Tomorrow, Chairman Dave Camp of the House Ways and Committee is expected to release his long-awaited taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reform plan. As always we will evaluate it based on the principles of sound tax policy, which have guided the Tax Foundation since 1937 and generations of economists since then, and before, going back to Adam Smith. Particularly, the following four questions arise regarding Chairman Camp’s plan (or any tax reform proposal):
1. Does it make the tax code simpler?
The complexity of the tax code is apparent to virtually everyone. It’s 70,000 pages long, 4 million words, sits a foot tall when printed, takes over 6 billion hours for Americans to comply with, etc. Tax reform should reduce significantly these measures of complexity.
2. Does it make the tax code more transparent?
Another problem with our tax code and the tax writing process is the lack of transparency. First of all, many taxes are hidden from the ultimate taxpayers, e.g. corporate taxes are ultimately paid by workers to a large degree. How many taxpayers and how many voters know that? Or ask yourself this: how does Congress decide how much tax revenue a particular bill or proposal might raise? Now imagine how uninformed the average voter is on this. Do voters or members of Congress understand the differences between static and dynamic scoringDynamic scoring estimates the effect of tax changes on key economic factors, such as jobs, wages, investment, federal revenue, and GDP. It is a tool policymakers can use to differentiate between tax changes that look similar using conventional scoring but have vastly different effects on economic growth. ? Early signs indicate that Chairman Camp’s efforts are leading to a healthy and public debate on these issues.
3. Does it make the tax code more neutral?
The most critical failing of the tax code is the many cases of non-neutral treatment, resulting from years of piling on rewards or punishments for this or that special interest. The most egregious example, and the one most detrimental to long-term economic growth, is the non-neutral treatment of consumption today versus consumption tomorrow. A pure income tax double taxes saving and investment, through corporate taxation, shareholder taxation, and estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. ation. This causes less saving and investment, which means more consumption today but less tomorrow. Because saving and investment are the key to long term economic growth, America is limiting its future with such a relatively heavy reliance on income taxation. Tax reform properly understood addresses at least one of the layers of double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. of saving and investment, either through reduction of corporate taxes, reduction of shareholder taxes (for example, by crediting shareholders for corporate taxes paid), or reduction of estate taxes. This is what most countries outside the U.S. have been doing for the last 20 years, leaving the U.S. far behind.
4. Does it avoid retroactivity?
As with any law, tax laws should be stable over time and not apply retroactively. This is a basic fairness issue, but it also lets taxpayers better plan their affairs, particularly long-term economic decisions like investment and hiring.
For more on the perils and promise of tax reform, including the growth effects of various changes, see our publication from earlier today.
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