Pro-Growth Tax Reform: Myth vs. Fact

The Trump administration and Republican congressional leaders released a long awaited tax reform outline that would finally fix our broken tax code. If passed, this recent proposal would grow the economy, create jobs and increase wages for American workers by 1) lowering and simplifying individual tax rates for all Americans, 2) cutting taxes for large and small businesses alike, 3) permitting tax-free entrepreneurship, 4) ridding the tax code of special interest handouts, and 5) ending the practice of double-taxing overseas profits made by U.S.-based companies who want to invest in America.

Myth: The GOP tax plan is a big tax cut for the wealthy.

Fact: The GOP tax plan is a tax cut for all Americans. Under the proposed tax framework, the current seven bracket system with rates of 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, and 39.6 percent is reduced to just three brackets at simpler and lower rates of 12 percent, 25 percent, and 35 percent. In addition, this plan nearly doubles the standard deduction to $12,000 for single filers and $24,000 for married couples, resulting in an expanded zero percent bracket. This means that a family does not have to pay tax on the first $24,000 they earn. This is the biggest benefit to low and middle class families. Other details will come as tax-writing committees begin drafting the actual legislation.

Myth: The GOP tax plan is pro-business, not pro-worker.

Fact: The GOP tax plan cuts taxes for all businesses and that will benefit the American workers. Most empirical estimates conclude that labor bears between 75 percent and 100 percent of the corporate tax burden. Corporations pass the cost of the tax burden to their workers in the form of lower wages or to their customers in the form of higher prices. U.S. corporations employ 54.8 million hard-working individuals, more than half of Americans invest in the stock market, and almost 40 percent of corporate stock is owned through retirement plans. By cutting the corporate tax rate from 35 percent to 20 percent, and the pass-through rate from 39.6 percent to 25 percent, the GOP tax plan would result in higher wages for American workers and more return on investment for the millions of Americans saving for retirement and investing in our economy.

Myth: The GOP tax plan will blow a hole in the federal debt.

Fact: The primary driver of America’s growing debt is the federal government’s addiction to spending. Over the last ten years, the federal government has spent at a higher level than it ever has in American history. In fiscal year 2015, the federal government spent a total of nearly $3.7 trillion or almost $30,000 per U.S. household. The current rise in federal spending has resulted in $20 trillion in total national debt. Federal debt held by the public is now equivalent to 74 percent of the entire U.S. economy. While some politicians blame the rise of the national debt on lower taxes, (tax revenue as a percent of GDP is well above the historic average and baseline projections will continue to increase over the next 20 years), the problem is clearly irresponsible federal spending. The federal government has a spending problem, not a revenue problem.

Additionally, the GOP tax plan will generate economic growth that leads to increased federal revenue. Specifically, the GOP tax plan cuts the corporate tax rate, the small business tax rate, and allows for full and immediate expensing. These provisions will lead to higher levels of savings and investments – the two key components of economic growth. According to recent analysis, pro-growth tax reform has the potential to grow the economy by 10 percent over the next 10 years and increase the average American family’s wages by more than 7 percent or about $4,000 for someone earning $50,000 a year. At the end of the day, the purpose of tax reform is not to give the federal government more money, but to give the American people more jobs and higher paychecks. Increased federal revenue is a side effect of pro-growth tax reform, but the best way to reduce debt is to reduce spending.     

Myth: Doubling the standard deduction will undermine the mortgage interest deduction, hurting homeowners and the real estate market.

Fact: Doubling the standard deduction benefits everyone including homeowners. While doubling the standard deduction will encourage homeowners to take the standard deduction over the mortgage interest deduction (MID), it does not necessarily mean homeowners receive less of a tax break. According to the National Association of Realtors (NAR), the average monthly payment for a mortgage is just above $1,000 totaling about $12,732 a year. Under the GOP tax plan, the standard deduction will be $12,000 for single filers and $24,000 for married couples. In addition, economic studies suggest that eliminating the MID — which this plan does not do — would lower housing prices, and potentially lead to an expanded first time homebuyer market for the real estate community.  

