Dems: You need to be FOR tax reform too

Dear Congressional Democrats,

I recently wrote a letter, which you can read here, asking that you stand up and be FOR meaningful health care reforms.  In addition to opposing the mean-spirited Republican bills, you need to offer your own policy proposals that would actually strengthen the Affordable Care Act and further decrease the number of uninsured.

Please accept my apologies for not writing that letter any earlier, prior to the release of the Senate GOP bill, although there is still time for you to be for… well, something.

This letter, however, is about tax reform.  Since the Republicans have yet to draft their version of tax reform legislation, you have more time and can seize the initiative if you get your act together quickly.

Once again, PLEASE STAND UP AND BE FOR SOMETHING.   The U.S. national debt is nearly $20 trillion (that’s $20,000,000,000,000) and growing, and the tax code is a terrible mess.

In 2015, the U.S. government collected approximately $1,541 billion in individual income taxes, $344 billion in corporate income taxes and $1,065 billion in social security and Medicare contributions.

The Trump Administration seems fixated on corporate tax reform.  Even though that’s the smallest piece, let’s start there.

Corporate tax reform should address several issues (not necessarily in priority order):

First, lower marginal tax rates.  For the largest corporations, our top marginal tax rate of 35% is much higher than most of the world.  For global conglomerates, this creates an incentive to move headquarters to lower tax countries.  The U.K., Ireland, Switzerland, Netherlands and Bermuda are now the official headquarters of multiple companies widely recognized as American businesses.  A lower marginal rate is necessary for global competitiveness.

Second, encourage repatriation of overseas profits.  Profits earned overseas are taxed in the U.S., but only when the cash is moved into U.S. accounts.  An estimated $2.6 trillion in profits is parked offshore, and this cash isn’t going to be put to work in the U.S. without some form of relief.  Once this is resolved, you should also reform how overseas profits are taxed in the first place.

Third, close tax loopholes.  Whether we call these tax expenditures, corporate welfare, corporate entitlements, special tax breaks, special interest deductions, loopholes, or some other name, the tax code is full of ways for corporations to lower their taxable incomes.

Broad-based loopholes include (just to name a few):

• deferral of income from controlled foreign corporations (which gives rise to the un-repatriated offshore profits)
• deductions for interest on debt (which encourages excessive leverage)
• accelerated depreciation (which allows write-off of capital expenditures faster than the economic lives of the underlying assets)
• qualified employee benefit plans (which allows deduction of payments for health insurance, retirement and other benefits without treating these payments as a form of non-cash compensation to employees)
• deduction for state and local taxes paid
• special deductions for income attributable to domestic production activities
• alternative inventory accounting methods (such as LIFO)
• immediate expensing of R&D costs
• certain aspects of the use of pass-through entities such as S corporations, partnerships and limited liability companies

More targeted loopholes include:

• tax credits for providers of low-income housing
• exclusion of interest income from public purpose state and local government bond and hospital construction bond investments
• exemption of credit union income
• exclusion of income held within life insurance policies
• deduction of charitable donations
• energy production credits
• work opportunity tax credits
• energy investment credits
• alcohol fuels credits
• credits for the preservation of historic structures

Using the tax code as an incentive for one type of commercial activity over another encourages special interests and their lobbyists to ask for more and more breaks and loopholes.

I’m not suggesting that 100% of these provisions should be repealed.  But I am suggesting that Congressional Democrats should have their own plan.  Each loophole that is closed would generate some amount of additional revenue.  Then the marginal rate could be lowered to make the change revenue neutral.  Or not lowered, instead narrowing our annual deficits and accumulated national debt.  Or something in between.

As I suggested in my letter about health care reform, you should hold mock hearings.  If the Republicans won’t allow official hearings, have unofficial off-site hearings on the Democratic tax reform bill.  Set up a room to look like a Congressional hearing room.  Invite the media.  Invite experts to testify and explain corporate tax loopholes, why they exist and how much they cost the treasury.  Hammer home the differences between the Republican approach that will increase income and wealth inequality versus a plan that acknowledges and would fix numerous imperfections in the tax code today.  Invite comments and incorporate the best ideas into a revised bill.

Make a big media spectacle out of being FOR something that is fiscally responsible.  Act like you should be in charge of Congress!  Right now, the public perception is that you don’t have a plan other than to vigorously oppose whatever the other side drafts.  That isn’t good enough.