Judd Gregg: Tax reform — the good, the bad and the ugly

Judd Gregg: Tax reform — the good, the bad and the ugly
© Camille Fine

Tax reform is the last stand of this Republican Congress.

Let’s hope it does not turn into the charge of the light brigade.

The goal of tax reform should be to create economic growth by restructuring our tax laws so that they promote efficient investment of capital, rather then investment for the purpose of avoiding taxes. 

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In addition, as a matter of realpolitik, it is obligatory that any new tax structure maintain the progressivity that has become dominant in our tax system.  

 

The top 20 percent of people in terms of taxable income today pay approximately 85 percent of the personal income taxes. This is redistribution politics by any honest evaluation. It has become a core element of our social tax purpose and structure.

Thus, if tax reform is done right, it must reduce rates so that people invest for return, not to avoid taxes — and it must remain highly progressive.

These were not only the goals but the actual outcomes of past, serious attempts at tax reform, including the Reagan-Rostenkowski tax bill of 1986 and the Simpson-Bowles bipartisan package of 2010.

They are not necessarily the outcome of the bill unveiled by the House Republicans last week.

The House bill is good work when it comes to two major areas.

A reduction of the present 35 percent corporate tax rate to 20 percent is a huge step forward in leveling the playing field of international competition.

This 20 percent rate will not only make it possible for American companies to remain competitive while staying domiciled in America; it will also be a magnet to draw overseas companies into our country. 

This will be a job-creating juggernaut.

In addition, the effort to finally straighten out our misdirected and self-destructive international tax rules is welcome news. 

The House bill as proposed, although somewhat tentative, should cause billions of dollars stuck overseas to return to the United States. It will mean that the money of American companies, now being spent on overseas investment, will be available for use here.

Americans on Main Street will actually feel the windfall from this return of dollars. There will be expanded job-generating investment across the country. We can also expect a growth in the value of people’s retirement funds as American companies pay out higher dividends or buy back stock. 

This is good policy.

Unfortunately, there is also the bad.

The failure to have a serious capital gains and dividend differential is a fundamental flaw. The House bill sticks with the high, Obama-era capital gains and dividend rates.

If the goal is economic growth, then those who invest to generate growth should be rewarded. 

A capital gains differential that is meaningful would immediately spike economic activity as funds that have to be locked down in investments would be released. 

This would generate a one-time large revenue boost to the federal government and would energize a significant movement of funds to better, more productive investments.

Then there is the ugly. 

It makes no sense to retain abnormally high marginal tax rates if the purpose of tax reform is to encourage better use of investment dollars.

The approach in the proposed bill on individual rates is the exact opposite of the approach taken on the corporate side of the bill. 

They got it right, on the corporate side. But they sure have gotten it wrong on the individual side.

The purported reason for keeping the high top marginal rates is the imperative to retain the fairness of progressivity and the need for revenue.

Both of these claims are delusional.

As Reagan-Rostenkowski and Simpson-Bowles showed, top marginal rates can be reduced into the twenties while still retaining progressivity.  

All it takes to accomplish this is to be aggressive — or should we say bold — in reducing deductions and exemptions.  

Stepping on the toes of the people who promote complexity in the tax code in order to game the system is the essence of how one gets real tax reform.  

Revenue neutrality is even possible if this “toe-stepping” is done with enough gusto.

It is essential if tax reform is to work and grow the economy that the top rates be lowered while retaining progressivity.

Not only does this proposal not lower rates, it actually may increase taxes. It fails to even accomplish the most elemental tax improvement at the top end, which would be repealing the “Obama surcharge” — an extra tax on investment income.

This is all done because the administration and the House Republicans want to mute the left’s claim they are writing a tax law to benefit the wealthy. 

Here is some news that should be obvious: No matter what the Republicans propose, the Democrats and their myriad media allies are going to say their proposal is a windfall for the wealthy. 

Republicans fell into this political trap when they decided against doing a bipartisan bill. 

This tax bill will be met with the same intense antipathy as ObamaCare — only this time, the attacks will come from Democrats and those on the left who have no fingerprints on the bill. 

They will view attacking it as a winning political formula. Thus, there is no downside for Republicans in doing what is right and really reducing marginal rates through across the board reductions in special interests’ deductions and exemptions.

Also, much more revenue will be produced by a tax law with rational marginal rates that energizes effective use of investment dollars than one with high marginal rates that causes people to seek out tax avoidance as their primary goal of investing.

Tax reform should not be a tentative exercise. Make it market-oriented, keep it progressive and cut not only the corporate rates but also individual marginal rates, a lot.  

This opportunity does not come around often.  Do it right.

Judd Gregg (R) is a former governor and three-term senator from New Hampshire who served as chairman and ranking member of the Senate Budget Committee, and as ranking member of the Senate Appropriations Foreign Operations subcommittee