Myth: Repealing the state and local tax deduction hurts middle class families.

Fact: The state and local tax deduction currently forces federal taxpayers in low-tax states to subsidize taxpayers in high-tax states. The biggest beneficiary of this provision are high-income earners, not middle class families, who live in states with high taxes. In practice, this provision incentivizes state and local governments to raise their tax rates since local voters can write off the high taxes and don’t hold their local politicians accountable. By eliminating this provision, Congress can lower tax rates for all Americans by as much as 16.4 percent and apply pressure on big-government states like New York, Illinois and California to lower rates on their taxpayers. The state and local tax deduction is bad policy and Congress should eliminate it as part of tax reform.

Myth: Repealing the death tax (estate tax) is a giveaway to the wealthy.

Fact: The death tax is an unjust form of double taxation that kills family owned businesses and farms. Most wealthy individuals avoid paying the death tax by putting their wealth in liquid assets, setting up various trusts or partnerships, or by making charitable donations and gifts. The hardest Americans hit by the death tax are family owned businesses and farms whose wealth consists of physical assets such as buildings and land. Repealing the death tax will correct this injustice and boost U.S. economic growth by more than $46 billion over the next 10 years and generate an average of 18,000 private-sector jobs annually. Dying should not be a taxable event.  

Myth: The Alternative Minimum Tax (AMT) is a tax cut for the wealthy.

Fact: The AMT is an unnecessary complexity that is poorly designed. This provision requires certain individuals and businesses calculate their taxes two ways and pay the government the larger of the two amounts. In general, the AMT takes effect when deductions are “too large” relative to income. The AMT does its intended job poorly and inefficiently by burdening taxpayers with additional paperwork and raising little extra tax revenue. The GOP tax plan simplifies the tax code and ends special interest carve outs, making the AMT unnecessary.

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The Need for Pro-Growth Tax Reform

Background: President Donald Trump, Speaker Paul Ryan and Senate Majority Leader Mitch McConnell made it clear before the November 2016 election that pro-growth tax reform would be a major legislative priority for Republicans in 2017 if they were given the chance to govern. Now that the American people gave Republicans control of the House, Senate and White House, there is a real opportunity to achieve comprehensive, pro-growth tax reform. A rewrite of the tax code couldn’t come soon enough. It has been far too long since Congress made major updates to the tax code. In fact, the last major reform of our nation’s tax code was under the Reagan administration in 1986, and every major effort since then has failed. After three decades of no major changes to the tax code and a stagnant economy, the time for tax reform is now.

Problem: Over the past few decades, the U.S. tax code has become a significant obstacle to economic growth, job creation and higher wages for American workers. This is due to a number of reasons.

1.)    Our tax code suppresses business creation, expansion and reinvestment here in America due to high rates, double taxation, and how foreign profits are taxed. At an average of 39.1 percent, the U.S. corporate tax rate is the highest in the industrialized world making Americans companies uncompetitive with their foreign counterparts. Small businesses, who mostly file taxes through the individual income tax code as pass-through entities, also have a difficult time competing as they experience an average top marginal income tax rate of 47.2 percent. High tax rates encourage businesses to raise prices, decrease wages for workers, or even leave the country altogether.

If this wasn’t enough, the tax code inherently punishes saving and investment, the lifeblood of economic growth. Income that is saved or invested is often taxed two, three, or more times. The same dollar can be hit by individual income taxes, again by the corporate income tax, and yet again by the capital gains and dividends tax. After all this, before your family can inherit your small business or farm, the government levies a final death tax. These forms of double taxation discourage saving and investment, the most essential components of economic growth.

In addition, the U.S. is one of a very few countries that operate under a worldwide tax system rather than a territorial one. This means domestic companies are double taxed on profits they earn overseas – once by the foreign country they earn profits in, and once again when they bring those profits back to the U.S. This system encourages domestic companies to keep their profits out of the country, preventing more than $2.6 trillion in profit from being reinvested here at home.

