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It’s so early in the political season and already so much talk is of taxes.
On one side, Republicans are lamenting the scheduled expiration of the Bush tax cuts at the end of this year—which would increase the capital gains tax rate from 15 percent to 20 percent for many taxpayers, push the estate tax rate on inheritances exceeding $1 million up to 55 percent, and raise the top marginal income tax rate from 35 percent to 39.6 percent.
The White House, meanwhile, is campaigning aggressively for what has become known as the Buffett tax—a minimum tax rate on upper-income individuals so they pay, as a percentage of their income, “at least as much as their secretaries.”
What does this get us besides debating points?
The rhetorical tax battle is symptomatic of one of America’s most serious economic problems: There’s too much tax talk but not enough understanding of the changes needed to give the economy a long-lasting shot in the arm.
Here’s my take on things:
1) America’s combined, statutory corporate tax rate—now at 39.2 percent—needs to be cut to level the playing field with other industrialized countries. (The rate that tends to be used in discussion is 25 percent, but it matters who you are competing against.)
2) A tax holiday should be considered as a way of encouraging U.S. corporations to repatriate overseas profits.
3) The tax code needs to be simplified, not larded with additional carve-outs, exceptions, exemptions, and targeted subsidies. The tax code should treat all companies the same.
4) Washington needs to straighten the mess out and then leave things alone. More than anything else, corporate decision-makers are looking for long-term stability and predictability.
An ever-changing tax landscape makes it difficult, if not impossible, for executives and investors to plan and make intelligent long-term decisions. The decision to build a new plant, for example, involves a 20- to 30-year commitment.
While it may be too late for this election cycle, it’s time to get serious about simplifying the tax code, setting it in concrete, and leaving it alone for a while. At the very least, that would reduce some of the guesswork that now complicates decision-making.