Fair Accounting for Income Realized from Betting Earnings Taxation Act

— 697 — Department of the Treasury time for any purpose. This would allow the vast majority of American families to save and invest without facing a punitive double layer of taxation. Entrepreneurship. To encourage entrepreneurship, the business loss limita- tion should be increased to at least $500,000. Businesses should also be allowed to fully carry forward net operating losses. Extra layers of taxes on investment and capital should also be eliminated or reduced. The net investment income surtax and the base erosion anti-abuse tax should be eliminated. The estate and gift tax should be reduced to no higher than 20 percent, and the 2017 tax bill’s temporary increase in the exemption amount from $5.5 million to $12.9 million (adjusted for inflation) should be made permanent.21 The tax on global intangible low-taxed income should be reduced to no higher than 12.5 percent, with the 20 percent haircut on related foreign tax credits reduced or eliminated.22 All non-business tax deductions and exemptions that were temporarily sus- pended by the 2017 tax bill should be permanently repealed, including the bicycle commuting expense exclusion, non-military moving expense deductions, and the miscellaneous itemized deductions.23 The individual state and local tax deduction, which was temporarily capped at $10,000, should be fully repealed. Deductions related to educational expenses should be repealed. Special business tax pref- erences, such as a special deduction for energy-efficient commercial building properties, should be eliminated.24 Wages vs. Benefits. The current tax code has a strong bias that incentivizes businesses to offer employees more generous benefits and lower wages. This limits the freedom of workers and their families to spend their compensation as they see fit—and it can trap workers in their current jobs due to the jobs’ benefit pack- ages. Wage income is taxed under the individual income tax and under the payroll tax. However, most forms of non-wage benefits are wholly exempt from both of these taxes. To reduce this tax bias against wages (as opposed to employee benefits), the next Administration should set a meaningful cap (no higher than $12,000 per year per full-time equivalent employee—and preferably lower) on untaxed benefits that employers can claim as deductions. Employee benefit expenses other than tax-deferred retirement account contributions should count toward the limita- tion, whether offered to specific employees or whether the costs relate to a shared benefit like building gym facilities for employees.25 Tax-deferred retirement con- tributions by employers should not count toward this limitation insofar as they are fully taxable upon distribution. Only a percentage of Health Savings Accounts (HSA) contributions (which are not taxed upon withdrawal) should count toward the limitation.26 The limitation on benefit deductions should not be indexed to increase with inflation.27 Employers should also be denied deductions for health insurance and other benefits provided to employee dependents if the dependents are aged 23 or older.

— 712 — Mandate for Leadership: The Conservative Promise 17. For a detailed discussion, see David R. Burton, “Tax Reform: Eliminating the Double Taxation of Corporate Income,” Heritage Foundation Backgrounder No. 3216, May 18, 2017, https://www.heritage.org/sites/default/ files/2017-05/BG3216.pdf. 18. One hundred dollars in corporate income less an 18 percent tax leaves $82. A 15 percent capital gains tax or qualified dividends tax is $12.30, which leaves $69.70, for an effective marginal tax rate of 30 percent. This, of course, abstracts away from certain timing issues. 19. Inflation Reduction Act, Public Law 117–169. 20. Ibid. 21. Tax Cuts and Jobs Act, Public Law 115–97, § 11061, amending Internal Revenue Code § 2010(c). The amounts before inflation adjustments are $5 million and $10 million, respectively. See also Internal Revenue Service, “What’s New: Estate and Gift Tax, Basic Exclusion Amount for Year of Death,” https://www.irs.gov/businesses/ small-businesses-self-employed/whats-new-estate-and-gift-tax (accessed March 22, 2023). 