2.)    Our tax code is far too complex for the average citizen. In 1913, the tax code was a reasonable 400 pages long, but by 2013 it grew to over 74,000 pages. Americans spend nearly 9 billion hours complying with the tax code every year costing our economy over $400 billion in foregone economic growth. The complexity of the tax code allows individuals and businesses with the best lawyers and accountants to game the system and pay the least amount of taxes possible.

3.)    Our tax system is full of cronyism that allows a few well-connected actors to game the system over hard-working taxpayers. The combination of tax credits, deductions and carve outs littered throughout the tax code due to special interest lobbying allow the most powerful and established individuals and businesses to pay low taxes while suppressing their competition.

Solution: Congress must pass comprehensive, pro-growth tax reform that lowers rates for individuals and businesses, simplifies the tax code, ends cronyism, and encourages domestic business creation, expansion, and investment. To do this, tax reform should include the following principles:

1.)    Lower and simplify individual tax rates: This can be accomplished by increasing the standard deduction for low-income earners and lowering rates for high-income earners and small businesses that use the individual code. The current standard deduction, which is the fixed amount of income not taxable, is $6,350 for an individual and $12,700 for a married couple. Lowering and simplifying rates will allow hard-working taxpayers to keep more of their money while encouraging small business owners to expand their companies and create more jobs.

2.)    Lower the corporate tax rate: Taxes on businesses should be cut as much as possible to encourage job creation and higher wages for workers who end up paying more than 70 percent of all business taxes through lower wages. The federal corporate tax rate is 35 percent plus the state corporate income tax rate. The average U.S. combined federal and state rate is the highest among developed countries and is making American companies uncompetitive.

3.)    Permit tax free entrepreneurship: Allow all businesses to deduct the full cost of capital investments from their taxable income, replacing the current system of depreciation, a convoluted multi-year accounting system that only allows a partial deduction. Full expensing would encourage new business investment, job creation and wage growth.

4.)    Establish a territorial tax system: A territorial tax system only taxes U.S. companies on the profits they earn in America. This will encourage foreign business investment here in America and help bring back more than $2.6 trillion in profits currently locked out of the U.S. by our broken and outdated tax system.

5.)    End cronyism: This includes all the special interest handouts, tax credits, deductions, and exemptions in exchange for lower tax rates across the board. For businesses this includes getting rid of tax subsidies to green energy, special economic development zones, nuclear power, and every other preference in the tax code. For individuals, tax reform should remove as many special deductions and exemptions as possible, including the state and local tax deduction which subsidizes high tax states at the expense of fiscally responsible states. Removing tax preferences must be paired with lower rates, so average Americans receive a tax cut.

According to recent analysis, this kind of pro-growth tax reform has the potential to grow the economy by 10 percent over the next 10 years and increase the average American family’s wages by more than 7 percent or about $4,000 for someone earning $50,000 a year.

Conclusion: In order to bypass a Democrat-led filibuster in the Senate, Republicans intend to use a powerful tool called budget reconciliation to pass tax reform. While this path allows Congress to fast-track tax reform in the Senate, it prohibits the consideration of legislation that increases the federal deficit outside the adopted budget window. Although somewhat restrictive, Congress can use this as an opportunity to pair tax reform with spending cuts in order to comply with the rules of budget reconciliation and maximize the economic benefits of tax reform. After all, the federal government has a spending problem, not a revenue problem. Federal revenues are expected to rise to 20 percent of the economy by 2021, a dangerous level seen only once since the end of World War II. Reducing federal spending alongside tax reform would ensure tax reform is permanent; whereas simply cutting taxes through the budget reconciliation process would result in the expiration of those tax cuts in 10 years. Regardless of the approach taken, by enacting pro-growth tax reform Republicans can fulfill their promise to create jobs, increase wages, and restore our stagnant economy back to sustainable long-term growth.

