Tax Reform 2.0 Framework a Good Start

The House Ways and Means Committee released its long-awaited tax reform 2.0 framework, which would make permanent the 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. Cuts and Jobs Act’s individual income tax changes and institute other reforms.

The framework would:

Make permanent the income tax rate and deduction changes scheduled to expire in 2025: The Tax Foundation’s Taxes and Growth model estimates that this would boost long-run GDP (2.2 percent) and wages (0.9 percent) and create 1.5 million additional jobs, while reducing annual federal revenues by $112 billion dynamically.

Streamline retirement savings accounts: Currently, the tax treatment of retirement savings is riddled with restrictions, limitations, and rules that differ across more than a dozen types of retirement accounts. Though the framework does not specify how lawmakers would reform the current structure of retirement savings, the creation of a universal savings account would be a significant improvement over today’s long-term savings options, especially for Americans who may not have access to retirement savings through their employer.

Improve the tax treatment of start-up businesses: While it’s unclear what provisions the House may consider, lawmakers could make the Section 179 deduction more generous or create a standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. for start-up business costs, among other options. Tax Foundation economist Kyle Pomerleau has testified before Congress on ways to remove the tax code’s barriers to entrepreneurship.

The TCJA was a pro-growth tax reform that can help create jobs in the United States, raise wages, and expand the economy. However, much of the TCJA is scheduled to expire over the next decade. The new framework from (Ways and Means) Chairman Brady helps provide individuals certainty in their tax code by proposing to make the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. provisions permanent. We project that making the individual income tax provisions permanent would increase the size of the U.S. economy by 2.2 percent in the long run while reducing federal revenue by $165 billion annually (on a static basis).

The inclusion of universal savings accounts is also a worthwhile addition. Our current tax code biases individual saving with a complex weave of a dozen types of accounts, with different limits and rules. Simplifying that structure is a much-needed reform.

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