House GOP Tax Blueprint Gives Families Tax Cuts, Higher Wages, and Simplicity
Opponents of the House Republican “Better Way” Tax Reform blueprint have falsely claimed the plan will increase costs for American families.
The critics say the border adjustability component of the cash-flow business tax will cost the average family $1,700 per year. But that is without acknowledging all the good the blueprint does. It’s a scare tactic. They are only looking at the border adjustment part of the plan in isolation without accounting for positive effects in the plan. Even then, it is not clear that they are accurately analyzing the impact of the border adjustable cash-flow tax.
Taken as a whole, the blueprint is a drastic net tax cut and implements numerous pro-growth policies. The plan cuts taxes for individuals across the board and implements reforms that will result in higher wages and more jobs due to stronger economic growth. The plan also drastically simplifies the enormously complex code.
Tax Cuts for Individuals
The blueprint reduces tax rates for American families across the board. It folds the existing seven tax brackets (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%) into three brackets (12%, 25%, 33%).
It also doubles the standard deduction from $6,000 to $12,000 ($12,000 to $24,000 for families). This larger standard deduction means that individuals who go from the existing 10 percent bracket to the new 12 percent bracket will see a net tax increase. These changes mean lower taxes for ALL Americans.
Higher Wages for Families
The blueprint contains numerous pro-growth policies that increase wages for families. The plan drastically reduces taxes on businesses (42 percent for both small businesses and corporations) and replaces the confusing and arbitrary depreciation schedules with immediate, full business expensing for investments.
According to research by the Tax Foundation, the blueprint will increase after-tax income by nearly 9 percent, or close to $5,000 for the average family. The plan will also increase economic growth by 9.1 percent over the long-term and create an additional 1.7 million new jobs.
Drastic Simplification of the Code
Currently, the tax code is too complex for families to understand. The code is around 75,000 pages long, forcing taxpayers to waste more than 8.9 billion hours and $400 billion in annual compliance costs. Half of all individual taxpayers rely on a paid professional to file their taxes.
The blueprint will make it so easy to file taxes that it can be done on a postcard. Numerous changes are made to the code, including repeal of the Alternative Minimum Tax and the Death Tax, and the consolidation of existing family tax credits will reduce the need to itemize deductions for the majority of Americans and the need to devote time and resources to tax filing.
Border Adjustability Does not Increase Costs
It is not even clear that border adjustability will increase costs to the extent that critics claim. Economists on both the Left and the Right agree that the reforms in the plan will offset any increase in costs. The cash-flow business tax that replaces the existing corporate income tax incentivizes foreign and domestic investment in the U.S. because of its low rate and consumption base. In turn, this drives up demand for the dollar, which causes the currency to appreciate. A stronger U.S. dollar means more purchasing power for consumers buying foreign goods.
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Oxfam Report is Wrong on the Problems of the Tax Code and Misses the Need for Reform
In its 2017 report on corporate taxation, Oxfam America uses numerous misleading or inaccurate statements to argue that U.S. businesses do not pay their fair share of taxes.
In page after page, the report misses the mark. It mixes effective tax rates and statutory tax rates to claim that businesses pay a rate far lower than they should.
The report also ignores the true reason that trillions of dollars of U.S. income is trapped overseas -- the U.S. has one of the most complex, internationally uncompetitive tax codes and double taxes income earned abroad. As a result, this money is unable to be reinvested back into the economy.
Businesses don’t pay taxes – people do, so any higher tax rate on businesses is passed onto employees, consumers, and investors. The problems with the U.S. tax code hurt American taxpayers through lower wages, fewer jobs, and stagnant economic growth.
Contrary to the claims of the report, the House Republican “Better Way” Tax Reform blueprint would reverse these trends. The plan, proposed by House Speaker Paul Ryan (R-Wis.) and Ways and Means Chairman Kevin Brady (R-Texas), makes numerous dramatic pro-growth changes that will increase income for taxpayers across the board, and give a booster shot to the U.S. economy.