22. The effective tax rate on foreign-derived intangible income should remain equal to the tax rate on global intangible low-taxed income. 23. For miscellaneous itemized deductions, see Internal Revenue Code (26 U.S. Code § 67). Business deductions that were suspended by the 2017 tax bill (other than those related to depreciation) should also be extended. This includes the local lodging expense deduction and entertainment expense deductions. The 2017 tax bill’s modifications to the deduction for personal casualty and theft losses should be made permanent. The Pease limitation on itemized deductions should be permanently eliminated. 24. Bonus depreciation provisions applied to specific industries should be maintained. 25. Employer-provided childcare expenses should also count toward the limitation on benefit deductions. 26. HSAs are flexible and portable, and they help contain costs by giving health care consumers skin in the game. 27. For additional revenue to fund pro-growth tax cuts, lawmakers could gradually phase down the limitation on benefit deductions. 28. Early versions of the 2017 tax bill envisioned reforming the corporate income tax into a destination-based cash flow tax, a form of consumption tax. A tax system that taxes labor and capital-factor incomes equally— and only once—results in higher output and higher incomes. Usually, in the modern public finance literature, this is called a consumption tax. On the economic superiority of consumptions taxes, see N. Gregory Mankiw et al., “Optimal Taxation in Theory and Practice,” Journal of Economic Perspectives, Vol. 23, No. 4 (2009), pp. 147–174, https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.23.4.147 (accessed March 19, 2023); Alan J. Auerbach, “The Choice Between Income and Consumption Taxes: A Primer,” NBER Working Paper No. 12307, June 2006, https://www.nber.org/system/files/working_papers/w12307/w12307.pdf (accessed March 19, 2023); and Charles E. Walker and Mark A. Bloom eld, eds., The Consumption Tax: A Better Alternative? (Cambridge, MA: Harper and Row, Ballinger, 1987). 29. Hoover Institution, “Simplifying the Tax System: The History of the Flat Tax,” March 1, 2019, https://www. hoover.org/research/simplifying-tax-system-history-flat-tax (accessed March 20, 2023). 30. David R. Burton, “Four Conservative Tax Plans with Equivalent Economic Results,” Heritage Foundation Backgrounder No. 2978, December 7, 2022, https://www.heritage.org/taxes/report/four-conservative-tax- plans-equivalent-economic-results. Consumption tax plans generally include carveouts that exempt very low-income Americans from federal tax liability. 31. Daniel J. Mitchell and Chris Edwards, Global Tax Revolution: The Rise of Tax Competition and the Battle to Defend It (Washington, DC: Cato Institute, 2008); Preston Brashers, “Like Constitutional Checks and Balances, Tax Competition Is a Bulwark Against Growth of Government,” March 17, 2022, https://www.heritage.org/ taxes/commentary/constitutional-checks-and-balances-tax-competition-bulwark-against-growth (accessed March 19, 2023). 32. James M. Robers et al., “Organization for Economic Co-operation and Development (OECD): What America Should Do,” Heritage Foundation Backgrounder No. 3593, March 16, 2021, https://www.heritage.org/ sites/default/files/2021-03/BG3593.pdf; Preston Brashers. “The OECD Crusade To Raise Taxes,” Heritage Foundation Commentary, February 4, 2022, https://www.heritage.org/taxes/commentary/the-oecd-crusade- raise-taxes; David Burton, “How the OECD is Promoting More Identity Theft, Crime, Industrial Espionage, and Suppression of Political Dissidents,” July 15, 2016, Heritage Foundation Commentary, https://www.heritage. org/taxes/commentary/how-the-oecd-promoting-more-identity-theft-crime-industrial-espionage-and; — 713 — Department of the Treasury David R. Burton “Towards a Global Tax Cartel?” Policy, Vol. 18, No. 4 (Summer 2002–2003), Center for Independent Studies (Australia), https://www.cis.org.au/wp-content/uploads/2015/04/images/stories/policy- magazine/2002-summer/2002-18-4-david-r-burton.pdf (accessed March 19, 2023). 