One Simple Way to Improve GOP's Tax Reform Proposal

One Simple Way to Improve GOP's Tax Reform Proposal
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After a year of failures, Congress is on the verge of reforming America’s convoluted tax code for the first time in more than three decades. Both the House and Senate tax plans have the potential to unleash economic growth, create American jobs, increase wages for American workers, allow families to keep more of their hard-earned money, and make U.S. businesses more competitive across the globe. That said, no tax reform is perfect and each plan has room for improvement. Fortunately, Senate Republicans announced they plan to include the elimination of Obamacare’s individual mandate tax penalty to their tax overall.

Given the Senate’s rules and unnecessary, self-imposed budget constraints, most improvements would require congressional tax writers to find “savings,” i.e., tax increases, elsewhere in the tax code. As we have seen, those trade offs can be painful in a town filled with corporate welfare, cronyism and self-entitlement. That is why eliminating Obamacare’s individual mandate tax penalty is such a politically advantageous option available.

Let’s start with the obvious: Obamacare’s individual mandate is an affront to small government conservatives and does not work, as evidenced by the 6.5 million who paid the individual mandate penalty and the 13 million who claimed an exemption in 2015. It also penalizes those that can least afford to hand over even more money to the federal government. In 2015, 90 percent of households that paid the Orwellian “individual shared responsibility payment” earned less than $75,000, and more than one in three household made less than $25,000.

From a health care and freedom standpoint, eliminating the individual mandate tax penalty is obvious, but given the absurd logic used by the Congressional Budget Office (CBO) it also “saves” $338 billion over the next decade. Those savings could be used to “pay for” additional tax cuts for hardworking Americans left reeling from the 2008 financial crisis. To be clear, the CBO’s estimate is absurd because it assumes that millions of people would reject free health insurance in the form of Medicaid or massively subsidized health insurance through the Obamacare exchanges if they were not forced to buy it. That fallacy hampered congressional Republicans during this year’s debate on repealing and ultimately replacing Obamacare, but it now provides some additional wiggle room when it comes to tax reform and Obamacare relief.

While $338 billion may sound like a lot, in the context of overall tax reform those ‘savings’ will evaporate quickly as problems are identified and corrected. In the House, the most obvious change would be the elimination of the so-called 45.6 percent bubble rate and lowering the top rate or reducing the egregious marriage penalty in the 35-percent bracket. While the Senate bill is better on the individual side, the individual rates could go lower, the new corporate rate could start immediately, expensing could be more robust, or the plan could be more aggressive in eliminating the death tax. Also, the ‘savings’ could be used beyond the 10 year budget window to ensure there are no expiring provisions -- with permanency being an important component of economic growth.

Last month, Senators Tom Cotton (R-Ark.) and Pat Toomey (R-Pa.) argued the individual “mandate is simply a tax on Americans who can’t afford insurance” and it’s clear the scheme “has fallen far short of expectations while hurting the working poor more than it is helping them.” Monday, President Trump reiterated his support for eliminating the mandate as part of tax reform, tweeting that he was “proud of the Rep. House & Senate for working so hard on cutting taxes {& reform.} We’re getting close! Now, how about ending the unfair & highly unpopular Indiv Mandate in OCare & reducing taxes even further?”

We agree, and fortunately Senate tax writers do as well.

There are two additional benefits worth noting. First, recent polling suggests a plurality -- roughly 45 percent of voters -- support the Republicans' tax reform efforts. According to a 2017 YouGov poll, nearly two-thirds of Americans want the individual mandate repealed. That number jumps to 81 percent when looking just at Trump voters. In other words, including repeal will increase the popularity of the tax package. Second, eliminating the individual mandate penalty will alter the CBO's health insurance coverage calculation when Republicans return to repeal-and-replace next year. Remember, the CBO routinely estimated that 15+ million people would “lose” insurance coverage because the bill eliminated the individual mandate, handing the media and the left a powerful talking point against any future reform.

The Trump administration and congressional Republicans are on the verge of delivering a decades-long promise to reform our nation's tax code, and including the elimination of Obamacare's individual mandate penalty will bring them even closer. We cannot allow self-serving special interests and a small group of lawmakers placing parochial interests above the nation's interests to torpedo this effort.

Michael A. Needham is chief executive officer of Heritage Action for America. David McIntosh is the president of Club for Growth and former Member of Congress from Indiana.

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