have all my savings in an IRA or 401(k)?  I don't pay dividend taxes.  Tax-advantaged accounts such as traditional pensions, 401(k)s, and IRAs don't face dividend taxation.  They do, however, face the same corrective market forces described above.  As a result, families' nest eggs should take a hit just like the broader stock market.

Congress should prevent the two tax increases on dividends from happening as part of the fiscal cliff.

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10 Million Middle Class Families Face 'High Medical Bills Tax' Under Obamacare


Posted by Ryan Ellis on Thursday, December 13th, 2012, 9:03 AM PERMALINK


Ten million middle class families with large medical expenses will find themselves paying higher income taxes thanks to an Obamacare tax taking effect on Jan. 1, 2013. The average family subject to this new tax makes just over $53,000 and will face a tax increase of between $200 – $400 per year.

Here’s how it works:

There are twenty new or higher taxes in Obamacare.  One of these taxes is an income tax increase on families with catastrophic medical expenses.  Americans for Tax Reform refers to this tax increase as the "high medical bills tax."

Present tax law. Under present tax rules, families are allowed to deduct out of pocket medical expenses as an itemized deduction on their taxes. They cannot have already benefited from other tax provisions for health care like tax-free employer-provided care or tax-free accounts like flexible spending accounts (FSAs) or health savings accounts (HSAs). A full list of qualified expenses can be found in IRS Publication 502.

After totaling all unreimbursed, out-of-pocket medical expenses, the taxpayer must then subtract from this figure an amount equal to 7.5 percent of the taxpayer's adjusted gross income (AGI). This subtraction amount is known commonly as a "haircut."

According to the IRS, 10 million families took advantage of this tax deduction in 2009, the latest year of available data. They deducted $80 billion in medical expenses after applying the “haircut.”

-Virtually every family taking this deduction made less than $200,000 in 2009. Over 90 percent earned less than $100,000.

-The average taxpayer claiming this deduction was able to successfully deduct about $8,000 in medical expenses with an average "haircut" of $4,000.

-That means the average taxpayer claiming this deduction earns just over $53,000 annually.

The Office of Management and Budget reports that this tax deduction saves these taxpayers upwards of $10 billion annually.

Obamacare's tax hike. The Obamacare law made one change to this tax provision: it raised the "haircut" from 7.5 percent of AGI to 10 percent of AGI. Since virtually all taxpayers claiming this income tax deduction make less than $200,000 per year, this is a clear violation of President Obama's "firm pledge" in 2008 to not enact "any form of tax increase" on these families.

It is not surprising that this tax increase cannot be on the wealthy. Because of the “haircut,” very high-income families are locked out from claiming this deduction at all. For example, a family earning $1 million would have to reduce out-of-pocket medical expenses by $75,000 under present law, or $100,000 under Obamacare. Either way, it's very unlikely this household can take advantage of this tax benefit.

In addition, this tax increase is focused on families with the largest medical bills that weren't covered by insurance. So the target population is low- and middle-income families with debilitating medical costs. That's a good definition of the opposite of “affordable” or “caring.”

According to the Joint Tax Committee, this tax increase is scheduled to raise between $2 billion and $3 billion annually. That may be a drop in the bucket in Washington DC, but try telling that to the $53,000 family with high medical bills that just saw a tax increase.  

ATR estimates that the average tax increase for the average family claiming this tax benefit will be $200-$400 per year.

President Obama and his Democrat congressional allies have some explaining to do.

Click here for the PDF version of this document

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Which Tax Increase Supported by President Obama Will Create the Most New Jobs?


Posted by Ryan Ellis on Friday, December 7th, 2012, 2:21 PM PERMALINK


The Bureau of Labor Statistics today came out with a fresh set of unemployment data showing an economy puttering along at low growth (see analysis here by AEI's Jim Pethokoukis. With unemployment at 7.7 percent, a shrinking labor force, and job growth not keeping pace with what the economy needs, it's time to see which of President Obama's 2013 tax increases will best give a boost to job creation.