U.S. Tax Rates Are High By Any Measure
The report claims that U.S. companies do not pay enough in taxes because they have an effective rate of just 25.9 percent even though the corporate rate is 35 percent. However, this analysis purposely compares effective tax rates with statutory marginal tax rates to make it appear as if companies are paying less in taxes than they are supposed to.
There is a clear distinction between statutory rates and effective rates. The statutory rate is specified in law and applies to business income before any deductions. In contrast, the effective rate is the percentage a business actually pays in income tax. The effective corporate tax rate is calculated after a business takes deductions – such as employee wages and benefits.
In almost every case, the effective rate is lower than the statutory rate for taxpayers. While the U.S. combined state/federal corporate rate for ALL U.S. corporations is 39.1 percent, the effective corporate tax rate is just 18.6 percent after deductions and credits.
By any measure, the U.S. rate is too high. The U.S. has the highest statutory rate amongst the major economies of the Group of 20, as noted by the Congressional Budget Office. Major competitors have rates ten or twenty points lower including Canada (26.3 percent), China (25 percent), and the United Kingdom (20 percent).
Even when using effective tax rates, the U.S. has the fourth highest rate in the world. At a rate of 18.6 the U.S. effective rate is higher than Germany (15.5 percent), Australia (10.4 percent), China (10 percent), and Canada (8.5 percent).
Trillions Trapped Overseas Due to Complex Worldwide System of Taxation
This U.S. competitiveness problem has only gotten worse in recent years as other countries have modernized their tax codes. Today, only six modern countries have this system, and more than a dozen have abolished it for the simpler, more competitive territorial system of taxation.
While the Oxfam report alleges that trillions are “stashed” overseas, this money is actually stranded because of the U.S. worldwide tax system. The second layer of tax stemming from the U.S. worldwide system impedes the ability of U.S. businesses to compete and means these trillions are in limbo, unable to be brought back to America to be reinvested in new jobs or higher wages or paid out to shareholders.
The solution to this problem should be simple – enact repatriation at a single digit rate as part of a transition to territoriality, so that businesses can bring back after tax income with the second layer of taxation.
This would end the lockout problem for good and give the U.S. economy a booster a strong boost as occurred when Congress enacted temporary repatriation in 2005. This repatriation allowed businesses to bring back double taxed income that had been deferred at a rate of 5.25 percent, resulting in $320 billion returning to the country that went to federal revenues, or was reinvested in the economy.
The Real Problem is the Outdated U.S. Tax Code
The Oxfam report misses that the fact that the many legal, yet self proclaimed "tax dodging" strategies are symptoms of a tax code that is overly complex and outdated. When it comes to globally tax competition, the U.S. is decades behind.
Since 2000, 32 of the 35 countries in the Organisation for Economic Development (OECD) have reduced their corporate rates. Today, only the U.S. and Chile have higher corporate tax rates than they did at the start of the century.
The winners here are not U.S. businesses, but foreign countries and corporations that benefit from new jobs, higher wages, economic growth, and revenue at the expense of American taxpayers and businesses.
Between 2004 and 2014, almost 50 American businesses left the country through an inversion. When these companies move their headquarters from the U.S. to a more competitive environment, they also take high paying jobs with them.
Similarly, the U.S. had a net loss of nearly $180 billion in assets that have been acquired by foreign competitors over the past decade, according to a report by Ernst and Young. The uncompetitive code means that foreign competitors are able to acquire assets at a far greater pace than American businesses. The report estimates that a corporate rate at the developed average of 25 percent would have resulted in U.S. businesses acquiring almost $600 billion in assets over the same period.
The House GOP Blueprint is Strongly Pro-Growth
Maintaining high tax rates and an uncompetitive system does not only hurt U.S. businesses; it is passed on to the entire economy. A 2006 CBO report found that roughly 70 percent of the corporate tax is borne by labor, while a report by scholars at the American Enterprise Institute find that every dollar increase in taxes decreases wages by two dollars.
Any proposal must involve changes to the tax code, not new rules that have already tried and failed.
One way to resolve the many problems with the U.S. tax code would be passing the House Republican “Better Way” Tax Reform Blueprint. Among the many pro-growth changes, the plan calls for a competitive 20 percent corporate rate, full territoriality, and immediate full business expensing.
