On Thursday, the Republican staff of the Senate Finance Committee released a report on the prospects of tax reform in the next session of Congress. The report gives insight into what policy reforms Sen. Orrin Hatch, R-Utah, might push as he takes over the committee when Republicans assume control of the Senate next month.
“I do not believe we can consider tax reform to be an optional exercise — it is a matter of necessity,” Hatch wrote in the report’s foreword. “That is why I am optimistic that there is enough goodwill in Washington and throughout our country to make this effort successful.”
Committee staff listed seven principles to guide tax reform. “The first three principles are adopted from President Reagan’s tax reform in the mid-1980s, with four additional principles that are critical in today’s world: (1) efficiency and economic growth, (2) fairness, (3) simplicity, (4) revenue neutrality, (5) permanence, (6) competitiveness, and (7) incentives for savings and investment.”
On simplicity, committee staff lamented the excessive number of tax expenditures. They also recommended elimination of the alternative minimum tax. Simplification efforts would result in more compliance by American taxpayers at a lower cost.
Committee staff also emphasized permanence and certainty in the tax code. The current debate over tax extenders shows why this is important. Some companies rely on certain tax extenders to make important business decisions, such as the research and development credit or bonus depreciation. Putting these sections of the tax code in question every year or two makes it difficult for business to operate. Proper comprehensive tax reform would change the code once and minimize future alterations.
The report also acknowledged that the U.S. corporate tax code is uncompetitive, costing American jobs and economic growth. “Tax reform should reduce the high U.S. corporate tax rate and also achieve neutrality through a territorial type of tax system, thereby placing American companies on an equal footing with their foreign competitors when conducting business in other countries,” said the report.
Only six OECD countries, including the U.S., have a worldwide tax system that taxes a corporation when it tries to repatriate foreign earnings. A territorial tax system would encourage multinational corporations to invest income earned abroad back into the U.S. economy.
The report also offers a thorough discussion of consumption taxes, which tax people’s purchases rather than their income. The most common type of consumption tax is a value-added tax, which is collected by every OECD country except the U.S. While many positive aspects of consumption taxes were discussed, the report advised against adoption of a VAT. “It would … effectively be a tax hike on every American, including those who currently pay no income tax,” said the report. “If a VAT were imposed on top of our existing income tax system, it could cripple our economy by imposing new costs on virtually every purchase of goods and services in the United States.”
Ultimately, conservative tax reform in the next session of Congress will need bipartisan support in the Senate to reach 60 votes and the approval of President Obama. Some reforms, such as tax simplification and permanence, could see bipartisan support. However, it may be difficult to get Democrats on board with business tax cuts.
