Today, Senators Ron Wyden (D-OR) and Dan Coats (R-IN) introduced bipartisan legislation to comprehensively reform the existing U.S. tax system in a revenue-neutral manner. The "Bipartisan Tax Fairness and Simplification Act of 2011" fundamentally reforms the U.S. tax code by eliminating many tax expenditures (but not some of the most popular ones like the mortgage interest deduction, charitable giving, the employer-provided health care exclusion, and the state and local tax deduction), reducing the number of individual income tax brackets from six to three, creating a single corporate tax rate, and creating a one-page tax form for most taxpayers.
Specifically, this bill--which is nearly identical to the bill sponsored by Wyden and former Senator Judd Gregg (R-NH) in the last Congress--would set three total tax brackets at 15 percent, 25 percent and 35 percent (changing the current brackets of 10, 15, 25, 28, 33, and 35 percent). The bill would also eliminate the Alternative Minimum Tax (AMT) and roughly triple the standard deduction. One major difference is that the newer version includes a temporary tax holiday that would allow multi-national American companies to bring overseas profits to the U.S. at a lower tax rate.
The bill also includes broader corporate tax reforms. It creates a single corporate tax rate of 24 percent through the reduction of various corporate tax breaks. Additionally, it creates a 100 percent deduction for all companies with annual gross receipts of less than $1 million to expense all equipment and inventory costs in a single year.
The new bill and its previous version represent important contributions to the vital tax reform conversation--that seems to be gaining steam--in that they highlight modernization and simplification of the tax code in a way that promotes economic growth. In particular, targeting tax expenditures for repeal and reform is a necessary step that has bipartisan support (see some ideas for reforming tax expenditures here).
Although Wyden-Coats offers an important starting point for reform, given the depth of our fiscal challenges the Senators must look beyond revenue-neutral reforms. Recent proposals, such as the Fiscal Commission's recommendations, show that lawmakers could be even more aggressive in tackling tax expenditures and reducing marginal tax rates while also contributing significant savings to deficit reduction. In a blog post last year on the Wyden-Gregg bill, we contended it did not go far enough in eliminating tax expenditures and we raised concerns over its deficit impact and made some suggestions for improvement.
There is widespread consensus that the tax code needs to be updated and streamlined. There is also growing agreement that fundamental tax reform will be an essential part of a much-needed comprehensive plan to get the U.S. on the right fiscal track. Everything, including increased revenue, will have to be on the table.