Reducing Our Tax Burden: Three Stages of Reform - In More Detail

As your Congressman, I will use my 25 years of experience and knowledge to fight for meaningful, principled tax reform. While managing a successful accounting practice, I gained a valuable understanding of how taxes can cripple small business owners, employees and their families. My years of public service in the Illinois State Senate and my leadership on the Senate Revenue Committee have prepared me well for the critical choices that the next Congress will face over tax policy. By sending me to Washington, you will have a Congressman who needs no on-the-job training regarding tax reform and who will be ready and willing to stand up to those in Congress who want to continue down the worn path of tax policy that stifles innovation and competition and that leaves individuals and families with too little of their paycheck. Sound tax reform is critical to a number of public policy issues. When families are able to keep more of what they earn, they can save for retirement, send their kids to schools that prepare them for higher education and make sound health care decisions. My guiding principle for tax reform is simple: federal policy must support, not deter, Americans’ natural inclination to work hard and save money. I fully recognize that long-term tax reform is necessary to achieve this goal, but some intermediate steps are also critical if we are to keep the engines of economic growth working for all of our citizens. My tax reform plan is broken down into three stages: (1) Immediate Reform – Repeal the Alternative Minimum Tax (AMT). The AMT was enacted to catch wealthy Americans who evaded their tax obligations. Just a few short years ago, it affected only a tiny fraction of taxpayers. Unfortunately, things have changed, and AMT has trapped millions of taxpayers in the past few years, individuals to whom the system was never intended to apply. I support the immediate repeal of AMT so that working families are not penalized several thousand dollars a year simply because the tax code was artfully drafted and incompetently administered. The AMT will have a disproportionate impact on families, particularly those with children, who earn between $75,000 and $100,000 per year. This is the very essence of middle-class America, and it is unconscionable that our legislators have failed to permanently address this problem. While repealing AMT makes for sound public policy, one core issue underlying this dispute is whether its repeal should be “revenue-neutral.” In other words, many legislators want to repeal AMT only if consensus is achieved on how to pay for it. The problem with this logic is two-fold: first, AMT is a phony tax generator, catching in its trap people who were never targets to begin with; and second, the term “revenue-neutral” is simply a way for the government to increase taxes elsewhere. Given the rise in federal tax revenues, and I support outright repeal of AMT and would not condition it on partisan negotiation over how the repeal should be “funded.” I will address the need to cut federal spending in a Fiscal Policy position paper. (2) Short-Term Reform – Make the Republican Tax Cuts of 2001 and 2003 Permanent. It is wrong for Washington politicians to use the Republican tax cuts as a pejorative term. The reality is that the tax relief enacted in 2001 and 2003 boosted productivity, fostered economic growth and raised the standard of living for all Americans, not just those in high-income brackets. First, the tax reform in 2001 and 2003 created a 10 percent bracket that brings needed relief to lower income families. Second, it eliminated the death tax. Third, it erased the marriage penalty. Unfortunately, the tax cuts are due to sunset at the end of 2010, and the next Congress must extend them until more meaningful, long-term reform can be addressed. Failure to do so will depress wages for employees, stifle business investment in plant and equipment, and raise the specter of recession. Sometimes lost in the analysis is the widespread positive impact that the 15 percent rate cap for dividends and capital gains has had on business investment and personal income. Despite populist rhetoric, this rate cap is not tantamount to corporate welfare. Instead, it encourages risk-taking by entrepreneurs and cuts the true price of products and services. Heritage Foundation studies show that, if this rate cut is extended, over 500,000 new jobs will be created and more than $100 billion in disposable income will be added to American households. That benefits everyone in the economy, not just a select few. Our short-term reform to extend the 2001 and 2003 tax cuts must not ignore the benefits that the 15 percent rate cap has had on the America’s ability to compete globally. Tax cuts must be matched with spending discipline, or deficits will be passed on to our children and grandchildren. (3) Long-Term Reform – Enact the FairTax. Both immediate and short-term reforms are precursors to a more fundamental change in our federal tax policy. It is time that our government recognized that the Internal Revenue Service is broken and that the tax code must be scrapped. It is time for a more efficient system that treats all Americans fairly. It is time for a system that provides no incentives for cheaters and for people who find clever ways to transfer the tax burden on hard-working Americans. The most principled, conservative policy to achieve these goals is for Congress to enact the Fair Tax Act of 2007 (HR 25/S 1025). Simply put, the FairTax replaces the income and payroll tax system with a retail sales tax and a “prebate” to ensure that no American pays taxes on spending up to the poverty level. The Act would repeal all income taxes, individual and employer payroll taxes, the corporate income tax, the self-employment tax, and the estate and gift tax. A 23 percent sales tax would apply to all retail sales for goods and services, exempting necessities. The result of the FairTax would be to increase our competitiveness in the global economy, more reliable sources of revenue, more transparency, privacy for all Americans and reduced administrative costs. Our relationship with the IRS would come to a much-needed end. Democrats and Republicans alike support the FairTax because it is principled and equitable for people across different walks of life. When people are educated about the FairTax, they realize that this is the system that eliminates the nebulous haze of the current tax code. I recognize that enactment of the FairTax is going to require time, education and a clear explanation of the impact of a fundamental shift in federal policy. But I also recognize that the current system does not work, that it creates perverse incentives, that it is a hodgepodge of special interest legislation with no core guiding principle and that we need real change. With bipartisan support and a growing number of Congressional supporters, the FairTax is a long-term solution to a broken tax system.   Index For additional reading concerning tax reform, please read the following informational materials: (1) May 2007 Cato Institute Tax & Budget Bulletin • Chris Edwards, Director of Tax Policy Studies, discusses repeal of the Alternative Minimum Tax. (2) October 30, 2007 Op-Ed by Charles B. Rangel • Editorial by Rep. Charles Rangel (D-NY) discussing the impact of AMT and proposed legislation for AMT’s repeal. (3) January 5, 2006 WebMemo by Heritage Foundation • William S. Beach and Rea S. Hederman, Jr. discuss the economic benefits of extending the 2001 and 2003 Bush tax cuts. (4) FairTax.org • Americans for Fair Taxation outlines the proposed legislation for The Fair Tax Act of 2007, with “plain English” explanations.     Return to Reducing Our Tax Burden: Three Stages of Reform