Despite the fact that this plan is hugely pro-growth, the Oxfam report falsely claims that the blueprint would not fix the problems with the code, and would hurt consumers.
In reality, the plan increases wages, and offers a net tax cut for all American families. The new border-adjusted cash flow business tax would incentivize doing business in the U.S. by taxing based on where a good or service is consumed, rather than where the income is earned. This plan cuts taxes for all businesses by 42 percent, and dramatically decreases the complexity of the tax code. This competitive new system will put an end to the exodus of jobs and assets to foreign competitors.
Every developed country in the world has a border adjustable tax system except the U.S., which disadvantages American businesses operating overseas and offers a benefit to foreign competitors importing into the country.
While the border adjustable component of the plan raises one trillion in revenue over a decade, the plan is a net tax cut of more than two trillion dollars. In fact, according to an analysis by the Tax Foundation, this plan will increase wages by close to $5,000 per family, create 1.7 million full time jobs, and increase economic growth by 9 percent.
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ATR Statement in Support of AHCA Progress
ATR President Grover Norquist released the following statement following the House Rules Committee approval of the Palmer-Schweikert Amendment to the American Health Care Act (AHCA):
“The Palmer-Schweikert Amendment will help reduce premiums and move to a competitive health insurance market. This progress shows that consensus on enacting the House Republican Obamacare repeal and replace legislation is growing stronger.
“In all, the American Health Care Act is a $1 trillion tax cut and $1.2 trillion spending cut over the next decade. It's passage makes fundamental tax reform possible this year. The AHCA also block grants Medicaid and expands Health Savings Accounts. It’s a giant step forward in reforming our nation's health care system.”
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Congress Must Act to Delay Then Repeal the Obamacare Health Insurance Tax
When it was signed into law, Obamacare imposed nearly one trillion dollars ($1,000,000,000,000) in higher taxes on the American people. These taxes directly impact middle class families and businesses and increase the costs of healthcare.
Most of these taxes are already in effect, but one, the tax on health insurance, will go into effect in 2018. Insurers must begin planning for next year months in advance, so if lawmakers fail to act quickly to repeal or delay this tax, the cost of insurance will rise for millions of families and small businesses.
The best solution is passing the American Health Care Act which fully repeals the health insurance tax, together with Obamacare’s other taxes. While lawmakers continue to make progress on passing this legislation, they should act quickly on the health insurance tax given the existing deadlines. Fortunately, they have an opportunity to delay the tax when they consider Fiscal Year 2017 government funding later this month.
Failing to delay or repeal this tax will mean the cost of insurance will continue to skyrocket. Next year alone, the health insurance tax will total $14.3 billion. The costs of the health insurance tax are passed directly to small businesses that provide healthcare to their employees, and middle class families through higher premiums. In addition, the tax impacts the care received by seniors through Medicare advantage coverage and low-income Americans that rely on Medicaid managed care.
According to the American Action Forum, the Obamacare health insurance tax will increase premiums by up to $5,000 over a decade and will directly impact 1.7 million small businesses, 11 million households that purchase through the individual insurance market and 23 million households covered through their jobs.
Obamacare's trillion dollars in new or higher taxes have already hit American families and businesses enough. The last thing taxpayers need is to have yet another tax go into effect. Lawmakers must act swiftly to delay – then repeal the Obamacare health insurance tax.
Free Market Groups Urge Opposition to Importation of Price Controls
In an open letter to Congress, 18 conservative, free market organizations and activists urged federal lawmakers to oppose efforts to allow the importation of price controls of prescription medicines.
Importation schemes are NOT the solution to lower prices and will NOT result in a more efficient healthcare system. Implementing an importation policy is simply adopting market-distorting price controls from other countries, which would disrupt U.S. innovation of life- saving and life-preserving medicines.
In addition, these proposals open the door to deadly medicines flooding the market. Importation should not be confused with free trade and should be opposed.
The full letter can be found here and is below:
Dear Member of Congress:
On behalf of the undersigned conservative, free-market organizations, we write in opposition to proposals calling for the importation of prescription medicines.
