Americans Deserve a 21st Century Tax Code
Last week, House Republicans passed a tax bill based on the Big Six framework proposed by Republican leaders in Washington. On the opposite side of the Capitol, the Senate Finance Committee approved of the Senate version of the bill. While the two bills work to overhaul the tax code in similar ways, they differ in several key areas.
The provisions of the original framework called for drastic reforms such as consolidating tax brackets, doubling the standard deduction, and eliminating the estate tax. Tax reform rooted in these guiding principles would constitute a major and welcome overhaul to the current 70,000 page tax code. The House and Senate should work together to come up with a compromise that preserves this framework; passing such a bill could may determine the fate of this Republican-controlled Congress. Moreover, if successful, the legislation would be a positive watershed moment for the American economy.
The tax code currently divides individuals and families into seven brackets according to income. The bracket rates are progressive, with the bottom tier of earners paying 10 percent and top earners, the 1 percent that Bernie Sanders crusade against, paying 39.6 percent.
Big Six called for the consolidation of the seven brackets into three. Low-income Americans would pay 12 percent, mid-range earners would pay 25 percent, and top earners would pay 35 percent. At face value, this appears to be a tax increase on the most economically disadvantaged; however, rates would be lowered across the board.
The House bill would slash tax brackets from seven to four, instead of three, with instruments in place to prevent earners in the top bracket from being unjustly affected by bubble rates. The Senate bill, by contrast, preserves the seven brackets, while lowering tax rates and avoiding bubble rates.
One of the most important pillars of the Big Six framework is that it doubles the standard deduction to $12,000 for single filers and $24,000 for joint filers. This would make the first $24,000 earned by a family tax exempt. During their second CNN debate, Senators Ted Cruz and Sanders publicly agreed that this is a good idea, albeit for different reasons. Cruz justifies his support on the basis of lowering taxes for all, while Sanders does so in the name of an empowered working class. If anything in the framework stands a chance at passing, a measure that garners support from two Senators as ideologically distinct as Sanders and Cruz may be it.
A joint-filing household earning the median income of $59,039 currently falls into the second tax bracket of 15 percent. After the current standard deduction, the household is taxed on $47,039 of yearly income. By doubling the deduction, the same household would only be taxed on $35,039. The purchasing power of the average household will increase by thousands of dollars within a single year and boost consumer confidence to new heights.
The House tax bill offers slightly higher increases to standard deductions as compared to the Senate bill. Under the House bill, standard deductions would be $12,200 for single filers; $24,400 for joint filers; and $18,300 for heads of household. The Senate bill sets the standard deductions lower at $12,000 for singles; $24,000 for joint filers; and $18,000 for heads of household.
The IRS defines the estate tax as “a tax on your right to transfer property at your death.” Progressives claim that this mechanism prohibits vast wealth accumulation by taxing monetary fortunes, real estate, and financial instruments in excess of a certain amount, set periodically by the federal government. For instance, estates with a value of $5,490,000 (as of 2017) are subject to this fee, which critics often refer to as the “death tax.”
Under Big Six, the estate tax would be eliminated. The Cato Institute reported in 2009 that this tax hampered American savings and investments by nearly $850 billion. How much has this tax affected our economy nearly a decade later? Without the estate tax, large property owners, such as farmers, would not have to pay a fee on their land, equipment, and wealth at the time of their death if they decide to pass their assets down to a beneficiary.
Both the Senate and House bills offer positive changes to the estate tax. However, they fall short of clean, immediate repeal. The Senate version would double the standard estate deduction whereas the House version would simply increase the deduction to between $10 and $11 million with the tax expiring after six years.
In addition to the above proposals, the Big Six framework makes sweeping changes to corporate taxes. Not only is America home to college football, the most fast food in the world, and Mickey Mouse, it is also home to some of the highest corporate tax rates in the industrialized world. The framework would slash America’s corporate tax rate to 20 percent, slightly below the global average. Both bills hold true to this part of the framework, although the House version would lower the corporate rate in 2018 while the Senate bill would delay the cut for another year.
Big Six has provided a framework for two solid bills that promise sweeping changes to the tax code that will benefit all Americans, by simplifying brackets, increasing the amount of non-taxed income, and confiscating less property from the deceased. If Congress can come together and pass a bill that preserves the principles of this framework, tax reform will be the landmark achievement of Trump’s first term and the 115th Congress, with important implications for 2018. If Congress does not, tax reform will be chalked up as one more sad policy failure by the Republican-controlled government.
Stephen Lusk is a Marketing major at Mississippi State University and a Young Voices Advocate focusing on economic policy. His Twitter handle is @LuskBrand.