Thirty years ago today, President Ronald Reagan signed into law the Tax Reform Act of 1986– which became the largest simplification of the U.S. Tax code in history. Prior to 1986, the federal tax code was a complex mess of brackets, deductions, and credits totaling over 26,300 pages.
Some of the laws major achievements were:
- The reduction of the top marginal individual income tax rate from 50 percent to 28 percent
- A reduction of the corporate income tax rate from 46 percent to 34 percent
- Reducing the total number of income brackets from 14 to 2
While Reagan achieved a significant victory with his reforms, they did not far outlive his presidency. Starting with President H.W. Bush, the top marginal tax rate was raised from 28 percent to 31 percent. President Clinton took it a step further raising the top rate to 39.6 percent. After a brief stint at 35 percent under President George W. Bush, President Obama returned the rate to 39.6 percent.
It has been thirty years too long. Our tax code desperately needs reform.
The Tax Code is Too Complex
Since 1955, the federal tax code has increased six-fold, from 409,000 words to 2.4 million words. Countless regulations have increased the tax burden on Americans and it’s time that time and money are spent doing what you want to do, not working to comply with the government. According to the Tax Foundation, Americans will spend 8.9 billion hours and $409 billion complying with IRS tax filing requirements this year. U.S. businesses and individual income tax returns make up the majority of the hours spent complying, clocking in at 2.8 billion hours and 2.6 billion hours respectively. It’s too complex and it’s too long.
The Tax Code is Uncompetitive
The tax code is the worst in the world. The U.S corporate tax rate is 39 percent, whereas the global average is 25 percent. The tax rate has barely changed since 1986 and since then, other countries have cut their rates aggressively. The U.S. rate is two to three times higher than its direct competitors, like Canada (26.3 percent), the U.K. (20 percent), and Ireland (12.5 percent).
Additionally, the U.S. is only one of six OECD countries that still utilizes a worldwide system of taxation. American businesses overseas are required to pay taxes in the country it earned the income in and then pay U.S. taxes on the remaining income, essentially double-taxing American businesses. This system of double taxation puts American businesses at an immense disadvantage, as they are competing with businesses who utilize the more modern territorial system of taxation. Ultimately, the costs of the worldwide system of taxation are passed onto employees, as much as 75 percent of the costs can be passed onto workers.
Congress Must Again Pass Pro-Growth Tax Reform
Pro-growth tax reform that cuts rates for all need not be viewed as costing the government money. As noted by the Congressional Budget Office, every 0.1 percent of higher economic growth equates to $286 billion in extra federal revenue, meaning an increase from 2 percent average growth to 3 percent growth would have economic benefits and would help resolve the government’s overspending problem.
House Republicans in their “Better Way” blueprint have introduced ways to simplify the puzzling tax code and fix our competitiveness problem. To simplify the code, House Republicans have proposed a way so that taxpayers can file their taxes on as little as a postcard. To fix, House Republicans suggest reducing the U.S. corporate rate to 20 percent, which is lower than the global average, and creating a territorial system of taxation. A 20 percent rate, like the blueprint calls for would create more than 600,000 full time jobs and increase GDP by more than 3 percent over the long term. If passed into law, these solutions will make American’s lives easier and ensure that our businesses can again compete in the global economy.