With the Democratic National Convention starting tomorrow, and Obama promising major policy reveals, we thought we would use our considerable experience with tax law to take a closer look at Paul Ryan’s* tax reform policy to better compare it against whatever the Democrats unveil over the week. Small businesses in the U.S. or anyone considering U.S. banking should be paying close attention, as Ryan’s tax reform includes sweeping changes to corporate tax and capital gains.
Paul Ryan’s plan includes 3 major changes to the current U.S. tax code.
1. Income tax becomes simpler
His plan would eliminate the current six tax brackets, ranging from 10-35%, replacing them with just two brackets at 10% and 25%, respectively. With Ryan hoping to eliminate deductions, credits, exclusions and loopholes from the tax code, taxpayers would have the option to file using a postcard-sized code with essentially, a tick box for the bracket you fit in.
2. Saving in the U.S. looks VERY enticing
Currently, the U.S. has a long-term capital gains rate that caps at 15%. Other gains have rates from 10-35%. Ryan’s plan would eliminate them entirely. This is designed to make saving in the U.S. a more attractive prospect while, hopefully curbing capital flight.
3. The U.S. becomes the new place to do business
Under Ryan’s plan, corporate income tax wouldn’t be lowered, so much as repeatedly cleaved with a hatchet until no longer resembling its former self. From the 35% it currently caps at, the tax rate for businesses would fall to 8.5%, about half the rate of every other industrialized country in the world. This would obviously encourage billions, maybe even trillions, in new investment in the U.S. as international corporations moved to take advantage of the new rate.
Why this could be great
This plan would be certain to bring in new investors in droves. From experience working in this sector, we can safely say that when you offer tax rates like what the U.S. would offer, businesses and wealthy persons all around the world are going to come. Similarly, we would see a decrease in capital going in the other direction, as offshore banking seems a less enticing option for Americans with similar advantages available at home. With a well-regulated financial industry, this capital inflow could lead to a sizable growth in the economy. More importantly, when new businesses open shop in America, jobs are created. Both would be good signs for the stagnating recovery occurring in the U.S.
Why this could be terrible
There is no way to disguise it. Paul Ryan’s plan really “sticks it” to the poor and middle-class. Even if you forget about the lower capital gains tax by assuming that anyone affected already takes their money overseas, millionaires see an average tax break of $264,000, compared to those earning under $100,000, who will see an average tax break under $1,000. This plan looks even worse for the 99% when you consider the need for a balanced budget. Tax revenue gets shorted by about $4.8 trillion, with the elimination of the alternative minimum tax, the repeal of Obamacare, and the new corporate tax responsible for about $1.5 trillion of that. Even with the new business investment, the U.S. growth rate likely won’t come near covering that lost revenue, so unless the “fiscal conservative” wants to substantially add to the deficit, government spending on health care, education and programs that assist the poor will need to fall drastically to make up the difference.
* We are aware that Romney and Ryan have some substantial differences between their plans, but we consider Romney’s current plan to be too vague to hold as an actual benchmark for comparison