 Below are your choices.  Good luck.

"Which of the following 2013 tax increases supported by President Obama will create the most new jobs?" 

­­­­­_____A.  An increase in the tax rate on the majority of small business profits.  Under the Obama plan, the tax rate faced by a majority of small employer profits will rise from 35 percent today to 39.6 percent (or higher) in 2013.  This is a marginal tax rate increase on one million small and medium-size businesses, the ones that create most of  the jobs in that sector of the economy.

_____B.  An increase in the capital gains tax from 15 to 23.8 percent as well as an increase in the dividend tax rate from 15 to 43.4 percent.  President Obama's plan raises these taxes in two steps.  First, the capital gains tax is raised to 20 percent and the top rate dividends tax raised to 39.6 percent in 2013.  At the exact same time, Obamacare imposes a new 3.8 percent surtax on investment income for individuals earning as little as $200,000.  Combined, this results in a massive increase in these tax rates, to levels far higher than when President Clinton left office.  This higher tax wedge will have to be priced into the value of stocks (reducing stock prices), so every American will take a hit in their IRAs and 401(k) plans.

_____C.  An increase in death tax rate from 35 to 45 percent and a shrinking of the death tax "standard deduction" from $10 million to $3.5 million.  Starting in January 2013, the "death tax" could again become a tax on the middle class.  For a married couple, they can currently exclude up to $10 million (plus inflation) from the death tax.  Under President Obama’s budget request, that number shrinks to $3.5 million. That may sound like a lot until considering real estate, 401(k) values, IRAs, small business equity, etc. all count toward that $3.5 million. Under the President’s budget request, the rate also rises, from an already-confiscatory 35 percent today to 45 percent in 2013. Family farms and small businesses will have to be sold just to pay the taxman, and workers will be laid off in the process.

_____D.  The new Obamacare medical device tax of 2.3 percent on gross receipts.  One of the twenty new or higher taxes in Obamacare imposes a 2.3 percent tax on the revenues (not profits) of medical device manufacturers.  Industry estimates peg the job losses from this tax at 43,000.  Even senator-elect Elizabeth Warren (D-Mass.) supports repealing this tax because of the damage it will do to her home state of Massachusetts.

_____E.  None of the above.  What, are you crazy?  Raising any of these taxes will kill jobs, not create them.  Anyone should be able to see that.

Click here for the PDF version of the quiz

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New Obamacare Tax Form Mandates Americans Report Personal Health ID Info to IRS


Posted by Ryan Ellis, John Kartch (@Ryanlellis, @JohnKartch) on Thursday, November 1st, 2012, 1:09 PM PERMALINK


When Obamacare’s individual mandate takes effect in 2014, all Americans who file income tax returns must complete an additional IRS tax form. The new form will require disclosure of a taxpayer’s personal identifying health information in order to determine compliance with the Affordable Care Act’s individual mandate. 

As confirmed by IRS testimony to the tax-writing House Committee on Ways and Means, “taxpayers will file their tax returns reporting their health insurance coverage, and/or making a payment”. 

So why will the Obama IRS require your personal identifying health information? 

Simply put, there is no way for the IRS to enforce Obamacare’s individual mandate without such an invasive reporting scheme.  Every January, health insurance companies across America will send out tax documents to each insured individual.  This tax document—a copy of which will be furnished to the IRS—must contain sufficient information for taxpayers to prove that they purchased qualifying health insurance under Obamacare.

This new tax information document must, at a minimum, contain: the name and health insurance identification number of the taxpayer; the name and tax identification number of the health insurance company; the number of months the taxpayer was covered by this insurance plan; and whether or not the plan was purchased in one of Obamacare’s “exchanges.”

This will involve millions of new tax documents landing in mailboxes across America every January, along with the usual raft of W-2s, 1099s, and 1098s.  At tax time, the 140 million families who file a tax return will have to get acquainted with a brand new tax filing form.  Six million of these families will end up paying Obamacare’s individual mandate non-compliance tax penalty.

