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Americans have suffered through years of the weakest economic rebound following a recession in modern history. Thankfully, to riff on a popular advertising jingle, “R-E-F-O-R-M” spells “relief.”
Beating the Christmas rush, congressional leaders have sent taxpayers a big gift, wrapped up in dollars and adorned with common sense: tax reform! On Nov. 2, U.S. Rep. Kevin Brady (R-Texas) introduced House Resolution 1, the Tax Cuts and Jobs Act, a bill that many have been waiting for all year.
One of the best things about the new tax reform bill is the effect it would have on the existing federal tax structure. HR 1 would flatten and simplify the tax code, reducing the extent to which taxes create effective penalties for those who are more successful and earn additional money.
By reducing the number of brackets from seven to four, Republican lawmakers are attempting to limit the number of times taxpayers’ effective marginal tax rate, the cost of earning one extra dollar, goes up.
HR 1 realigns the existing brackets, setting their rates at 12 percent, 25 percent, 35 percent, and 396 percent. If, for example, an individual earns $45,000 or less in a year, he or she would pay a 12 percent tax rate, instead of the 15 percent rate the government takes today. An individual earning between $45,001 and $200,000 would pay a 25 percent tax rate, and so on. Individuals earning over $500,000 annually would pay a 39.6 percent rate, the same rate paid under the current scheme.
Specific tax credits and exemptions, such as tax credits for parents who adopt or post-graduate students receiving scholarships, will likely be considered as the bill is negotiated in Congress, but, on the whole, HR 1 simplifies taxes by removing or tightening many tax loopholes, such as the state and local taxes (SALT) deduction.
SALT is a line-item deduction that allows taxpayers to deduct money paid on state and local taxes when calculating federal income tax liabilities. By allowing taxpayers to stay SALT-y and deduct state and local tax payments from their federal tax liability, the federal government subsidizes high-tax states at the expense of everyone else.
SALT essentially spreads the wealth around the nation, forcing everyone to pay higher tax rates to offset the deduction’s costs, and the SALT deduction removes taxpayers’ incentive to reward cities and states for spending and taxing less, short-circuiting the feedback loop between good tax policy and taxpayers’ siting decisions.
Just as President Reagan’s Tax Reform Act of 1986 planted the seeds for the prosperity of the 1990s and early 2000s, the Tax Cuts and Jobs Act could spur a new era of economic prosperity for everyone. Lew Uhler, founder and president of the National Tax Limitation Committee, says the economic impact of tax reform could literally be historic.
“It’s my judgment that the elements of this package probably will induce a rate of economic growth better than that enjoyed following either those of Reagan or Kennedy,” Uhler told Budget & Tax News.
Although there may be a few wrinkles for Congress to iron out, if lawmakers stick to their principles and do what they’ve promised to do, the Tax Cuts and Jobs Act will be a smash hit with taxpayers and consumers.
Now that a bill has been written, it’s up to Congress to finish the job and deliver the tax reform for which we’ve all been waiting. Every day that Congress dithers and delays is another day Americans are being taxed too much, and another day the promise of success and prosperity has failed to materialize for the millions of American families eagerly waiting for tax relief.
[Originally Published at The Hill]