A Way to Reform the Tax Code, from AEI

Alex Brill of the American Enterprise Institute (AEI) recently put out a tax reform plan that focuses on corporate taxes, but includes some individual provisions as well. The aims of his proposal, he says, are to "reduce tax rates for job creators, limit subsidies that promote excessive leverage, and phase out tax policies that encourage larger state and local governments."

On the corporate side, he first cuts the tax rate to 25 percent. Then, he:

  • Reduces the interest expense deduction by ten percent
  • Repeals the domestic production activities deduction
  • Makes permanent the 50 percent bonus depreciation that was in effect prior to this and next year's full expensing

Brill's plan ventures beyond the corporate tax system into the individual income tax as well. He:

  • Replaces the mortgage interest deduction with a 12 percent credit and reduces the amount of mortgage principal on which the deduction could be claimed from $1 million to $500,000
  • Phases out the deduction for state and local income taxes paid
  • Eliminates the AMT

Brill's plan is not intended to be comprehensive, but to some extent, he tries to appeal to both sides of the political spectrum by reducing marginal rates for corporations but raising effective rates--in this case, on the individual side--in a progressive manner by eliminating tax expenditures or making them more progressive.

The numbers below are Brill's own calculations of what each provision would cost or raise.

AEI Tax Reform Revenue Impact (billions)
  Ten-Year Savings
Cut Corporate Tax Rate/Repeal Domestic Production Deduction -$400 to -$500
Bonus Depreciation -$300 to -$400
Reduce Interest Expense Deduction $200 to $300
Subtotal, Corporate -$400 to -$700
Reduce Mortgage Interest Deduction $250 to $350
Repeal State and Local Deduction and AMT $200 to $300
Subtotal, Individual $450 to $650
Total -$250 to $250

An issue with the plan is its intended revenue-neutrality. If policymakers are going to take a hard look at some of the bigger tax expenditures, which they desperately need to do, they should also seek to reduce the deficit in addition to lowering tax rates. On that front, the Fiscal Commission serves as a useful guide. Still, Brill's plan provides an interesting example of how to reduce distortions in the tax code and improve economic growth through a more efficient allocation of resources.