Four Big Ideas for Tax Reform

pen, glasses and calculator on the tax form

(Image credit: LIgorko)

Americans don’t agree on much, but on one issue there’s broad consensus: The tax system is a mess. Nearly 60% believe the tax code is so flawed that Congress should overhaul it, according to the Pew Research Center. This discontent hasn’t gone unnoticed by the presidential candidates. Amid the name-calling and rancor are some ambitious ideas to reform the tax code that could resonate long after Election Day, even though their advocates are no longer in the running. Among them:

A consumption tax. Proponents say taxing goods and services would allow the government to reduce or eliminate taxes on capital gains and dividends, which would encourage savings and investment. In Europe and Canada, consumption taxes take the form of a value-added tax, or VAT, which is imposed at each stage of production and distribution of a product or service. Although the tax may not be as visible as a tax on income, it’s reflected in the retail price consumers pay. A big proponent is Texas senator and former Republican candidate Ted Cruz, who proposed a single 10% income tax rate and a 16% “business flat tax” on all business profits, rents and royalties.

A carbon tax. Advocated by Vermont senator and Democratic candidate Bernie Sanders, a carbon tax would be paid by businesses that burn fossil fuels and, like a consumption tax, ultimately passed on to consumers. Lawmakers and economists from both ends of the political spectrum have supported a carbon tax, or a cap-and-trade variant that would set a maximum level of allowable pollution but give companies flexibility to buy and sell pollution allowances. The object is threefold: to lower emissions, eliminate regulations and replace subsidies for alternative energy, says Howard Gleckman, senior fellow at the Urban-Brookings Tax Policy Center.

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Corporate tax reform. The current federal corporate rate is among the highest in the world, and experts agree that reform is almost certain, no matter who wins the election. The candidates have offered different proposals to make American companies more globally competitive and to discourage them from moving overseas to avoid U.S. taxes. Republican candidate Donald Trump would lower the rate—currently up to 35%—to 15% and phase out some business tax deductions. Democratic candidate Hillary Clinton has said she would provide tax relief for small businesses.

Fewer tax loopholes. Many economists believe that the tax code shouldn’t be used to reward certain behaviors, but they find it hard to agree on which deductions or credits to reduce or eliminate. Some are sacred: No one has proposed eliminating deductions for mortgage interest and charitable contributions. Trump would phase out all other deductions for high-income taxpayers, including deductions for state and local taxes and the tax break for employer-provided health insurance.

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Sanders and Clinton would retain all itemized deductions but cap them—Sanders at 30.2%, Clinton at 28%—for high-income taxpayers. For example, a taxpayer in the 33% bracket who donates $10,000 to charity now gets a $3,300 tax break; under Clinton’s proposed cap, the tax savings would drop to $2,800.

Block joined Kiplinger in June 2012 from USA Today, where she was a reporter and personal finance columnist for more than 15 years. Prior to that, she worked for the Akron Beacon-Journal and Dow Jones Newswires. In 1993, she was a Knight-Bagehot fellow in economics and business journalism at the Columbia University Graduate School of Journalism. She has a BA in communications from Bethany College in Bethany, W.Va.