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Empowering Workers Not Labor Unions

Background: Labor unions and their bosses often have goals that do not line up with the desires of workers. When the interests of unions come in conflict with the interests of workers, unions typically make decisions that benefit them rather than employees. The National Labor Relations Board (NLRB) has further exasperated this problem. When it was first established, Congress intended the NLRB to function as an impartial arbitrator mediating disputes between unions and businesses, but under the Obama administration, the Board consistently proposed and enforced rules that favored labor unions over both workers and employers.

These included: the Ambush Election Rule that shortens the time employers have to convince workers not to join a union, the Micro-Union Rule that allow unions to organize separate groups of workers within one company by job title, the Joint Employer Standard that empowers union members over business owners they indirectly work with, and undermining secret-ballot voting that protects worker privacy.

Problem: Past and recent union rules enacted by the NLRB and pushed by union bosses stifle job creation and undermine workers’ rights. Too often, union leaders put their desire to expand union size, revenue and power above the interest of their workers. In an effort to expand their power and influence, unions use dues to pay for political activities, discourage secret ballot elections to form a union, go on strike, or accept a contract, and suppress efforts by workers to replace union leaders. As a result, union leaders are no longer accountable to their members as 94 percent of union members never voted for the union that currently represents them.

Solution: In order to rebalance labor law in favor of workers rather than union bosses, Congress should pass the Employee Rights Act (H.R. 2723). Introduced by Rep. Phil Roe (R-Tenn.), the Employee Rights Act would guarantee employees the rights to:

  • Vote privately in a secret ballot election before forming a union;
  • Opt out of having their personal contact information provided to a union during an organizing drive;
  • Hear from employers at least 40 days prior to voting in a union election;
  • Vote in a secret ballot election before accepting a contract or going on strike;
  • Vote regularly on re-electing their union;
  • Decide whether their union can spend their dues on matters unrelated to collective bargaining; and,
  • Be free from union interference or extortion in exercising their legal rights.

This legislation is a major step forward in curbing the abuses of unions and will help ensure that unions best serve the interest of employees, not union bosses. Congress should also take steps to roll back the NLRB’s actions on ambush elections, the joint employer standard, and micro-unions.

Call to Action: The Employee Rights Act was cosponsored by 137 members of Congress when it was introduced last session by Rep. Tom Price (R-GA). Heritage Action has endorsed this legislation and urges Sentinels to contact their members of Congress and ask them to cosponsor the bill.

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Full Repeal Must Include the Regulatory Architecture of Obamacare

Background: On March 6th, House Republican Leadership released a long anticipated bill that partially repeals and replaces Obamacare named the American Health Care Act (H.R. 1628). Speaker Paul Ryan was forced to delay a vote on the AHCA before finally pulling it from the House floor due to lack of support among House Republicans – conservatives and moderates included. While the bill contains many provisions that should concern conservatives, the main problem with the repeal portion of the bill is the failure to repeal most of the insurance regulations that contribute to the rising cost of health care. The Republican proposal not only maintains the overall regulatory framework of Obamacare, but also subsidizes that regulatory framework through new refundable tax credits aimed to help individuals buy their own health care plans – plans that will remain highly regulated and overly expensive.

Obamacare Regulations Defined: The heart and soul of Obamacare contains numerous insurance mandates and regulations that restrict consumer choice and drive up the cost of health care premiums by as much as 68 percent. The four most problematic regulations include guaranteed issue, community rating, essential health benefits, and actuarial value.

1.) Guaranteed Issue: Prohibits insurance companies from denying customers regardless of their previous insurance history, which incentivizes potential customers to delay purchasing insurance until they need it. The guaranteed issue requirement necessitated the individual mandate in Obamacare, which has been replaced in the AHCA by the 30 percent surcharge in the individual market paid directly to insurance companies. Congress should address this issue by simply extending existing protections in the employer market to the individual market once Obamacare’s regulations have been repealed to solve the “waiting until you are sick to get coverage” issue.