Importation schemes are NOT the solution to lower prices and will NOT result in a more efficient healthcare system.
Instead, implementing an importation policy is simply adopting market-distorting price controls from other countries, which would disrupt U.S. innovation of life- saving and life-preserving medicines. Over the long-term this will result in substantially higher costs to the healthcare system, because there will be fewer research dollars to reinvest, thousands of jobs will be lost, and fewer lifesaving treatments will be available that will keep people out of the hospital and enable them to lead productive lives.
The United States is a leader in medical innovation, with more than half of pharmaceutical / biotech research being conducted in this country. Even so, it costs more than $2.6 billion and takes 10-12 years to develop a drug, conduct clinical trials, and obtain Food and Drug Administration (FDA) approval for each drug that makes it onto the market.
In contrast, almost every country in the world has excessive price controls that hinder medical innovation. In these countries, prices are often determined by politicians offering voters seemingly cheap medicines. In reality, the world rides on U.S. research and taxpayers.
Importation of prescription medicines should not be mischaracterized as an issue of free trade. Free trade means transparent prices with no tariffs, barriers, or price controls. Drug importation is the opposite of free trade.
Importation schemes are also potentially dangerous to consumers. The FDA has stated there is no way to assure the safety, authenticity, or effectiveness of imported drugs, or whether the drugs are from the country the packaging claims it to be.
Even attempting to construct such a system would be incredibly costly to taxpayers. In addition to drugs being adulterated, they could be deadly. The FDA has long expressed concern with the importation of medicines for these very reasons.
While some argue that importation would increase competition and lower costs, the solution to lower prices should be less government interference, not more.
Lawmakers need to help create an environment that encourages competition in the pharmaceutical realm. For example, Medicare Part D has provided medicines to seniors at less than half the projected costs because it facilitates private competition and encourages different stakeholders to offer savings.
Prescription drug importation would have disastrous effects on the economy, would hurt American innovation, and is dangerous to consumers. Members of Congress should reject these proposals.
President, Americans for Tax Reform
Chair, Alabama Center Right Coalition
President, American Commitment
Chairman, American Conservative Union
President and CEO, The Buckeye Institute (Ohio)
Peter J. Pitts
President, Center for Medicine in the Public Interest
Former FDA Associate Commissioner
President, Council for Citizens Against Government Waste
President, Competitive Enterprise Institute
Co-Chair, Florida Center Right Coalition
President, Galen Institute
President and CEO, The Heartland Institute
Don Racheter Ph.D.
Iowa Conservative Activist
President, Institute for Policy Innovation
Chair, Maryland Center Right Coalition
President, National Taxpayers Union
Executive Director, Property Rights Alliance
President and CEO, Small Business & Entrepreneurship Council
President, Taxpayers Protection Alliance
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ATR Statement in Support of American Health Care Act
Congress will soon vote on the American Health Care Act (AHCA), legislation that repeals Obamacare and implements numerous reforms toward a system of patient-centered, free market healthcare.
Members of Congress should have no hesitation supporting and voting “YES” on the to begin the process of repealing .
The AHCA makes important changes to entitlements, updates and improves HSAs and gives American middle class families and businesses important tax relief. It implements an efficient age-adjusted tax credit that is vastly superior to the existing credit and is not an entitlement. The legislation also begins the process of removing burdensome insurance regulations while leaving room for HHS Secretary Price to alleviate the burden of other regulations.
It is an excellent first step in implementing a healthcare system that works for all Americans.
“The Obamacare repeal bill abolishes 14 taxes that today siphon off nearly one trillion dollars from American Taxpayers each decade,” said Grover Norquist, President of Americans for Tax Reform. “The bill also expands Health Savings Accounts, making health care reform patient-centered rather than top-down command and control. And the reform block grants Medicaid to the states through a per capita allotment-- a long time Reagan Republican goal to empower states and reduce federal control.”
Opposition to this legislation means support for the status quo that is Obamacare. This is unsustainable and reckless.
The law has resulted in one-size fits all insurance that is too expensive, despite numerous government subsidies. Over one thousand counties in the nation have just one insurer participating on an exchange. Premiums increased by close to 25 percent last year, a trend that will likely only increase if this legislation fails.