33. Roberts et al., “Organization for Economic Co-operation and Development (OECD).” 34. See Inflation Reduction Act, § 10301. See also Preston Brashers, “IRS and Allies Downplay 87,000-Person Hiring Binge,” The Daily Signal, August 12, 2022, https://www.dailysignal.com/2022/08/12/the-irs-and-its- allies-downplay-87000-person-hiring-binge/ (accessed March 19, 2023). 35. U.S. Department of the Treasury, General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals, May 2021, pp. 88–89, https://home.treasury.gov/system/files/131/General-Explanations-FY2022.pdf (accessed March 19. 2023). 36. See U.S. Department of the Treasury, Fiscal Year 2022–2026 Strategic Plan. 37. U.S. House of Representatives, Committee on Oversight and Reform, Policy and Supporting Positions, December 2020 (the “plumb book”), p. 127 https://www.govinfo.gov/content/pkg/GPO-PLUMBOOK-2020/ pdf/GPO-PLUMBOOK-2020.pdf (accessed March 19, 2023). 38. Internal Revenue Service, “Organization and Top Officials,” https://www.irs.gov/pub/newsroom/marketing/ internet/irs-organization-chart.pdf (accessed March 19, 2023). See also Internal Revenue Code (26 U.S. Code § 7803(a)–(b)). 39. For a summary of various GAO reports on various IRS IT problems, see Vijay A. D’Souza, “Information Technology: IRS Needs to Address Operational Challenges and Opportunities to Improve Management,” testimony before the Subcommittee on Government Operations, Committee on Oversight and Reform, U.S. House of Representatives, October 7, 2020, GAO–21–178T, https://www.gao.gov/assets/gao-21-178t. pdf (accessed March 19, 2023). Charles O. Rossotti was named IRS Commissioner by President Bill Clinton primarily so that Rossotti could address widely acknowledged IT issues. He made some improvements between 1997 and 2002, but despite large investments, he did not really resolve the IT problems at the IRS. Since that time, the problems have worsened. 40. D’Souza, “Information Technology,” figure 1, p. 5. 41. Internal Revenue Service, IRS Integrated Modernization Business Plan, April 2019, https://www.irs.gov/pub/ irs-pdf/p5336.pdf (accessed March 20, 2023). 42. See, for example, the Omnibus Taxpayers’ Bill of Rights, Public Law 100–647, Subtitle J of Title VI of the Technical and Miscellaneous Revenue Act of 1988; Taxpayer Bill of Rights 2, Public Law 104–168; IRS Restructuring and Reform Act of 1998, Public Law 105–206, Title III; Consolidated Appropriations Act, Public Law 114–113, Title IV, Subtitle A (adding Internal Revenue Code § 7803(a)(3) and other changes); and Taxpayer First Act, Public Law 116–25, Title I. 43. For a list of 68 proposed reforms, see National Taxpayer Advocate, 2022 Purple Book: Compilation of Legislative Recommendations to Strengthen Taxpayer Rights and Improve Tax Administration, December 31, 2021, https://www.taxpayeradvocate.irs.gov/wp-content/uploads/2022/01/ARC21_PurpleBook.pdf (accessed March 19, 2023). Most, though not all, of these proposals have merit. Regarding penalty reform, see Jeremiah Coder, “Achieving Meaningful Civil Tax Penalty Reform and Making It Stick,” Akron Tax Journal, Vol. 27 (2012), https://ideaexchange.uakron.edu/cgi/viewcontent.cgi?article=1153&context=akrontaxjournal (accessed March 19, 2023). 44. Internal Revenue Service, 2023 Congressional Budget Justification & Annual Performance Report and Plan, Rev. 3–2022, https://home.treasury.gov/system/files/266/Internal-Revenue-Service-FY-2023-CJ.pdf (accessed March 19, 2023). 45. Internal Revenue Service, 2021 IRS Data Book: October 1, 2020 to September 30, 2021, table 11, p. 26, https:// www.irs.gov/pub/irs-pdf/p55b.pdf (accessed March 19, 2023). 46. Ibid., 2021 IRS Data Book, table 2, p. 4. 47. Scott A. Hodge, “The Compliance Costs of IRS Regulations, Tax Foundation Fiscal Fact No. 512, June 2016 https://files.taxfoundation.org/legacy/docs/TaxFoundation_FF512.pdf (accessed March 19, 2023). 48. Organization for Economic Cooperation, The Multilateral Convention on Mutual Administrative Assistance in Tax Matters: Amended by the 2010 Protocol, https://read.oecd-ilibrary.org/taxation/the-multilateral- convention-on-mutual-administrative-assistance-in-tax-matters_9789264115606-en#page1 (accessed March 20, 2023).

