The FY 2013 budget release is out this morning from Congressman Paul Ryan's (R-Wisc.) Budget Committee.  There are lots of good spending cuts and reforms at its heart, but there's also a great, pro-growth tax plan Congressman Ryan developed with the House Ways and Means Committee which should not be overlooked.

The main details are:

Revenue neutrality.  The budget calls for the House Ways and Means Committee to produce a tax reform package with a tax revenue target of between 18 and 19 percent of GDP.  This is in line with historical revenue figures.  By contrast, big government budgets like "Gang of Six," "Simpson-Bowles," and the Obama budget call for a long-range revenue target of over 20 percent of GDP.  The Ryan budget is a no tax hikes budget.

Six personal rates down to two.  The Ryan budget replaces the current six-rate personal income tax structure (10, 15, 25, 28, 33, and 35 percent) with a two-rate system of 10 and 25 percent.  This will result in a lower tax rate on the majority of small business profits, from 33 or 35 percent down to 25 percent.

Repeals Obamacare tax hikes.  The Ryan budget eliminates the entire Obamacare law.  This includes repealing the 20 new or higher taxes which have taken or are about to take effect from that law.

Eliminate the AMT.  The Ryan budget eliminates the AMT, instead favoring a simpler system with lower rates and a broad tax base.

Lower rates on businesses.  As said above, the Ryan budget lowers the tax rate on the majority of small business profits to 25 percent.  It also lowers the federal income tax rate on larger corporate employers from 35 percent (the highest in the developed world) to 25 percent (closer to the developed nation average).  While this makes American companies more competitive, it would still leave us with a higher corporate income tax rate than the developed nation average, Canada, and the United Kingdom.  In order to make us truly internationally-competitive, the federal rate must fall to 20 percent or less.

No more picking winners and losers in the tax code.  In order to target revenues at 18-19 percent of GDP with tax rates no higher than 25 percent, the Ways and Means Committee will have to curtail or eliminate most tax exclusions, adjustments, deductions, and credits.  That means that all consumed income will be taxed once and only once.  No longer will the tax code favor one type of economic behavior over another.

Moves tax code from "worldwide taxation" to "territoriality."  The Ways and Means Committee is directed to shift our tax code from one which seeks to tax income earned all over the world to one which only seeks to tax income earned in America.  This is known as "territoriality," and it's already been adopted by and large by our trading competitors.  By retaining a worldwide tax regime, we're exposing our own countries to double taxation--once when they pay the foreign nation's income tax, and again when they try to bring the money home.  We've written much more about this topic here.

Open questions remain.  Now the questions shift to the Ways and Means Committee.  They have a broad mandate, but many details remain.  These include, but are not limited to:

• What will the tax rate on capital gains and dividends be?  In a pure consumption base with a corporate layer of taxation, the correct rate should be "zero."  That applies to capital gains realized by corporations, too.
   
• Will the new tax system allow companies to immediately-deduct ("expense") all business input costs, including assets and intangibles?  We need to move away from the unfair depreciation/amortization system which delays and denies legitimate business cost deductions.
   
• How will the committee deal with the problem that the corporate rate federally must come down to 20 percent or less for American employers to be truly competitive around the globe?
   
• What will the committee do with the death tax (including the gift tax and generation-skipping transfer tax components)?  In a pure consumption base, this would not exist at all, since it's a redundant second tax on savings.  Will the committee let the death tax return to 55% with a $1 million exemption?  Will it adopt the Obama proposal of a 45% death tax with a $3.5 million exemption?  Will it continue the present law treatment with a 35% death tax and a $5 million exemption ($10 million for married couples)?  Will it reduce the present rate?  Will it eliminate the death tax entirely?  There is a lot of uncertainty here.
   
• How will the committee deal with the payroll tax?  There is currently a 2 percentage point Social Security tax holiday in effect.  Will that continue?  Will the payroll tax be integrated into the income tax, as the Heritage Foundation plan proposes, or will it be retained in its current form to allow for personal retirement accounts?

Posted by Ryan Ellis on Tuesday, March 20, 2012 12:01 PM EDT

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