Many lawmakers in Congress have long promised their constituents they would repeal and replace Obamacare with a cost-effective, patient centered, sustainable alternative. By passing this legislation they can fulfill this commitment to voters.
Repeal of Obamacare Taxes
When it was signed into law, Obamacare imposed roughly a trillion dollars in new or higher taxes that hit middle class families, raise the cost of healthcare, and reduce access to care.
The law imposed a tax for failing to buy government-mandated insurance, a new tax on health insurance, a tax on medical devices, a tax on innovative medicines, taxes on Health Savings Accounts and Flexible Spending Accounts, and even a tax hike on Americans facing high medical bills.
This legislation repeals all of these taxes. It also delays the Cadillac tax on employer provided insurance plans until 2026. [Full list of Obamacare Taxes Repealed]
Repealing these taxes will provide much needed relief to the paychecks of families across the country. Repealing Obamacare will also undo former President Barack Obama’s broken promise not to sign “any form of tax increase” on any middle class American family.
Expands Health Savings Accounts
Health Savings Accounts (HSAs) are a key component to ensuring Americans have access to patient centered health care that best fits their needs and incentivizes keeping costs low. American families typically pay for some or their entire healthcare costs indirectly (doctors and hospital visits, medicines and treatments etc.). HSAs give individuals direct control over these funds so they can make healthcare choices that best fit their individual needs and in the most efficient way.
Not only does the repeal bill abolish several taxes on HSAs, the law also makes several improvements. The plan expands the contribution limits for HSAs ($6,550 for individuals and $13,100 for families) so they can now be relied on to cover more medical costs. The legislation also increases the flexibility of savings accounts by allowing spouses to make catch-up contributions to HSAs and allows HSAs to cover certain medical expenses incurred before the saving account has been established.
Implements New, Age-Adjusted Tax Credit
The legislation implements an improved advanced refundable tax credit that is administered based on a taxpayer’s age ($2,000 for individuals under 30 scaling up to $4,000 for individuals over 60). The credit is indexed to inflation plus one percentage point and applies to the oldest five individuals in a family. It can be used by anyone not receiving employee insurance or Medicare/Medicaid.
Compared to the flawed and highly wasteful income based Obamacare tax credit, this new tax credit is far more efficient and will result in taxpayer dollars being spent far more responsibly.
While some have claimed that this tax credit is an entitlement, it is a common feature of Republican alternatives to Obamacare. The plan put forward by Senator Rand Paul (R-Ky.) contains tax credits, as does the plan released by HHS Secretary Tom Price when he was in Congress. All of these plans contain tax credits because they are vastly superior to other alternatives such as a straight subsidy.
Enacts Medicaid Reform
The existing fiscal trajectory of Medicaid is unsustainable. Obamacare expanded Medicaid to millions of able-bodied adults, an approach with high costs and low outcomes.
The AHCA addresses this by block granting Medicaid to the states through a per capita allotment. This approach will control federal spending and ensure states retain flexibility to implement a system that best fits their individual needs. Streamlining the funding process will not only ensure that Medicaid enrollees have access to more appropriate care, it will also cut down on waste, and promote more efficient allotment of resources.
These reforms will also save hundreds of billions of dollars over the next decade.
Addresses Obamacare’s Insurance Regulations
The legislation reduces the impact of many Obamacare insurance regulations. Most notably, the bill zeroes out the individual mandate and employer mandate tax penalties. Under the AHCA, these mandates become suggestions with no enforcement mechanism.
The bill also increases coverage options by repealing actuarial standards of Obamacare plans and permits changes to age-based ratings to give insurers greater flexibility over costs.
In other cases, this bill does not repeal or modify insurance regulations, because doing so would mean the AHCA is no longer reconciliation compliant and thus would be unable to pass the Senate under a simple majority. Adding new provisions repealing insurance regulations would trigger a 60 vote threshold in the Senate, which makes it virtually impossible to pass repeal legislation.
