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By Suzanne Thiele,

The biggest inversion deal in history just took place when Pfizer, a pharmaceutical company merged with an Irish one with an agreement to relocate the tax base to Ireland. This has spurred talk on both sides of tax reform necessity—Trump is as outraged as Clinton.  Tax reform has been a long put-off necessity. It makes economic sense to do so, in addition to the fact that the current system is completely unfair for a multitude of reasons. When analyzing reform proposals, it is important to consider what will actually happen. The main reason I voted for Obama the first time he ran was because I adamantly agreed with his tax incentive plan. Of course, none of it actually happened. It is important to consider practicality. Reform is now likely to happen since everyone from Sanders to Rubio is calling for it. Bush’s plan is the most likely to happen so far, because it is slated to be a proposed law, not just political talking points. And as far as the presidential role in our economy is concerned, fiscal policy is where there is huge opportunity to make vast improvements.

Any economist would advocate for tax reform because of the billions lost in the form of costs as well as another several billion at least in opportunity costs that those savings could accrue and generate. Tax revenue is always seen by neo-classical economists as deadweight loss to the economy, and the revenue gained, should be invested in necessary and generally non-profitable activity such as infrastructural investment and public goods (schools, safety, etc.) The US tax code is completely convoluted and littered with perks, incentives, loopholes and lobbied-for deductions that it is nearly impossible to navigate or enforce. Tax overhaul would result in everyone winning, because everyone’s rates would lower, filing taxes would be less of a headache if not unnecessary, and it would be far fairer.  Everybody wins including the unemployed, because a portion of the money kept would spur job creation. We will likely always have a progressive income tax system, never a flat tax, but flattening rates or decreasing the number of rates would save us a lot of time and money.

Republican presidential candidates are capitalizing on this opportunity. Bush and Trump have broadcasted and signed off on their platforms to drastically change how the federal government taxes income, including on investments, and how it incentivizes. Then again, regarding tax reform, how far is too far? Trump proposes the most aggressive tax reform, the closest to fairness and theoretical economic utopia, but such a drastic overhaul could prove infeasible, even according to conservative skeptics. Bush’s plan is not as aggressive, but it is more likely to succeed for a couple reasons. Unfortunately, neither have all the answers, because despite the seemingly audaciously low rates, they are not low enough to bring back, let alone prevent the fortunes of capital flight kept offshore. Regardless, they are both in the right direction, no pun intended.

By the way, there is a common misunderstanding about income tax that works against anyone’s best interest. You will never make less money after taxes on your total income by accepting a raise. Progressive taxation means that you are only taxed on the amount up to the bracket threshold for each amount of income earned. If you get a raise that takes you into a higher tax bracket, you will only be taxed the higher rate on the amount over that bracket minimum. To explain, taking Trump’s proposed brackets below, if a single filer makes $50,000 annually and is in the 10% bracket, she will only be taxed an additional 10% on anything over $50,000. Put another way, she enters the 20% bracket, but only gets taxed 20% on the amount equal to or above the new bracket minimum of $50,001.

Income Tax Rate Long Term Cap Gains/ Dividends Rate Single Filers Married Filers Heads of Household
0% 0% $0 to $25,000 $0 to $50,000 $0 to $37,500
10% 0% $25,001 to $50,000 $50,001 to $100,000 $37,501 to $75,000
20% 15% $50,001 to $150,000 $100,001 to $300,000 $75,001 to $225,000
25% 20% $150,001 and up $300,001 and up $225,001 and up

https://www.donaldjtrump.com/positions/tax-reform

There are two things that Bush and Trump’s fiscal proposals have in common. The first is a general simplification of the tax code, the second is a reduction in rates across the board—including on capital gains—both addressing inversions, a euphemism for tax evasion, by offering repatriation. Simplification, in addition to reducing headache for filers and tax preparers alike, saves a lot of money. Neoclassical economics generally advocates a flat tax, and the lower the better. Both plans significantly lower tax burdens for every bracket, the number of which is also reduced. Along with that simplification under both plans would be a reduction or elimination of most deductions, especially for the very wealthy and special interests. Repatriation would involve a one-time reduced rate of taxation on money brought back to the country from offshore havens. The idea is that if low enough, many will choose to keep their money here from now on under a cheaper fee. That’s the idea.

The problem is that the lowered rates under repatriation, which is an incentive to bring money home, are still not as low as Switzerland, a common if not the quintessential haven.  Therefore, while this might lure some cash back into the states, it is highly likely that after the temporary benefit is lifted, capital will take flight again, back to business as usual as we know it. That makes this sound a lot more like lip service than idealistic aggressive reform, because this would be the opportunity to match Swiss rates on capital gains at least, and in the very least during the repatriation period proposed. The politics of appeasement unfold.

Bush’s plan is taking us in the right direction regarding corporate tax rates. (See graph from his proposal.) Lowering this rate is important for business attraction and retention as well as preventing inversions. Mr. Trump has been very assertive about bringing jobs back to America from overseas yet still will not make America the cheapest place tax-wise to do business. His proposal is 15 percent, compared to Bush’s 20, which would tie our rate with Canada, the third lowest in the world. Compared to where we are currently, 35 percent, certainly either candidate’s goals would spur growth. Bush’s growth estimate is an addition of 19 million new jobs with a GDP growth rate of four percent. But to say this plan creates 19 million jobs is misleading. The U.S. is already creating about 12 million jobs every four years anyway under our current system with no changes. The number 19 million is an increase of what is automatically projected, everything equal, but only by 7 million. He is estimating an increase in job creation, but not by nearly as many as the statement makes it seem. These are fine targets, but they are not as immense as they first sound.

 

Tax

https://jeb2016.com/backgrounder-jeb-bushs-tax-reform-plan/

In a sense, tax plans, like other campaign commitments, are highly rhetorical. While Trump’s tax plan is more in line with where our fiscal planning as a nation should be, it is a little risky and highly unlikely. The fact that Bush’s plan is more viable, and since it is presumably set to become a bill, it is many times more reliable.  Since both political parties are talking about tax reform, it is definitely possible, if not likely. Accomplishing a fairer, cheaper system would be a testament to our new president’s leadership.

Suzanne Thiele is a Marine Corps veteran who served in Iraq in 2004. She has a bachelor’s degree in economics and Middle Eastern studies from Pace University in New York. Recently she graduated from the London School of Economics with a Master of Science in Anthropology and Development, where she received distinction in her economic development.