For decades, American citizens have been burdened with a hopelessly complicated federal tax system that discourages market growth and competition, while contributing to the rapid growth of federal government overreach and wasteful spending. For this reason, it is encouraging to see President Trump and the Republicans in Congress taking on the important responsibility of fixing this issue. The current tax reform proposals brought up by both houses of Congress help to resolve some of the most pressing issues of the federal tax system. However, it is also apparent that they are not willing to go far enough in addressing the deepest and most fundamental problems with our tax code.
The corporate tax rate of the United States is currently 35 percent, which is one of the highest of its kind in the developed world. This tax rate makes it difficult for companies to use their profits for their own investment, leading to higher unemployment rates and lower wages. This tax rate also encourages companies to shift their resources overseas to countries with more competitive tax rates. The Republican tax plan includes a significant reduction of the corporate rate to 20 percent.
However, Republicans are not going far enough in simplifying the tax code. The plan calls for a reduction from seven tax brackets to four but keeps or enhances many of the tax deductions in place. The ideal solution would be to eliminate all deductions and create a flat income tax rate for all citizens over a certain income level.
Simplification is vitally important to tax reform for two reasons. The first and most important reason is that a complex tax system makes it easier for large companies with abundant legal resources to avoid paying the taxes, giving companies an unfair competitive advantage over small businesses. This leads to economic hardship, especially in rural areas where small businesses play a bigger role in local economies. Second, a complex tax system forces businesses and individuals to spend an inordinate amount of labor hours on tax preparation and bookkeeping; time that they could have spent on more valuable and productive tasks.
It is also a shame that the Republican tax plan contains no direct cuts to capital gains taxes. These taxes are charged on profits from capital investments, such as stocks. This disappointing decision is politically motivated by the fact that the American public tends to view investors and bankers in a negative light, especially after the financial crisis in 2008. However, wealthy investors would not be the primary beneficiaries of a lower capital gains tax. A reduction of this tax would benefit the working class most significantly since most of these investments are put into 401(k)s, mutual funds, pensions and other retirement plans.
The first and most fundamental step in reducing the size of government is to cut off the lifeblood of its spending addiction, which is tax revenue. Reform of the federal government must happen quickly, and the Republican tax plan is a step in the right direction. However, it is not enough.
