Republican Budget Would Slash Taxes, Establish Two-Bracket Tax System And Scrap AMT

Tyler Durden's picture

While it has no chance of passage, the GOP 2013 budget, details of which have been leaked by the WSJ, proposes slashing corporate and individual tax rates, collapsing the current six tax bracket system into just two tiers (10% and 25%), lowering top corporate tax rate to 25% and scrapping the anachronism that is the AMT, or Alternative Minimum Tax. Finally, the proposed plan would nearly eliminate U.S. taxes on American corporations' earnings from overseas operations: something which companies with foreign cash would be rather happy to hear. Needless to say, Democrats will promptly dead end this budget in the Senate: "The proposal, to be offered by Rep. Paul Ryan (R., Wis.), who has become the Republicans' leading figure on budget issues, has little chance of becoming law soon. While likely to be welcomed by House GOP rank-and-file members, it would be rejected by the Democratic-controlled Senate."

Among the more contentious issues is the elimination of some top individual tax brackets...

The current tax system has six individual tax brackets, with a top marginal rate of 35%. The proposal to replace it with just two brackets, with rates of 10% and 25%, echoes proposals by some GOP presidential contenders. Former Pennsylvania Sen. Rick Santorum would reduce rates to 10% and 28%; former Massachusetts Gov. Mitt Romney would cut current rates by one-fifth; and former House Speaker Newt Gingrich and Texas Rep. Ron Paul support some form of flat tax.

...As well as the elimination of repatriation taxation, allowing companies like Apple to bring back their foreign cash horde tax free:

The new budget also would lower the top corporate tax rate to 25% from 35% and plunge into a fierce debate about how to tax companies' overseas operations. Currently, U.S. companies pay the tax rate of the country where the outpost is located and then, if they bring those profits home, often pay some U.S. taxes as well. Under the Ryan-Camp proposal, companies essentially would pay just the tax rate of the country where the profits are earned.

So why is the GOP proposing this?

"We don't expect to make law this year, but we expect to give the country an alternative choice for the future," Mr. Ryan, who chairs the House Budget Committee, said in an interview. "We're going into this election with a specific plan and showing how we could realize it and get it done."

 

The document was drafted with input from Rep. David Camp (R., Mich.), who heads the tax-writing Ways and Means Committee and has long pushed for a tax overhaul. "We think it's very important to have a clear message on jobs and the economy," Mr. Camp said. "The code is too costly, too burdensome, and it's hurting job creation, so we think we should take action."

Democrats see the tax issue as a smokescreen:

Democrats see the tax proposal as an attempt to deflect attention from the more controversial parts of Mr. Ryan's budget, such as a Medicare overhaul and a decision to set 2013 spending levels at a lower figure than that agreed to in the debt-limit deal last August.

 

"Republicans are on a maddening push once again to end Medicare and raise health-care costs for seniors, while giving more special tax breaks to big oil companies and millionaires," said Rep. Steve Israel (D., N.Y.), who coordinates the House Democrats' campaigns.

 

Mr. Ryan caused a furor last year by proposing to change Medicare from a program in which the government pays directly for health care into a "premium support" program for those currently 55 or younger. Medicare would subsidize beneficiaries' premiums as they bought private insurance.

In other words, it is a given that none of the proposed by the GOP will happen.

Instead, the Democrats favor the Buffett rule, which seeks to further widen the class divide by making the wealthy pay progressively more, in the process funding even greater bailouts of TBTF financial institutions, and the even greater encroachment of the insolvent welfare state.

So while the political theatrics continue, the US still has to decide what expenditures it will cut as part of last summer's debt ceiling deal. That this will not happen is also a given.

Which makes us wonder: why even pretend with taxation? As we have shown, the US is progressively more reliant on debt issuance as a funding source for all deficit. At last check debt issuance served to fund 54% of all government expenditures, as tax revenues net of refunds now account for less than half. In fact as of today, in Fiscal 2012 the US has issued $115 billion more in debt ($776 billion) than it has collected in net tax revenues ($661 billion).

So why pretend America will ever repay its debt? Why engage in meaningless political theatrics and senseless optics, and collect taxes at all, as sooner or later virtually all US deficits will be funded through debt issuance, and thus Fed monetization? Why not just cut all marginal tax rates to 0%, and get consumers to truly enjoy a few months of unbridled spending euphoria before the hyperinflation hits?

Alas, we won't find many answers here or anywhere.

For the interested, here is the personal message from Paul Ryan in the form of a rhetorical question. It too will not be answered: after all America (and everyone else, everywhere) has proven beyond a shadow of a doubt that taking pain in the short-term, in order to avoid a complete catastrophe in the longer-term, is not only unacceptable, it is inconceivable. Especially when there are iTrinkets to be distracted with.

The Path to Prosperity Budget: Your Country. Your Future. Your Choice.