Yesterday, the Obama administration announced a sort of Berlin Wall for U.S. companies -- trying to keep them from moving their headquarters to another country with a more advantageous tax climate than ours, one of the few industrialized countries that tries to tax profits earned overseas. The better approach is to revamp a corporate tax code that is increasingly uncompetitive . President Obama says he wants to do this, but his sincerity is in doubt given how little effort he's put into such a reform.
Today, Sens. Mike Lee of Utah and Marco Rubio of Florida propose taking the reform approach, as part of a wide-ranging overhaul of the entire U.S. tax code for the first time in almost three decades.
On the corporate side, the GOP senators write (in an op-ed in the Wall Street Journal):
"These reforms would eliminate double-taxation on investment, and enable small businesses and startups to compete on a more level playing field against entrenched incumbents, who for too long have profited from the cronyist giveaways our plan would eliminate."
That last bit is a worthy injection of populism into a system that too often rewards those with the best lobbyists, not those with the best logic. The duo also proposes finally ending the practice of taxing overseas profits and instead moving to the kind of territorial tax system almost every other industrialized nation uses. "The way to reverse corporate inversions and bring capital in off the sidelines," they write, "isn't to punish companies for obeying outmoded laws, but to change those laws to make America once again the best place in the world to pursue happiness and earn success."
The more striking reforms they propose, however, come on the individual side. They propose reducing the tax brackets to just two rates of 15 percent and 35 percent while ending or changing a host of deductions, although their op-ed doesn't specify which deductions or mention where the brackets would begin and end. It would also end the so-called marriage penalty, as well as something they dub the "parent tax penalty":
"This hidden, double burden on parents isn't offset anywhere else in the system, and so true conservative tax reform needs to account for it. ... Our proposal would account for this and level the playing field for working parents by augmenting the current child tax credit of $1,000 with an additional $2,500 credit, applicable against income taxes and payroll taxes -- i.e., the taxes that most burden lower- and middle-income families. The credit would not phase out, and would be refundable against income tax and employer and employee payroll tax liability."
Accounting for the financial burden borne by parents is a good way to address the problems faced by middle-income families, and allowing the new, larger credit both to count against payroll taxes and to be refundable ensures that low- and middle-income families will actually see the money in their pockets. There's also a very sound outline of a plan to rework the Earned Income Tax Credit so that it dovetails better with income-based welfare benefits so that those workers don't face effective marginal tax rates as high as some multimillionaire professional athletes face.
Some more details would be helpful -- it's an op-ed, not a white paper -- but all in all it's the kind of direction Lee and others have been talking about for months now. It's the kind of proposal that, if embraced by more Senate Republicans, would give them a major policy position to offer voters in this midterm election, and a centerpiece for a governing agenda in 2015-2016 should they win a majority.
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