Tax Reform Q&A

Pro-Growth Tax Reform

The Path to Prosperity’s major proposals to make the tax code simple, fair and competitive:

  • Reforms the broken tax code to spur job creation and economic opportunity by lowering rates, closing loopholes, and putting hardworking taxpayers ahead of special interests.  The pro-growth reforms ensure the tax code is fair, simple, and competitive.

  • Consolidates the current six individual income tax brackets into just two low brackets of 10 and 25 percent and repeals the Alternative Minimum Tax.

  • Reduces the corporate rate to 25 percent and shifts from a “worldwide” system of taxation to a “territorial” tax system that puts American companies and their workers on a level playing field with foreign competitors.

  • Rejects the President’s call to raise taxes – broadens the tax base instead to maintain revenue growth at a level consistent with current tax policy and at a share of the economy consistent with historical norms of 18 to 19 percent in the following decades.

Q: What loopholes are specifically eliminated under this budget?

A: This budget calls for lowering tax rates and broadening the tax base. All corners of the tax code should be on the table. The House Ways and Means Committee, led by Chairman Dave Camp of Michigan, has held dozens of hearings over the past year examining how best to simplify the tax code while maximizing economic growth. House Republicans will continue building upon the bipartisan consensus for pro-growth tax reform.

Unfortunately, the President has chosen to isolate himself from this bipartisan effort by calling for higher tax rates and additional complexity to the code. Treasury Secretary Geithner recently admitted in testimony before the House Budget Committee that their budget’s plan for raising rates and adding complexity was at odds with the bipartisan consensus for tax reform.

Q: Does this budget cut taxes for the rich?

A: The President’s budget chases ever-higher spending with ever-higher tax increases. His approach – taking more from hardworking taxpayers through higher rates while adding burdensome complexity to an already broken tax code – stands in opposition to the growing bipartisan consensus for lowering rates and simplifying the code.

This budget reforms the tax code to make it simpler fairer and more globally competitive. It proposes lowering everybody’s rates to promote growth while curbing distortions and carve-outs in the tax code disproportionately enjoyed by wealthier Americans. This is not a tax cut – it is a revenue-neutral reform to make our economy more competitive and to ease the burden that tax complexity imposes on taxpayers. Individuals, families and employers spend over six billion hours and over $160 billion a year trying to negotiate a labyrinth of deductions.

The Path to Prosperity rolls back the countless loopholes and burdensome rules that cost Americans money, time, and frustration to comply with. It makes the tax base broader and more secure so we are better protected against economic fluctuations. It gets the government out of the politically-driven business of picking tax winners and losers. And it spares American employers from having to chose between hiring more workers and paying the highest corporate tax rate in the developed world. 

While The Path to Prosperity proposes lower rates for all Americans to promote growth, it also proposes to roll back deductions that go overwhelmingly to a relatively small class of mostly higher-income individuals. The value of tax preferences is often very low for lower-income individuals but they sum to the tens of thousands to hundreds of thousands for upper-income Americans. Without the benefit of these special deductions and credits that serve to minimize taxable income, upper-income individuals could pay roughly the same amount they pay now even at a lower tax rate. This budget plan also proposes to eliminate the carve-outs and loopholes that have allowed some corporations to avoid paying taxes altogether.

Q: How do the tax proposals in The Path to Prosperity compare to those put forward by President Obama’s bipartisan Fiscal Commission?

A: The principles of tax reform guiding The Path to Prosperity are identical to the principles that guided the tax proposals put forward by the President’s bipartisan Fiscal Commission: lower rates to promote growth, with a broader tax base to raise revenue more fairly and efficiently. But rather than allow government’s share of the economy to rise to record high of 21 percent, as the Commission’s proposals would allow, this budget includes real spending restraint that enables government’s take from the economy to remain closer to its historical average between 18 and 19 percent.

This is important, not because 19 percent is a magic number, but because Washington cannot solve its spending problems by taking even more money from taxpayers. American families have had to cut their own budgets in the last few years, and it is time for Washington to do the same. By returning government to its proper roles, this budget brings spending in line with taxes – not the other way around.

Q: Weren’t our deficits caused by the Bush tax cuts for the millionaires?

A: No. Washington’s fiscal problems are the result of government spending too much, not because Americans are taxed too little. Following the enactment of tax relief in 2003, the amount of revenue collected by the government went up by more than $700 billion over five years and the deficit went down. Tax rates have been stable for the past ten years, while over the past four years, Washington increased spending by 39 percent. This budget tells Washington that is has to stop spending money we don’t have. 

Q: Won’t this budget hurt homeowners and charitable giving by removing the mortgage interest and charitable contribution tax deductions?

A: The Path to Prosperity does not specify assumptions about these two deductions. The decisions about which tax preferences to curb or eliminate will ultimately be made in the Ways and Means Committee through the open hearing and public dialogue process that this committee began last year. This budget advances a framework for pro-growth tax reform, as the House Ways and Means Committee continues their work in building a consensus to simplify the tax code while maximizing economic growth and job creation. 

Q: Does this budget include special tax breaks for oil companies?

A: No. This claim is false. In fact, this budget does the opposite. This budget advances a framework for fundamental tax reform that scales back the deductions, loopholes and carve-outs that are distorting economic activity. It does call for an increase in safe, environmentally responsible domestic energy exploration – but promoting American energy production would actually increase revenues collected from energy companies, while at the same time lowering gas prices and creating jobs in America.