The campaign to overhaul the nation’s tax code began Sept. 27 with a speech by President Donald Trump in Indianapolis and will be spearheaded in Congress by Rep. Kevin Brady, R-Texas, chairman of the tax-writing House Ways and Means Committee. Brady has been advocating tax reform for more than a year and his Tax Blueprint capsulizes the key changes proposed by Trump and Republican leaders on Capitol Hill.
Provisions in the Blueprint – designed to reduce tax rates, increase economic activity and simplify the tax code – are the starting point for the impending tax reform debate.
The Blueprint is divided into individual and corporate tax sections.
The individual tax return would be simplified so most taxpayers can fill out their federal income taxes on a postcard. First, determine taxable income by adding wages and other compensation to half of investment income. Then subtract specified saving plan contributions and the standard deduction allowed by IRS to determine total taxable income. (Taxpayers would have the option of substituting mortgage interest deduction and charitable contributions in place of the standard deduction.)
Taxpayers also could deduct the child credit, earned income credit and higher education credit from the preliminary taxes owed according to the tax chart.
The Blueprint calls for three tax rates (12, 25 and 35 percent) instead of the seven brackets under the current code.
The proposed corporate tax overhaul includes some interesting and controversial provisions, the most popular being reduction of the maximum tax rate to 20 percent; reducing the tax on dividends and capital gains by 50 percent; making the research-and-development credit permanent; and repealing the alternative minimum tax and the estate tax.
One of the most controversial provisions is called the “border adjustability” provision.
“Under our current broken tax code, U.S. companies pay a tax when exporting products, but not when they import products,” Brady says. “To avoid paying that tax on exports, U.S. companies move jobs, research, and headquarters overseas. That way, the products they sell abroad are not subject to U.S. tax and the products they import back to the U.S. are not subject to U.S. tax. Under our Blueprint, ‘Made in America’ products will no longer be taxed and imports will be subsidized – setting our manufacturers up for success around the world.”
Brady says that under current tax policies, “U.S. companies are taxed when they sell their product in foreign markets – a tax not imposed on a foreign competitor selling in the same markets. Our Blueprint levels the playing field, ensuring that competition is based on quality, price, and service – not outdated tax regimes.”
The Blueprint proposes a 20-percent tax rate on imports.
In the petroleum industry, refineries that import crude oil strongly oppose the import tax. Oil producers, especially many independents, have advocated a tax on imported oil since the 1970s. Independents have pointed out the economic and national security benefits of taxing imported oil, but neither Republican nor Democratic presidents have supported such a tax.
Policymakers in Washington now have a chance to make tax reform and tax simplification a reality. The Tax Blueprint provides the starting point.
Alex Mills is president of the Texas Alliance of Energy Producers.