Fortunately, HHS Secretary Price has the authority to loosen or undo these regulations. Numerous sections of federal law grant the Secretary broad discretion to reinterpret federal law including what counts as a “qualified health plan” or “essential benefits,” or to grant states “innovation waivers” to Obamacare requirements.
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Tax Simplification Should Include Repeal of FATCA
After more than 30 years, comprehensive, pro-growth tax reform may finally be signed into law in 2017. This is an opportunity to cut taxes for American families and businesses across the board, enact an internationally competitive system for businesses, and drastically simplify the tax code. It should also be an opportunity to repeal the Foreign Account Tax Compliance Act (FATCA).
FATCA was signed into law in 2010 with the goal of stopping tax evaders that were using offshore bank accounts. However, it was designed as a blunt instrument that targets any American with a bank account overseas. Most who are forced to comply are expatriate Americans who have, little if any U.S. presence.
As a result, compliance costs far outstrip any effectiveness in curbing tax evasion. American citizens overseas have become locked out of financial institutions including banks, stockbrokers, hedge funds, and insurance. Often, it is easier for these businesses to deny US citizens service.
“FATCA is the Alternative Minimum Tax (AMT) for Americans overseas—an intrusive, complicated, painful and unfair tax regime designed to be massive overkill in hunting for coins between the cushions,” said Grover Norquist, President of Americans for Tax Reform. “We are finally abolishing AMT—after 48 years—in Trump’s tax reform package. We should put FATCA to sleep at the same time.”
Under FATCA, any overseas account held by U.S. citizens must be reported to the IRS. This means that millions of Americans must give up personal information and comply with burdensome IRS regulations and reporting requirements. The law requires financial institutions to collect and disclose this information. If they fail to do so, the IRS can impose a 30 percent withholding on an institution’s U.S. investments.
FATCA also requires American citizens to comply with tax filing forms if they have assets overseas meet or exceed $50,000. For overseas Americans, this means they must comply with the tax compliance laws in their country of residence in addition to IRS laws.
FATCA should be repealed as part of tax reform. In a letter to Congressional leaders, 23 conservative and free market groups urged Congress to repeal this burdensome law as tax reform efforts move forward.
However, this should be step one of reforming the taxation of overseas citizens. FATCA is merely a symptom of a larger problem.
Just as American businesses operating overseas are forced to comply with the outdated and burdensome worldwide system of taxation, Americans are forced to comply with a system of citizenship-based taxation.
This means that regardless of where a US citizen lives, they must comply with IRS rules and are double taxed on income - once when they earn it overseas and again because they are an American citizen. While repealing FATCA would ease the burden on citizens living abroad, a longer term solution should involve enacting residence-based taxation for Americans.
The current citizen-based system affects an estimated eight million Americans that live and work overseas. This system is nearly unique to America – every other country in the world with the exception of Eritrea has residence-based taxation.
In contrast, residence-based taxation subjects individuals to taxation based on location of residence without regard to citizenship. This would make tax compliance far simpler and should be part of any effort to simplify the code for individuals.
There is a clear need to reform this burdensome system and updated the way the tax code treats citizens living overseas. This can start with repealing FATCA, however it should not end until residence-based taxation is signed into law.
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Wyden Calls for Capital Gains Tax Hike
While giving remarks at the liberal Tax Policy Center, Senate Finance Ranking Member Ron Wyden (D-Ore.) called for increasing taxes on capital gains by taxing it as ordinary income. Deriding the capital gains tax as a “loophole,” Wyden criticized GOP plans to reduce the rate, instead suggesting that they should be taxed at a top rate of 39.6 percent. As noted in his remarks:
“Of course, when you talk about the carried interest loophole, you’re talking about capital gains. And when you talk about capital gains, you’re talking about the biggest tax shelter of all – the one hiding in plain sight.
“Today the capital gains tax rate is 23.8 percent. Republicans want to make it 16 percent. So if you can take advantage of a gimmick that characterizes your income as a capital gain, your tax rate plummets. The White House and the majority party in Congress are working to make it even easier to get away with that gamesmanship.”
A goal of the left is higher taxes across the board and one of their favorite targets is hiking the capital gains tax. They do this because they know they can only raise the top ordinary income tax rate so much higher than it is today without wrecking the economy.