As a service to the public, Americans for Tax Reform has released a projected version of this tax form to help families and tax specialists prepare for this additional filing requirement. Taxpayers may view the projected IRS form at www.ObamacareTaxForm.com or see below.  On the form, lines 3-4 show where taxpayers will disclose their personal identifying health information.

Follow the authors on Twitter: @Ryanlellis and @JohnKartch

Download a PDF version of the form here.

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U.S. Corporate Income Tax Rate Is a Foreign Policy Debate Issue


Posted by Ryan Ellis on Monday, October 22nd, 2012, 1:53 PM PERMALINK


The U.S. corporate income tax is the highest in the developed world.  When state corporate taxes are factored in, the U.S. has the highest corporate income tax rate in the world at 39.2 percent.  America not only has a higher rate than the developed nation (OECD) average; we have a higher rate than each of our chief trading competitors:

Country

Corporate Income Tax Rate

United States

39.2%

OECD Average

25%

Canada

27.6%

Mexico

30%

Japan

35%

Germany

30.2%

United Kingdom

26%

France

34.4%

 

 

Obama claims to be for corporate tax reform, but his plan is actually a net tax hike. His administration released a corporate tax reform plan in the spring, but he hadn’t said a word about it until the first debate.  It’s a net tax increase even while cutting the corporate rate slightly to just over 32 percent (including states).  It increases the cost of capital investment, raises taxes on corporate shareholders, and seeks to raise net taxes to pay for Obama-sized government.

The Obama tax hike plan’s rate isn’t competitive.  How does the plan’s 32 percent-plus rate compare to the rates of our biggest global trading partners? Our new 32.3 percent rate would only beat out France (34.4 percent) and Japan (35 percent). We would not be competitive with the OECD average 25 percent rate, nor with Canada (27.6 percent), the United Kingdom (26 percent), Mexico (30 percent), or Germany (30.2 percent). Rate reduction this inadequate makes the plan a lemon right from the start.

Obama’s plan “doubles down” on international double-taxation. The U.S. is one of the only countries left in the world which seeks to tax the worldwide income of her companies (on top of income taxes already paid overseas). The smart move would be toward a territorial system, where only U.S.-source income is taxed (as Obama's own jobs commission recommended). This could be transitioned into with a round of repatriation.

Rather than embracing this common-sense and globally-accepted idea, the Obama administration wants to make the double taxation worse by imposing a global minimum tax rate. They also want to take away several of the tax provisions in law today which make this international double-taxation regime bearable for many companies.

The Obama plan discriminates against family-owned businesses that compete abroad. The Obama plan broadens the tax base (read: eliminates exclusions, deductions, and credits) for everyone, but only cuts the tax rate for corporate employers. What about the 30 million sole proprietorships, partnerships, LLCs, and S-corporations that face taxation at the individual rates? Their tax rate goes up, from 35 percent today all the way to over 40 percent in 2012 (39.6 percent top rate plus a new 3.8 percent Medicare payroll/surtax).  As Paul Ryan has pointed out, these businesses compete internationally, too.  To raise their rates in the face of fierce competition is foolish.

Romney, unlike Obama, actually has a corporate tax reform plan.  Romney’s plan is actual tax reform: lower the rates, broaden the base, and don’t raise net taxes.  The Romney plan would immediately cut the federal corporate income tax rate to 25 percent, and pay for it by broadening the corporate tax base.

Even the Romney rate cut plan may not be enough.  Under the Romney plan, the integrated federal-state rate would still be about 29 percent, leaving our competitors losing out to Canada, the United Kingdom, and the OECD average.  In reality, "20 is the new 25." To have a truly globally-competitive corporate rate, you need to get the federal rate down to 20 percent or below.  That rate would beat the OECD average and every one of our major trading partners.

 

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