By Andrew Hyman, Class of 2019
The recent tax cut, passed by Republicans in Congress and signed by President Trump, was a disappointment for many of us hoping for sweeping changes to the tax code. Years of promises to lower rates, broaden the base, and simplify the code so that we could “fill out our taxes on a postcard” came to little. The tax code didn’t get any simpler: we still have a plethora of surtaxes for both payroll and capital gains, and the number of brackets and deductions remained the same. All we got was a roughly 2% rate cut in every bracket on the individual side, and a major reduction on the corporate side that puts the US slightly below the OECD average.
While I certainly welcome a reduction in taxes, this plan is hardly innovative. Speaker Ryan spent years banging the drum of tax reform, yet he is going out with a whimper. Had Republicans gone bigger and pushed for major structural changes, they might have gained a huge policy victory that would disrupt the status quo and show Americans that they are pushing to make government smarter and more effective. Instead we are left with the same system as before, and Democrats planning to reverse the cuts once they’re back in power.
What we need is a holistic plan that makes America’s tax system simple, fair, and competitive. We must eliminate the complexities of our overlapping, regressive tax mechanisms, and simplify the rates so that people can easily see how much they are actually paying to the government. The benefits are numerous. A simpler tax code makes people’s lives easier during one of the most stressful interactions with government. It would also reduce the amount of taxes that go unpaid each year, which totals $458B at the latest count. And it would help people feel that their government is funded in a fair, transparent, and evenhanded way. These changes, coupled with the increased standard deduction and lower corporate rates embedded in the Tax Cuts and Jobs Act (TCJA), would improve America’s competitiveness as an attractive place to live, work, and invest.
My plan is as follows:
Eliminate the payroll tax and require the employer-side payments to be included in wages: this provides an immediate 12.4% reduction in taxes on all income up to $118,500, and 2.9% on all income, giving a raise to all Americans, cutting taxes for the lowest earners, and ending regressive payroll taxes.
Tax all income the same, regardless of whether it is earned through capital gains or ordinary income. This ends the bias in the tax code towards wealthier people, who disproportionately earn income through capital gains.
Eliminate all estate, gift, and excise taxes. This simplifies the tax code, avoids double taxation, and incentivizes wealth creation.
Maintain the standard deduction and personal exemption rules from the TCJA. The $12,000 standard deduction reduces taxable income for all earners and discourages itemization, which makes filing taxes more complicated and difficult.
Minimize disruption by maintaining current AGI calculations and other deductions. This will ease implementation of the new plan and avoid taking away deductions people like, such as the mortgage interest deduction.
Discussions about tax policy will continue in the future, regardless of whatever reform is passed. But a transformational reform would change the conversation and make our tax code better, simpler, and fairer, and hopefully allow us to tackle other serious challenges faced by our society today.