2.) Community Rating: Prevents insurance companies from setting prices based on the age, health status and/or gender of the customer. The AHCA only moves the age rating ratio that Obamacare uses from 3:1 to 5:1, but does not address health status or gender.

3.) Essential Health Benefits: Outlaws inexpensive and customized health insurance plans by requiring insurance companies to cover comprehensive benefits, even unnecessary ones including maternity care for single males, specific rehabilitative services, preventive services, and others.

4.) Actuarial Value: Abolishes cheaper, catastrophic plans by requiring insurance companies to cover a certain percentage of total health care costs. The AHCA does get rid of this regulation, which is one of the only positive reforms in the bill.

Moderate Republicans have hidden behind the flimsy argument that Congress cannot repeal Obamacare’s insurance mandates and regulations through budget reconciliation because it does not have a clear budgetary impact. In reality, Obamacare’s regulatory architecture imposes significant costs on taxpayers and is inseparable from the rest of the law. These regulations are one of the main reasons why health care costs are rising and federal spending is increasing under this law. Congress has the legislative tool it needs to repeal Obamacare’s regulatory architecture through budget reconciliation and should maximize its use. Congress can address individuals priced out of the market with pre-existing conditions through alternative solutions such as state based high risk pools.

Full Obamacare Repeal: Republicans cannot maintain Obamacare’s regulatory structure and claim to have repealed the law. Without repealing these insurance regulations – the regulatory architecture of Obamacare – Republicans will fail to keep their seven year promise to fully repeal Obamacare, and health care costs will continue to rise. According to Heritage Action CEO Michael A. Needham:

“Many Americans seeking health insurance on the individual market will notice no significant difference between the Affordable Care Act (i.e., Obamacare) and the American Health Care Act. That is bad politics and, more importantly, bad policy. Rather than accept the flawed premises of Obamacare, congressional Republicans should fully repeal the failed law and begin a genuine effort to deliver on longstanding campaign promises that create a free market health care system that empowers patients and doctors.”

Obamacare Timeline Slipping: The ongoing delay over how much of Obamacare to repeal and what to replace it with has caused the timeline to slip. Further delays are pushing repeal past the congressional Easter recess and dangerously close to when the federal government runs out of funding on April 28th and when insurance companies must submit proposed premiums for 2018 Obamacare plans on May 3rd. Congress could quickly repeal first and then debate and pass free-market health care reform that lowers cost, increases choice, and restores the doctor-patient relationship.

Conclusion: Republicans promised to fully repeal Obamacare, including Title I regulations, campaigned and won on full repeal, and voted more than 60 times to repeal parts or all of the disastrous healthcare law. Congress can repeal Obamacare through modifications to the AHCA, through a new, more comprehensive rewrite, or by simply re-passing the 2015 repeal bill (H.R. 3762) with additional language repealing the insurance regulations. The 2015 bill was supported by nearly every single Republican, but ultimately vetoed by former President Barrack Obama in 2016.

Now that voters gave Republicans a unified government including the White House, there are no more excuses. Failure is not an option. Conservatives need to continue pushing for full repeal, including all of the Obamacare insurance regulations, as soon as possible by actively participating in town halls, writing letters to the editor, and contacting their member of Congress.

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How to Repeal and Replace Obamacare under a Trump Administration

Background: Republicans promised the American people a full repeal of Obamacare dating back to 2010, when the health care law was first passed. In fact, since Republicans took control of the House in 2010, Congress voted over 60 times to repeal parts or all of the law. Republican Congressional Leadership and President-elect Donald Trump have all promised to repeal this unaffordable, unworkable, and unfair law.

In 2015, Congress used a filibuster-proof process known as budget reconciliation to pass an Obamacare repeal bill (H.R. 3762), that was ultimately vetoed by former President Barrack Obama in 2016. Now that the American people voted to keep Republican majorities in both chambers of Congress and give Republicans the White House, Congress must act immediately to repeal Obamacare once and for all. There are no more excuses.

