There is an important issue looming on the congressional horizon: how to address the expiration of the Bush tax cuts at the end of this year. We believe there is a consensus way forward, which is why we are introducing the Bipartisan Tax Fairness and Simplification Act of 2010.
By streamlining and modernizing the outdated tax code, our proposal would eliminate many of the specialized tax breaks that currently benefit one group of Americans over another. The changes we propose will create policies that benefit everyone. They include: fiscally responsible middle-class tax cuts, business tax breaks to help American companies compete globally and create jobs, and a fairer and simpler tax system for all Americans.
The IRS estimates that each year Americans spend nearly $194 billion and 6.6 billion hours on tax compliance. Under our simplified approach, most taxpayers will be able to use a straightforward and shortened one-page 1040 IRS form to file their federal income taxes. In an effort to make paying taxes even simpler, taxpayers will be able to request that the IRS prepare a tax return for them to review, edit and sign.
We reduce the number of tax brackets from six to three—15%, 25% and 35%—and simplify the tax code for individuals and families by eliminating the alternative minimum tax. By nearly tripling the standard tax deduction, creating new opportunities for tax-free saving, and eliminating restrictions on personal exemptions and itemized deductions, under our proposal most Americans with an annual income of up to $200,000 will fare as well or better than they do under the current system. Furthermore, they won’t have to worry about maintaining the records and receipts necessary to document itemized deductions.
In order to encourage investment, our legislation would exempt taxpayers from paying taxes on the first 35% of their long-term capital gains income. To qualify as a long-term gain, investments would have to be held for at least six months for the first $500,000 of capital gains, and for at least one year for capital gains after the first $500,000. This will give smaller investors more flexibility than they have now to respond to a volatile investment climate.
Another key element of our proposal is a flat corporate tax rate. Currently, U.S. corporations are at a competitive disadvantage internationally. They pay the second highest tax rate in the industrialized world. Our legislation would reduce the top corporate tax rate, which can exceed 35%, and replace the existing six corporate rates and eight brackets with a single flat rate of 24%. This will cut the U.S. corporate rate by nearly 30% and, for the first time in nearly a decade, give American corporations a competitive tax advantage over foreign competitors in Canada, Germany, France and many other countries.
As our economy continues to recover from one of the most significant economic downturns in history, our tax policy should be a tool for encouraging growth and stability, rather than an incentive for individuals and businesses to invest in more favorable tax climates.
We make fiscally responsible tax reform possible by eliminating many of the specialized tax breaks strewn throughout the tax code. Our legislation maintains the most popular tax breaks like the mortgage interest deduction and the health-care tax exclusion, while eliminating specialized exemptions such as a company’s ability to deduct as a business expense punitive damages resulting from lawsuits.
Our legislation also eliminates tax incentives that encourage American businesses to keep more of their foreign earnings overseas and export jobs by repealing the rule that allows U.S. companies to defer taxes on foreign income. And we take a hard line on corporate welfare by directing the Congressional Budget Office to examine the roughly $90 billion that the federal government spends to subsidize businesses directly and indirectly each year. These steps not only make the tax code simpler and fairer for everyone, they reduce opportunities for individuals and businesses to cheat the system and avoid paying their fair share.
This legislation represents a bipartisan compromise on major policy reform, something that doesn’t happen much in Congress anymore even though a majority of Americans want such compromises. Of course, working together from different sides of the aisle means that neither of us got everything we wanted, but we are proud of what we did get: a comprehensive approach to tax reform that will give all Americans an opportunity to get ahead.
Mr. Wyden, a Democrat, is a senator from Oregon. Mr. Gregg, a Republican, is a senator from New Hampshire.