The Republican Study Committee led by Budget and Spending Task Force Chair Kevin Hern (R-Okla.) and RSC Chairman Jim Banks (R-Ind.) today released their Fiscal Year 2022 Budget. This budget contains numerous conservative proposals including nearly $2 trillion in tax cuts for working families and small businesses.
The budget calls for making the individual tax reduction in the Tax Cuts and Jobs Act (TCJA) permanent, ensuring families and individuals will continue to see tax reduction for decades to come. The budget also calls for various pro-growth tax provisions to encourage American businesses to invest, create jobs, and raise wages.
The proposal contains several tax cuts to encourage saving and investment including indexing capital gains taxes to inflation and creating universal savings accounts.
Strong Tax Reduction for Middle Class Families
The RSC budget makes the individual tax reduction from the TCJA permanent. This will ensure continued tax relief for working families and individuals. If lawmakers fail to act, these tax cuts will expire in 2025 because of budget rules that prohibited the tax cuts from adding to the deficit outside the ten-year budget window.
Middle class families were the biggest winners from the TCJA. Nationwide, a typical family of four received a $2,000 annual tax cut and a single parent with one child received a $1,300 annual tax cut.
According to IRS statistics of income data analyzed by Americans for Tax Reform, households earning between $50,000 and $100,000 saw their average tax liability drop by over 13 percent between 2017 and 2018. By comparison, households with income over $1 million saw a far smaller tax cut averaging just 5.8 percent.
Even left-leaning media outlets have (eventually) acknowledged the tax cuts benefited middle class families. The Washington Post fact-checker gave Biden’s claim that the middle class did not see a tax cut its rating of four Pinocchios. The New York Times characterized the false perception that the middle class saw no benefit from the tax cuts as a “sustained and misleading effort by liberal opponents.”
Extends Pro-Growth Tax Policies that Encourage Investment, Job Creation, and American Competitiveness
The RSC budget also extends several tax provisions that encourage American businesses to invest in the economy, create new jobs, and compete with foreign countries.
For instance, the budget makes full business expensing permanent for new investments and extends this tax treatment to education and training services provided to American workers. There are two benefits to this policy. First, by encouraging new investment, full expensing helps promote greater economic productivity, job growth and higher wages. Second, it simplifies the tax code by equalizing the tax treatment of new investments with other business expenses such as wages, rent, and healthcare costs.
The RSC budget also provides for permanent, immediate expensing for research and development expenses, a policy that ensures that American businesses can innovate in the U.S.. This policy is especially important given that the pandemic has exposed the need to ensure that U.S. supply chains are not overly dependent on any one country.
In addition, the RSC budget calls for maintaining the existing standard for deducting interest expenses. If lawmakers fail to act, businesses including manufacturers, will see a tax increase of $140 billion over the next decade starting next year. The existing standard of EBITDA (earnings before interest, tax, deduction and amortization) is a globally competitive standard that is utilized by many foreign countries including the United Kingdom, France, Germany, Korea, and Mexico utilize an EBITDA standard for their interest deduction limitations. Maintaining this EBITDA standard will therefore help American manufacturers and other businesses compete with foreign businesses.
Helps American Families and Individuals Save and Invest
The RSC budget also contains several important tax cuts for Americans looking to invest, save, and grow their nest egg.
For instance, the budget calls for indexing capital gains taxes to inflation. Currently, the capital gains tax fails to account for gains that come from inflation. This unfairly exposes taxpayers to additional taxation on phantom gains.
For example, an investor makes a capital investment of $1,000 in 2000 and sells that investment for $2,000 in 2017 will be taxed for a $1,000 gain at a top capital gains tax rate of 23.8 percent. After adjusting for inflation, the “true gain” is much lower – just $579. (1,000 in 2000 – $1,421 in 2017).
Indexing capital gains taxes to inflation would also benefit Americans across the country from workers saving for retirement to farmers and ranchers selling off a parcel of land to acquire capital for new equipment and machinery that would help grow their family business.
The budget also increases the income threshold at which the 15 percent long-term capital gains bracket kicks in. The budget calls for increasing the threshold for single filers from $40,001 to $75,000, a proposal that will ensure many low- and middle-income families do not have to pay capital gains taxes.
Finally, the budget proposes creating Universal Savings Accounts (USAs), allowing Americans to invest in their future, free of double and triple taxation. Currently, there are numerous tax-advantaged savings accounts that can be used for healthcare, education, and retirement. These accounts can drastically reduce the tax burden for individuals and families. Unfortunately, the complex requirements of how these accounts can be utilized causes many individuals to under-save.
USAs solve this problem by allowing individuals to save or invest a certain amount in tax-free accounts without limitations on how the money can be spent. By introducing a simple, streamlined saving account available for any expenditure, Americans will save more, be taxed less, and be able to better manage their finances. USAs would also allow families’ savings, already taxed twice through income taxes, to avoid a triple round of taxation through capital gains.