Obamacare “Two Budget” Repeal Strategy: Just as they did in 2015, Republicans should use budget reconciliation to repeal Obamacare. Budget reconciliation allows Congress to pass legislation with a simple majority in order to avoid a filibuster in the Senate. Ironically, Democrats used this same method to help pass parts of Obamacare in the first place. Due to conservative opposition, Congress failed to pass a budget for fiscal year 2017, creating an opportunity to pass two budgets, each with reconciliation possibilities, this year.

In the first budget, Congress should include the full repeal of Obamacare. This budget should pass the House and Senate easily and be placed on President Trump’s desk for his signature soon after he takes office. The next best option would be for Congress to take the reconciliation bill that repealed Obamacare, but was vetoed earlier last year (H.R. 3762), and pass it again with additional language repealing the Obamacare insurance mandates – a central reason health insurance premiums continue to rise. The third and minimal option would be for Congress to simply re-pass H.R. 3762, which does not include the repeal of insurance mandates and other important provisions. Repealing Obamacare does not mean that individuals on the federal and state Obamacare exchanges would immediately lose their health care plans. Instead they would have an ample period of time to transition back to an insurance plan on the individual market without losing coverage.

Congress should then pass the normal budget for fiscal year 2018 that lowers spending levels and includes other conservative priorities. This will give Congress time to work on an Obamacare replacement plan that restores consumer choice, strengthens the doctor-patient relationship and lowers costs. Replacement reforms Congress should consider include improving and expanding health savings accounts, removing government barriers that stop patients from participating in direct primary care arrangements, allowing patients to buy health insurance across state lines, and equalizing the tax treatment of health insurance for individuals and businesses, among others.

Obamacare Repeal Timeline Slipping: This January, Congress took an import first step to repeal Obamacare by passing the FY 2017 “shell” budget resolution (S. CON. RES. 3). Heritage Action key voted “Yes” on the resolution since it’s “the only way to expedite the repeal of Obamacare.” This resolution begins the process of budget reconciliation by setting up instructions for the House Ways & Means Committee, the House Energy & Commerce Committee, the Senate Finance Committee, and the Senate Health & Education & Labor & Pensions Committee to write a budget reconciliation bill that repeals Obamacare. Once the bills pass out of their respective committees they move to the Budget Committee. The Budget Committee then passes one unified repeal bill which the House and the Senate can then pass with a simple majority and President-elect Trump can sign into law.

Unfortunately, despite passing the budget resolution in early January, Congress has still not written the budget reconciliation bill repealing Obamacare. Seven in ten Americans believe the longer Congress waits, the less likely Obamacare repeal becomes a reality. Congress cannot allow the timeline to continue to slip. Not only does it delay work on other legislative priorities, but millions of Americans are suffering from the harmful side effects of Obamacare as premiums and deductibles continue to rise and health insurance choice falls.

Conclusion: Some repeal proponents assume Republicans must have a replacement plan at the same time as repeal, but this ensures momentum for full repeal stalls. Republicans may have a difficult time agreeing on any one single replacement plan, and Democrats will refuse to negotiate, instead doing everything in their power to sink the replacement plan and therefore Obamacare repeal.

Congress will use any excuse to avoid doing the right thing. As former Senator Jim DeMint and current President of the Heritage Foundation strongly wrote: “When I was in the Senate, they would use every excuse to avoid fighting for conservative priorities. “Wait until we get the House.” Done. “Wait until we get the Senate.” Done. “Wait until we get the White House.” Done and done. There are simply no alternatives left but to repeal Obamacare and win the fight (a shocking prospect for some!)”

Members who truly want to repeal Obamacare must insist on repeal immediately. This proposed two-step process gives Republicans the best chance to repeal Obamacare and honor their commitment to the American people who put them in power while providing plenty of time to enact a replacement plan. Conservatives must continue to urge their member of Congress write and pass the budget reconciliation bill to repeal Obamacare as soon as possible.

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