March 16, 2010 2:13PM

Wyden‐​Gregg Tax Plan

By Chris Edwards

Senators Ron Wyden and Judd Gregg recently introduced the "Bipartisan Tax Fairness and Simplification Act." There is a lot of interest in this plan, so I've put together some "pros" and "cons" from my small-government, flat-tax perspective.

INDIVIDUAL TAX CHANGES - PRO

  • Scraps the alternative minimum tax.
  • Cuts the number of rates from six to three.
  • Reduces the tax subsidy for municipal bonds.
  • Creates Lifetime Savings Accounts (LSAs)--like Roths IRAs except better because all withdrawals are tax-free. This is a very important reform, and by the way, one that Canada has enacted already. See here.

INDIVIDUAL TAX CHANGES - CON

  • Keeps the top tax rate at 35 percent, which is quite a bit higher than the 28 percent acheived by the Tax Reform Act of 1986.
  • Increases the top capital gains and dividend tax rate from 15 percent to 23 percent.
  • Triples the standard deduction, which would likely take more people at the bottom end off the income tax rolls. That would simplify the code, but at the expense of increasing the demand for big government.
  • Repeals the exclusion on income earned abroad by U.S. citizens, which would likely damage the operations of U.S. multinational companies.
  • Retains all the most distortionary tax breaks under the individual code, including the mortgage interest deduction.

CORPORATE TAX CHANGES - PRO

  • Cuts the top corporate tax rate to 24 percent. This is a crucial reform.
  • Cuts corporate welfare spending, which Wyden-Gregg notes is about $90 billion a year, based on a Cato Institute analysis.

CORPORATE TAX CHANGES - CON

  • Subjects the foreign income of U.S. multinational companies to immediate taxation. That tax approach is not followed by any major advanced economy, and it would put U.S. firms at a disadvantage in global markets.
  • Broadens the business tax base in other ways that move in the wrong direction, such as repealing the expensing of energy exploration and development costs. Note that some of the plan's corporate base broadening ideas make sense--such as reducing the value of interest deductions--but only if the revenue raised is used to reduce the statutory rate (which it does seem to be here).

Overall, I would take the Wyden-Gregg plan over the current code. But Wyden-Gregg is a very limited reform compared to the Paul Ryan two-rate individual tax or the recent National Academy of Sciences tax plan, which features individual rates of 10 and 25 percent and a corporate rate of 25 percent.

Wyden-Gregg is a start, but it hardly simplifies the tax code at all and it doesn't reduce individual rates. However, it does cut the corporate rate and it includes LSAs, which would revolutionize personal savings. So we can take heart that supply side tax policies still garner some support on Capitol Hill.

For more on tax reform, see here.