Our tax system plays a critical role in our nation’s economy. It shapes incentives to work, consume, save, and invest, thus influencing future incomes and government revenues. Today, however, our tax code has become a complex maze of rules that are difficult to navigate. It is rife with exemptions and special treatment that benefit only the few who can afford expert advice or those who have the most well-connected lobbyists. These provisions are often inefficient, unfair, or duplicative, and they waste precious resources.
The 2022 tax reform plan aims to reduce complexity by simplifying the individual and business tax codes and removing unnecessary taxes, fees, and penalties. This includes the elimination of a tax on estates and gifts, eliminating the alternative minimum tax, and reducing the value of itemized deductions, which are predominantly used by wealthy taxpayers because the amount of a deduction matches an individual’s marginal rate of tax.
On a conventional basis, the plan would increase average after-tax incomes by 1.1 percent in 2024 and 2033, including the boost from higher economic growth. But to achieve these gains, the plan must be revenue-neutral. This is because a large reduction in rates for one group of taxpayers necessarily necessitates an increase for another.
The proposed plan accomplishes this by replacing the current progressive income tax with a flat 20 percent tax on individual income and replacing the current corporate and pass-through business income taxes with a simple, flat distributed profits tax. As a result, the plan reduces compliance costs by removing many taxes, fees, and penalties, as well as the need for multiple sets of books.
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