Often they see raising the cap gains tax in increments as the best way to achieve their long-term policy goal of higher taxes. One of their favorite targets is taxing carried interest capital gains as ordinary income. Despite the misleading rhetoric put out by the left, there is no difference between carried interest and any other income derived as a capital gain.
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ATR Urges Congress to Repeal Section 541 of the Tax Code
Americans for Tax Reform today released a letter to Congress urging lawmakers to repeal Section 541 of the tax code. Section 541 is an outdated and unnecessary provision that imposes a personal holding company tax on certain businesses to prevent a loophole that no longer exists.
March 1, 2017
The Honorable Kevin Brady
Chairman, Committee on Ways and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, D.C. 20515
Dear Chairman Brady:
One of the guiding principles of pro-growth tax reform must be simplification of the code for both businesses and families. As Congress works toward reform, one section of the code that should be repealed is Section 541, an outdated and unnecessary provision that imposes a personal holding company tax on certain businesses to prevent a loophole that no longer exists.
At around 75,000 pages in the length, it is unquestionable that the code is too complex. Each year, American families and businesses spend more than 8.9 billion hours and $400 billion complying with the code. Unsurprisingly, the majority of Americans support simplifying the tax code.
Simplification of the code should include removing the numerous unnecessary provisions such as the Death Tax, the Alternative Minimum Tax, and many of the distortionary tax credits. While this process sounds straightforward, in reality there are numerous sections of the code that can – and should be repealed as part of tax simplification.
One part of the code that should be repealed is Section 541. Section 541 serves little purpose, is often unknown amongst tax experts, and today serves solely as a trap for unwary taxpayers.
When it was enacted into law nearly 80 years ago, Section 541 was intended to address a potential loophole in the code where taxpayers would retain assets in a corporate entity rather than distributing them to the (and paying taxes at) the individual level.
At the time, there was clear incentive to do this – the top individual income tax rate approached 80 percent, while the top corporate income tax rate was as low as 20 percent. Today, no such discrepancy between individual and corporate rates exists.
The provision imposes an additional 20 percent in taxes if 60 percent of a business’s AGI is passive income and if more than 50 percent of the corporation’s stock is owned by five or fewer individuals. As a result, the only taxpayers hit by Section 541 are those who are unaware of the law and have made innocuous business choices, yet they are needlessly punished with a higher tax burden.
As you consider overhauling the code through dramatic simplification, I urge you to consider including repeal of Section 541. The fact, is the current code is too complex and burdensome for American families and businesses because of provisions like Section 541.
Grover G. Norquist
President, Americans for Tax Reform
Trump Promises “Historic” Tax Reform
In his first address to a joint session of Congress, President Donald Trump promised “historic” tax reform that will allow American businesses to compete, will reduce rates and complexity for American families, and will grow the economy.
It has been more than 30 years since comprehensive tax reform was last signed into law. Since then, our tax code has almost tripled in size. Today, the status quo of the current tax system is unacceptable and indefensible. Tax reform is desperately needed.
The code is far too complex for American families to understand. The tax code is more than 75,000 pages long and contains over 2.4 million words. This complexity forces American families and businesses to spend more than 8.9 billion hours and $400 billion complying with the code every year.
The US tax code is also the most uncompetitive in the world. The outdated code makes it difficult, if not impossible for businesses to compete with foreign competitors. The federal/state corporate tax rate is almost 40 percent, while small businesses pay rates above 40 percent. By comparison, the average rate in the developed world is just 25 percent. The tax rate has barely changed since 1986 while other countries have cut their rates aggressively. The U.S. is also one of the few countries that still has a worldwide system of taxation, which subjects American businesses to double taxation when they do business overseas.
The tax code is suppressing the economy. Over the next decade, the Congressional Budget Office projects the economy will continue to grow at a stagnant 2 percent, far below the historical average. This insufficiently low economic growth has resulted in too few new jobs and low wages.
President Trump has shown he understands the need for tax reform. In his first year in office, he must continue pushing for desperately needed pro-growth reform.