Building off of the work of the Fiscal Commission, on which I served, that Gang of Six plan would require a complete overhaul of the tax code by lowering rates, simplifying the tax code, increasing revenues for deficit reduction, eliminating many market distortions, enhancing our global competitiveness, and once again, making America the best place to start a business and create jobs. And the plan ensures that none of the revenues unleashed from economic growth would go to new government spending. Importantly, their plan requires that tax reform be projected to stimulate economic growth. Any additional revenues from increased economic growth would go to deficit reduction or further reductions in marginal tax rates.
The job-creating tax plan calls for eliminating or reforming nearly all the distortionary credits, deductions, and preferences in the code – tax earmarks which are really just spending by another name. Tax expenditures for health, charitable giving, home ownership, retirement savings and low income families would be preserved, but in a more cost-efficient and targeted manner.
The savings from eliminating or reforming tax expenditures would be used to dramatically lower marginal tax rates for individuals and businesses. And finally…finally…the disastrous Alternative Minimum Tax would be eliminated once and for all. This tax has been plaguing millions of businesses and families for years and threatens to affect tens of millions more under current law. Setting aside the vast improvement in our fiscal future, getting rid of this tax abomination should be heralded as a national achievement in and of itself.
The most pro-growth aspect of the plan is the dramatic reduction in corporate and individual tax rates. The six current tax rates in the individual income tax would be consolidated to three lower rates. The top rate on individuals and businesses would be reduced from 35% today to between 23% and 29%, rates not seen since President Reagan signed the 1986 Tax Reform Act into law. And foreign income would be taxed under a competitive, pro-business territorial system which would encourage job creation and put U.S. corporations on equal footing with foreign competitors. In other words, American firms operating oversees would no longer be taxed twice, with many times the paperwork as foreign firms.
The benefits of such a tax reform are many. Instead of serving as a vehicle for hidden subsidies for special interest, tax rates would be made lower and flatter, and the tax code would treat everyone fairly. American taxpayers would no longer need to fuss with deductions, tax credits, and other tax incentives, saving time and money wasted on tax preparation. Tax evasion – and therefore the amount of uncollected revenue (the “tax gap) – would go down dramatically. Businesses would have a new sense of certainty and a new willingness to hire and invest. And economic activity will improve enough to generate substantial new revenue from growth.
But most importantly, the new low rates for individuals and corporations would spur economic growth and create a more pro-business climate. According to the non-partisan Joint Committee on Taxation, an individual tax reform similar to what the Gang has proposed would add as much as 1% or 2% to economic growth. By also lowering corporate tax rates and moving to a competitive territorial system, it would add significantly more on top of that. Not to mention the positive economic impact of a $4 trillion deficit reduction plan.
Getting the country’s fiscal situation under control will require a serious effort to bring spending under control – something which the Gang has proposed. It will be impossible to solve this problem, however, without a vibrantly growing economy. And it is hard to imagine a better way to improve economic growth than fundamental tax reform.
David M. Cote is chairman and CEO of Honeywell.