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Tax Reform Would Play Well in Peoria

July 19, 2013 by Ike Brannon

Passing fundamental tax reform in the next year is a top goal of both Democrats and Republicans in Congress, but accomplishing it will be no easy feat. While everyone professes to want a tax code that does more to create jobs and economic growth than the current one, doing what reform actually entails — namely, reducing various tax breaks and using the savings to lower rates — creates winners and losers. And the losers will fight fiercely to prevent such a thing from occurring.

But it is a fight worth having, especially for Central Illinoisans, because tax reform done right would do more to create jobs in this region than almost anywhere else, and the community would feel little of the pain from reform.

How reform would impact a taxpayer largely depends on whether he itemizes his taxes or merely takes a standard deduction from reported income — reducing deductions won’t impact those who don’t have deductions large enough to bother to itemize. In places like San Francisco and New York, homeowners almost always find it worthwhile to itemize, mainly due to high state and local taxes and high-priced real-estate markets. They also tend to be in higher tax brackets, so their deductions are worth more.

In central Illinois, real-estate prices and state and local taxes (two of the biggest deductions in the tax code) are low, at least for now, so fewer people itemize here. While nearly 40% of taxpayers in San Francisco and New York itemize, in Central Illinois it’s just 11%. The other 89% have little to lose from reform but would benefit from lower rates.

Corporate tax reform would also be a boon for the area, if done correctly. The current code deals poorly with the foreign income of U.S. businesses, imposing U.S. taxes on foreign-sourced income on top of the taxes paid in the country where the company earned the profits.

However, we allow companies to defer taxes on foreign income until the money is brought back to the United States, meaning that U.S. companies face higher tax rates when operating abroad than their foreign competitors unless they never bring foreign profits back to the U.S. The biggest losers from this tax structure are companies that have significant export operations as well as large foreign operations — which fits Caterpillar to a T.

Reducing our corporate income-tax rate (which is the highest in the developed world) along with the tax penalties on foreign income and the incentives to keep that money abroad would make U.S. manufacturers more competitive abroad, in turn creating new jobs in the U.S.

A broad-based, comprehensive tax reform will ultimately benefit all Americans by creating more economic growth, and with it more jobs and higher incomes. But in the short run, Peorians would feel few of the up-front costs while seeing a major and immediate up-tick in the local economy.


Author

Ike Brannon
Ike Brannon

Ike Brannon served as an Economic Growth Fellow of the George W. Bush Institute from 2012 to 2015. He has a Ph.D. in economics from Indiana University and a B.A. in math, Spanish, and economics from Augustana College. View his full bio

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