This post was originally published on Forbes Sep 10, 2015
It is tough to love a tax plan that starts with two false statements. I can probably get by them, although I feel compelled to highlight them. In his Reform And Growth Plan, we learn from Jeb Bush:
Today, the tax code is a labyrinth littered with thousands of special-interest giveaways, subsidies and other breaks written to favor Washington insiders. At 80,000 pages, it’s a tax code only an army of tax accountants and lobbyists could love—because they’ve written it.
......that publication isn't just the tax code. "That includes the code, regs, annotations to court cases, revenue rulings, explanatory material, other things that come out of the IRS that are not regulations," said Mark Luscombe, principal analyst for the tax and accounting group at CCH. "But some politicians and media have picked that up and called it the code, which is not correct."
All remaining itemized deductions, with the exception of charitable contributions, would be limited by a tax cap. The cap would limit the tax value of itemized deductions to two percent of a filer’s adjusted gross income. Since it is dependent on a progressive tax schedule, a filer in a lower bracket will be able to have more deductions as a share of their incomes. Low- and middle- income filers in the 10 percent tax bracket could deduct up to 20 percent of their income, while high-income filers in the top bracket could only deduct about 7 percent. The cap has the virtue of allowing the taxpayer to use any of these deductions but not to an excessive extent.
The proposal eliminates the state and local tax deduction. The tax deduction favors filers in states with high tax rates. Over 90 percent of tax expenditures related to state and local taxes accrue to filers with AGIs above $100,000. The tax expenditure subsidizes high tax states, which encourages poor fiscal policy by state governments. High tax, high spending states have the right to conduct whatever fiscal policies they prefer, but citizens of lower tax states should not be required to pay for it.
The proposal would allow the individual in a married couple with the lower earnings (wage and salary income) to file a separate simple tax return using the tax schedule for single filers. All other income, deductions, and credits would remain on the tax return of the primary earner.
All non-investment income will be taxed at ordinary rates. That is, only those putting real capital at risk will be able to benefit from the lower rate on capital gains. Specifically, “carried interest” without real capital at risk will no longer receive the same tax treatment as real investment income, but instead will face a top rate of 28 percent
The estate tax is eliminated along with the step-up in basis on assets for estates that would be currently taxable.
This would simplify the tax code and significantly increase incentives to invest in new machines, equipment, buildings, and other structures.
Generally, businesses would no longer be able to deduct interest payments. Under the current code, debt financing receives favorable tax treatment relative to equity financing. Allowing both expensing and interest deductions would create negative tax rates on debt financed capital expenditures.
It will make bank loans nonviable as sources of financing for companies and businesses, mostly eradicate the leasing business and would make property development almost impossible in any economic manner. Those are all fairly large effects from a simple change to the tax code but they are indeed likely outcomes of it. Even if it doesn’t cause calamity it’s going to cause huge ructions in the economy and be incredibly destabilizing as the practices of well over a century (and, we should note, the practices followed by every other country’s tax system) are over turned.