Despite controlling the House of Representatives, Democrats have failed to vote on or even release a budget for Fiscal Year 2020.
In contrast, conservatives led by Republican Study Committee Chairman Mike Johnson (R-La.) and RSC Budget and Spending Task Force Chairman Jim Banks (R-IN) have a vision to restore the nation’s fiscal health and build on the success of the GOP tax cuts.
This budget, entitled “Preserving American Freedom,” reduces taxes by $1.88 trillion, equating to almost $15,000 in tax reduction per family. Most notably, the budget calls for further individual tax reduction, enacts pro-growth policies, indexes capital gains taxes to inflation, and repeals distorting tax provisions.
Strengthens Individual Tax Cuts
The TCJA dramatically reduced taxes for American families with 90 percent of Americans seeing increased take-home pay. For instance, a family of four with annual income of $73,000 (median family income) will see a tax cut of more than $2,058, a 58 percent reduction in federal taxes.
However, arcane Senate procedure and the refusal of Democrats to support tax cuts meant that the individual provisions in the Tax Cuts and Jobs Act could not be made permanent. If Congress does nothing, these important tax cuts will sunset in 2026.
The budget addresses this by making individual tax cuts from the TCJA permanent:
- The doubling of the standard deduction to $12,000 and $24,000 for a family.
- The reduction of nearly every individual income tax bracket.
- The doubling of the child tax credit to $2,000 Child Tax Credit.
- A 20% deduction for pass-through businesses (LLCs, partnerships, S-corporations etc.)
- An increase in the threshold that the Alternative Minimum Tax hits individuals so that it kicks in at $1 million of annual income.
The budget also fully repeals the death tax and reduces the bottom two tax brackets from 10 percent to 9.5 percent and from 12 percent to 11 percent.
Indexes Capital Gains Taxes to Inflation and Strengthens Family Savings
The RSC budget proposes ending the inflation tax on savings and investment by indexing the calculation of capital gains taxes to inflation.
For decades, Americans have paid capital gains taxes on phantom, inflationary gains which unfairly expose taxpayers to additional taxation. According to a 2013 analysis by the Tax Foundation, the average effective inflation indexed rate on capital gains between 1950 and 2012 was 42.5 percent, nearly twice today’s 23.8 percent top capital gains tax rate.
Lowering the capital gains rate would encourage the formation of more capital and would result in the creation of more jobs. In turn, worker productivity and wages would be higher.
The budget also reduces the top two capital gains tax rates from 20 percent to 18 percent and from 15 percent to 13 percent, and creates Universal Savings Accounts, allowing taxpayers to save $10,000 a year tax free that can be withdraw tax free any time, for any reason.
Builds on the Success of Pro-Growth Tax Reform
In addition to individual tax reduction, the RSC budget also promotes strong economic growth. The budget makes 100 percent expensing permanent, which gives businesses a zero percent rate on new investments.
Under the pre-TCJA system, businesses were forced to deduct, or “depreciate” the cost of new investments over multiple years as depending on the asset they purchase, as dictated by complex and arbitrary IRS rules.
Full business expensing is the right tax treatment – it encourages investment and increases productivity, leading to stronger economic growth and the creation of new jobs.
The budget also makes current law restrictions on interest deductibility permanent. Businesses can currently deduct interest to the extent it is below 30 percent of EBITDA (earnings before interest, tax, depreciation and amortization.) Starting in 2022, the deduction for net interest expense is narrowed so that it is based on a corporation’s earnings before interest and tax (EBIT).
The existing EBITDA interest limitation is consistent with the limitations imposed by foreign competitors and should be made permanent.
Finally, the RSC budget repeals a number of distortionary tax provisions. For instance, the state and local tax deduction is fully repealed under the budget ending the federal tax subsidization of high state taxes.