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Rubio-Lee Plan Is Tax Reform We’ve Been Waiting For

By: Nick Zaiac - @NickZaiac - Mar 12, 2015, 10:04 am

To many in Washington, DC, comprehensive tax reform seems like a mirage. It is something to be spoken about, to float dream-world proposals of, and for bureaucrats to build careers chasing, without ever amounting to anything in law.

Yet, periodically, we see serious proposals emerge to fix the tax system once and for all. Some are good, some come up short, but all aim to make the system simpler and easier for average people to deal with.

The latest of these plans is the Economic Growth and Family Fairness Tax Plan, better known as the Rubio-Lee plan, after the senators who proposed it. The plan would fix many, if not the large majority, of the problems with the current federal tax system.

Some highlights include the end of damaging extraterritorial taxation of corporate income, ending taxation of capital income, and ending the vast majority of itemized deductions. All of these would dramatically simplify the current tax system for both corporations and average citizens, and remove much of the confusion that confronts taxpayers each April when they file their income taxes.

Simplifying the corporate tax system and ending taxation of capital income are clear and well-understood measures that would boost the economy. Ending extraterritorial taxation of corporate income and lowering the overall corporate tax rate are major components of the Rubio-Lee proposal.

We know the United States has one of the highest and most burdensome corporate tax regimes in the developed world, lagging behind her peers in Europe. The Rubio-Lee plan would put an end to that, encouraging companies to invest in new US operations, and bring some of the cash they have abroad for tax purposes back to the United States.

Even better, ending taxation of capital income would do much to end the tax system’s bias against saving and in favor of consumption in the short term. In a nation where the number of people who have saved too little for their future is high, this would certainly be a plus. When combined with a lower corporate tax rate, more savings and a greater return on investment would naturally encourage more lending to businesses. This would almost certainly encourage job creation and decrease some of the barriers to entrepreneurship.

Ending itemized deductions would be another positive step, even though it would likely prove deeply unpopular among many groups. This aspect of the deal would make up for the revenue lost from the above-mentioned reforms, while removing complexity from the current tax system. The plan does preserve a few popular deductions, like medical insurance, giving to charities, and, worst, the mortgage interest deduction.

Yet, closing the vast majority of loopholes would be a valuable proposition, even to some people left materially worse off. This is because the cost, in time, money, or both, in preparing an individual’s taxes would plummet. This reform would make filing individual income taxes a task that’s simple and understandable for nearly anyone.

It would generally eliminate the need to pay accountants, download tax-filing software, or fill out complex paperwork by hand, all with doubt that the IRS will find some fraudulent deduction if they choose to audit you.

The Rubio-Lee plan has plenty of benefits, although many of them will be seen as costs to some people. Is it a perfect plan to end the burden the tax system places on the economy? No. Is it one of the best plans floated in recent years? Certainly. Every reform proposal will have some bad with the good, and the “bad” in this case seems generally limited to ending many long-held benefits of special-interest groups.

Any one of the major components of the proposal seem like winners on their own, and combined, they make for one of the best comprehensive tax reform proposals we have seen in recent years. Now we can only hope that Congress is willing to make the necessary and hard choices to make this plan a reality.

Edited by Guillermo Jimenez and Fergus Hodgson.

Nick Zaiac Nick Zaiac

Nick Zaiac is a public-policy researcher in Washington, DC. He also serves as a policy analyst at the Maryland Public Policy Institute. His column, The DC Leviathan focuses on the often-ignored bureaucratic agencies, from the Department of the Interior to the General Services Administration. He has been published in the Baltimore Sun, City AM, CapX, and other outlets. Follow @NickZaiac.