Simpson vs. Ryan—tax reform

This is the second post in a series on fiscal reform.

Rep. Paul Ryan’s plan can be found at Roadmap for America (The font is very small – you might want to use zoom to make it larger – I used 140%)

The Report (pdf version) of the President’s Commission on Fiscal Responsibility, chaired by Alan Simpson can be found at The Moment of Truth

I’ll endeavor to summarize the differences for you, but the actual language can be found at these websites.

Neither proposal has gotten very far. President Obama accepted Simpson’s commission report in December 2010, and hasn’t mentioned it since, nor has he included any portion of it in his own so-called Fiscal Reform Plan. A few days after Ryan’s plan was released, Obama lambasted it in a speech with Ryan sitting directly in front of him. Truly, I don’t know why Ryan didn’t get up and leave the room.

Tax Reform

Rep. Paul Ryan’s plan dares to simplify and replace the current 70,000 page tax code.  The so-called “progressives” will desperately resist such changes, since so much of their years of political and social meddling is embodied in the current incredibly complex rules and regulations.   It will not pass without overriding President Obama’s veto.  The changes Ryan recommends are designed to restore America’s economic prosperity.  Specific provisions:

    • Full repeal of the alternative minimum tax.
    • Elimination of double taxation.  No more taxes on interest, capital gains, or dividends; no more estate taxes.  This is a bold move.  Savings, business, and investment will thrive.
    • Simplified personal income tax rates.  Two rates rather than six:  10% on adjusted gross income  up to $100,000 for joint filers, and $50,000 for single filers; and 25% on taxable income above these amounts.   Nearly all existing tax deductions, exclusions, and other special provisions are eliminated.  The standard deductions and personal exemptions are generous: The standard deduction is $25,000 for joint tax filers, $12,500 for single filers. The personal exemption is $3,500.  The combination is equivalent to a $39,000 exemption for a family of four.  A strange provision: the taxpayer may elect to file under the old tax system.  I imagine this is to placate Democrats, but I doubt if it will do so.
    • Business tax reform.  In my opinion, Ryan’s business tax reforms are brilliant.  Currently, only Japanese businesses pay higher taxes, which places our businesses at a disadvantage in international markets, and costs an untold number of American jobs.

Details:
1.  A Business Consumption Tax (BCT) of 8.5% will be levied on goods and services, based on the value added (sales less purchases).  

2.  Taxes will not be leveled on exports but will be on all foreign imports.  To level the playing field and eliminate the competitive
disadvantage on American businesses and American-made products, the BCT is not imposed on U.S. exports when they leave the U.S. It is instead imposed on foreign imports when they enter the U.S.  Other countries do the same thing, and it is about time we do it as well.

3.  Under the BCT, the cost of an investment is fully deducted immediately – in other words, investments are “expensed” rather than depreciated over the estimated life of the investment.

4.   The current Corporate Income Tax is eliminated.  Like the individual income tax, the corporate income tax contains a host of tax preferences that end up narrowing the corporate tax base by up to 25 percent, according to the Treasury Department. 

The Simpson Plan Tax Reforms.

This is not a specific reform plan.  It is a list of objectives, left to the Congress and the President to finalize and enact.  The objectives are not very aggressive.  They are best expressed in the tables of Figure 7 (in the referenced document above) for personal income tax reform and Figure 9 for business tax reform.  These are “illustrative proposal” i.e., suggested results of the reform to be implemented by Congress and the President:

Individual income tax changes:

  • Three tax rates: 12%, 22%, and 28%.
  • Eliminate Alternative Minimum Tax.
  • Itemized deductions eliminated – all individuals take the standard deduction.
  • All capital gains and dividends taxed at ordinary income rates.
  • Changes add credits for mortgage interest paid, charitable giving, and retirement.

Business income tax changes:

  • Corporate tax rate reduced to 28% (from 35%).
  • Tax credits and tax expenditures eliminated.
  • Tax on foreign source income goes to territorial system.  I believe that means money earned in the US is taxed. 

Summary:

The Ryan plan is specific and should be implemented.  I believe it would have many good effects on our economy.   The Simpson recommendations deserve a “Nice Try, but go back to the drawing board.”

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This entry was posted in Currency, Politics, Taxes, the federal debt, The federal deficit and tagged . Bookmark the permalink.

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