Recent Tax Reform Proposals: The Good and the Bad

Over the past few weeks the Tax Policy and Health subcommittees of the House Ways and Means Committee held Member Day hearings, in which Representatives pitched their favorite pet tax reform proposals to their colleagues in hopes of moving some of the measures forward.

A few things stand out: 1) many of our Representatives have great ideas on how to reform our tax code that makes it fairer, more equitable, and raises revenues, but; 2) the good proposals are overshadowed by a litany of horrible bills that would make our tax system less adequate and fair.

Here is a list of some of the best and worst bills covered during the Member Days:

The Good

Earned Income Tax Credit Improvement and Simplification Act (H.R. 902):  The Earned Income Tax Credit (EITC) is one of the most popular and effective anti-poverty tax credits. Awarded to low-income workers age 25 and older, the EITC and the Child Tax Credit (CTC), another tax credit for working families, lifted 9.8 million people out of poverty in 2014. In their current form, these credits fail to adequately meet the financial needs of childless workers and non-custodial parents. In 2012, the flaws in the EITC regarding childless workers resulted in 7 million workers being taxed into or deeper into poverty.

H.R. 902, introduced by Rep. Richard Neal (D-MA), seeks to rectify this oversight. In addition to directly increasing the overall tax credit available to single and married low-income workers with or without qualifying children, H.R. 902 also allows unmarried 21 year-olds with no qualifying children to claim the credit as long as they are not full-time students. Rep. Neal’s bill would provide10.6 million workers with an average tax benefit of $604.

Fairness in Taxation Act (H.R. 389):  Introduced by Rep. Jan Schakowsky (D-IL), the Fairness in Taxation Act aims to curtail the accumulation of wealth that the “super-duper rich” of the country have been enjoying for over a decade. The bill uses two mechanisms to accomplish this goal. The first is introducing five new income tax brackets between taxable incomes of $1 million and $1 billion (the top federal tax bracket currently starts at $373,000).

The second, and more important, policy in H.R. 389 would end the special preferential tax rate for capital gains and dividend income. Both capital gains and dividend income are currently taxed at much lower rates than ordinary income and are predominantly held by the richest among us. Citizens for Tax Justice (CTJ) projects that 94 percent of capital gains and 82 percent of qualified dividend income go to the richest 20 percent of the country, with 67 percent of capital gains and 38 percent of qualified dividend income going to the richest one percent alone. CTJ also estimates that Rep. Schakowsky’s bill would raise $849 billion in revenue over the next decade, helping to raise the revenue our country desperately needs to make more public investments.

Common Sense Housing Investment Act (H.R. 1662):  Introduced by Rep. Keith Ellison (D-MN), this bill would boost federal support for low-income housing. H.R. 1662 would cap the amount of a home mortgage eligible for a tax break at $500,000, down from the current cap of $1 million (only 4.5 percent of mortgages from 2011 to 2013 were above $500,000). The bill would also convert the regressive Mortgage Interest Deduction to a flat, 15 percent non-refundable mortgage interest tax credit.

These proposed changes would enable 16 million more homeowners with a mortgage to receive a bigger tax break. It would also make a significant contribution to the gap of 7 million affordable rental homes needed for extremely low-income families. Nearly half of renters spend more than 30 percent of their income on rent. The bill would raise $200 billion in revenue over the next decade, which would be invested into expanding the Low-Income Housing Credit and provide a source of permanent funding for the National Affordable Housing Trust Fund, supplying low-income homebuyers with even more support and financial security. These reforms would go a long way toward reversing the current upside down nature of the deduction, in which the wealthiest families get tens of thousands of dollars in housing support from these tax programs, while low- and middle-income families get next to nothing.

The Bad

Fair Tax Act (H.R. 25):  Introduced as H.R. 25 in every Congress since 2003 (and yet to make it out of Committee), the current iteration was introduced by Rep. Rob Woodall (R-GA). The Fair Tax Act would replace the entirety of the federal tax code (including corporate and income taxes) with a so-called 23 percent national sales tax (though in reality it’s more like 30 percent) on all purchases in the U.S.

An ITEP analysis of the Fair Tax  found that the bottom 80 percent of Americans would pay 51 percent more in sales taxes than they now pay in all federal taxes. In contrast, the best-off one percent of all taxpayers nationwide would get average tax reductions of about $225,000 per year.

Under the “Fair Tax,” revenues would likely fall dismally short of what the bill’s proponents claim; the Brookings Institute, CTJ, and the congressional Joint Committee on Taxation have each estimated that the national sales tax rate would have to be closer to 60 percent for the government to break even. Political leaders throughout history have shown a fondness for promoting simple solutions for complex problems that are very appealing on the surface, but overlook the intricacies of reality. The Fair Tax is no exception to this trend.

Create Jobs Act (H.R. 4518):  Introduced by Rep. Tom Emmer (R-MN), H.R. 4518 seeks to “allow the U.S. to better compete in the global economy.” The bill purports to accomplish this goal by cutting the federal corporate income tax rate from 35 percent to five percent below the average corporate tax rate for Organization for Economic Co-operation and Development (OECD) countries, or 10 percent if that reformed rate is still too high. The bill also requires a congressional joint resolution to approve a tax rate increase.

Rep. Emmer’s bill is based on the false premise that U.S. corporations are paying high corporate taxes, when in reality they are paying relatively low tax rates. While it is true that the U.S. statutory rate is 35 percent, most companies pay far less than that full rate. Thanks to the numerous subsidies and tax breaks afforded to big business, CTJ found 288 consistently profitable Fortune 500 corporations paid a federal income tax rate averaging just 19.4 percent over five years, with a third of the companies paying less than 10 percent and 26 corporations paying no federal income taxes at all. This explains why the United States corporate tax level is below the OECD average, even though our statutory rate is the highest. In other words, U.S. corporations already routinely pay below the OECD average, so all this bill would do is cut rates even lower and lose hundreds of billions in critical revenue.

Bad Exchange Prevention Act (H.R. 4297):  Introduced by Rep. Charles Boustany (R-LA) in response to guidelines issued by the U.S. Treasury Department regarding the OECD’s Base Erosion and Profit Sharing (BEPS) Action Plan, H.R. 4297 seeks to limit the sharing of corporate income and tax information between the U.S. and other countries. Also known as country-by-country reporting (CbCR), BEPS allows the U.S. and countries around the world to track international tax avoidance and evasion. H.R. 4297 would delay CbCR until 2017, and would instruct the Treasury to blacklist any foreign jurisdiction that “abuses” the confidential information in CbCR.

While safeguarding confidential information sounds like a reasonable requirement, it’s not. H.R. 4297 would effectively transform America into the world’s largest secrecy jurisdiction, in which corporations could hide behind their political friends in order to avoid disclosing financial information that provides evidence of tax fraud and evasion. Rather than joining the rest of the world in curbing the offshore tax avoidance, Rep. Boustany is complicit in the professional tax avoiders’ extortion of countries’ tax laws in the race to the bottom.