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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.
TARIFFIED: Trade Talk with Matthew Rooney
This week, trade relations between the U.S. and India are continuing to escalate. Earlier this month, the U.S. stopped granting India special trade privileges by taking away the Generalized System of Preferences (GSP) program, and India has responded by enforcing more tariffs of its own. The George W. Bush-SMU Economic Growth Initiative Director Matthew Rooney breaks down the trade conflict: For more information on trade groups and the global economy, visit www.bushcenter.org/scorecard.
How Trade Spreads Holiday Cheer
It is projected that the average American household will spend more than $1,000 during the holidays this year.
Deporting Salvadorans May Lead to Economic Decline
We should think carefully about a policy whose major impacts are likely to be reductions in employment and economic activity here at home, and increased instability and lawlessness along our borders.
Bush Institute's Laura Collins Talks Immigration on Good Morning Texas
Last week, Deputy Director of Economic Growth at the George. W. Bush Institute Laura Collins spoke with Good Morning Texas about immigration myths. During the interview, Collins had the opportunity to set the record straight and address common misconceptions about legal immigrants living in America today. The segment was inspired from facts released earlier this fall by the Bush Institute in the third edition of America's Advantage: A Handbook on Immigration and Economic Growth. Watch the full Good Morning Texas interview here.