— 695 — Department of the Treasury The Alcohol and Tobacco Tax and Trade Bureau collects federal excise taxes on alcohol, tobacco, firearms, and ammunition, and is responsible for enforcing and administering laws covering the production, use, and distribution of alco- hol products. The Internal Revenue Service is the largest of the department’s bureaus, account- ing for about 85 percent of Treasury’s personnel and about four-fifths of its appropriated budget. It administers and enforces U.S. tax laws. The Bureau of Engraving and Printing develops and produces U.S. currency notes. The Financial Crimes Enforcement Network (FinCEN) is designed to protect the financial system from illicit use. It also administers the beneficial ownership reporting regime mandated by the Corporate Transparency Act.12 The Bureau of the Fiscal Service provides central payment services to federal program agencies, operates the U.S. government’s collections and deposit systems, provides government-wide accounting and reporting services, manages the collec- tion of delinquent debt owed to the U.S. government, borrows the money needed to operate the government through the sale of U.S. Treasury securities (including the state and local government series), and accounts for and services the public debt. The United States Mint designs and mints U.S. circulating and bullion coins. The Office of the Comptroller of the Currency (OCC) charters, regulates, and supervises national banks and federal savings associations (thrifts) to ensure that they operate in a safe and sound manner, provide fair access to financial services, and comply with applicable laws and regulations. The OCC also supervises fed- eral branches and agencies of foreign banks and has rulemaking authority for all savings associations. TAX POLICY Tax policy has a powerful impact on the economy. The Treasury Department should develop and promote tax reform legislation that will promote prosperity. To accomplish this, tax reform should improve incentives to work, save, and invest. This, in turn, is accomplished primarily by reducing marginal tax rates,13 reducing the cost of capital14 and broadening the tax base to eliminate tax-induced economic distortions by eliminating special-interest tax credits, deductions, and exclusions. Tax compliance costs will decline precipitously if the tax system is substantially simplified.15 The Treasury Department should also promote tax competition rather than supporting an international tax cartel. Principles of Good Tax Policy. These are the principles governing good tax policy. l First, the tax system should raise the revenue necessary to fund a limited government for constitutionally appropriate activities. It should raise this revenue such that it: (a) applies the least economically destructive forms of — 696 — Mandate for Leadership: The Conservative Promise taxation;16 (b) has low tax rates on a broad, neutral tax base; (c) minimizes interference with the operation of the free market and free enterprise; and (d) minimizes the cost to taxpayers of compliance with and administration of the tax system. l Second, the tax system should minimize its adverse impact on the family and the core institutions of civil society. l Third, the tax system should be applied consistently—with special privileges for none—and respect taxpayer due process and privacy rights. The current tax system is inconsistent with these principles and needs to be reformed to promote prosperity, reduce compliance costs, and improve fairness. The incoming Administration should promote immediate intermediate reforms to the existing system. It should then pursue fundamental tax reform. Intermediate Tax Reform. The Treasury should work with Congress to sim- plify the tax code by enacting a simple two-rate individual tax system of 15 percent and 30 percent that eliminates most deductions, credits and exclusions. The 30 percent bracket should begin at or near the Social Security wage base to ensure the combined income and payroll tax structure acts as a nearly flat tax on wage income beyond the standard deduction. The corporate income tax rate should be reduced to 18 percent. The corporate income tax is the most damaging tax in the U.S. tax system, and its primary economic burden falls on workers because capital is more mobile than labor.17 Capital gains and qualified dividends should be taxed at 15 percent. Thus, the combined corporate income tax combined with the capital gains or qualified dividends tax rate would be roughly equal to the top individual income tax rate.18 The system should allow immediate expensing for capital expenditures and index capital gains taxes for inflation. In addition, intermediate tax reform should repeal all tax increases that were passed as part of the Inflation Reduction Act,19 including the book minimum tax, the stock buyback excise tax, the coal excise tax, the reinstated Superfund tax, and excise taxes on drug manufacturers to compel them to comply with Medicare price controls. The next Administration should also push for legislation to fully repeal recently passed subsidies in the tax code, including the dozens of credits and tax breaks for green energy companies in Subtitle D of the Inflation Reduction Act.20 Universal Savings Accounts. All taxpayers should be allowed to contribute up to $15,000 (adjusted for inflation) of post-tax earnings into Universal Savings Accounts (USAs). The tax treatment of these accounts would be comparable to Roth IRAs. USAs should be highly flexible to allow Americans to save and invest as they see fit, including, for example, investments in a closely held business. Gains from investments in USAs would be non-taxable and could be withdrawn at any