Tuesday, July 2, 2013

Tax Reform for Jobs 2014

Introduction  


The current taxation system of the United States does not help us to be globally competitive and is detrimental to our survival as a nation. There are many basic problems with our taxation system. The first basic problem is that the low rates on capital gains and dividend income (i.e., rewarding investing) has not benefited our country as a whole but has benefited a few. As we have seen since the enactment of the low capital gain/dividend rates in 2003, it did not prevent our nation from suffering economic catastrophe in 2008. The US taxation system rewards the investing of businesses that outsource to cheap foreign labor markets or import goods from nations with low labor costs. It is not the problem of investors; it is the problem of the Federal Government of not having a taxation system that spurs on growth in the US but creates wealth outside our country. The US Government has created a system were wealthy investors economically benefit while at the same time foreign businesses and governments (who are not always friendly to the US) have formed this economic alliance. The middle class in the US is being squeezed out.

We need a new taxation regime that rewards US businesses for creating decent paying jobs in the US while at the same time create economic wealth in the US. Our nation is becoming economically poor because we no longer produce any great quantity of assets from within our borders. The greatness of a nation depends on its ability to produce and create assets (tangible and intangible) within its own borders for its own use and for export. We are becoming a second rate nation if we don’t change course.

Lower Business Tax Rates

To be globally competitive we need to lower business tax rates to create decent paying jobs in the United States. Just lowering business tax rates with no tax incentive will not create decent paying jobs in the US. In theory if you lowered the tax rate to zero on US multi-national corporations they would still outsource or import from foreign entities (such as a US entity’s Controlled Foreign Corporations) that are located in foreign countries with low labor rates. Why because other entities at a zero tax rate would be looking for cheap labor source and a business has to be competitive or economically die.

Others have argued for a territorial system to help our US multi-national corporations to be competitive. If we look at European nations that have gone to a territorial taxation system, we will see that their economies have worsened with high levels of unemployment. Such territorial taxation regime does not eliminate the shifting of jobs to low wage base foreign countries. The US multinationals will just set up operations in such foreign countries causing a loss of decent paying jobs in the US. Then the foreign profits repatriated tax-free into the US will only benefit a few of the higher ups in the US multinational corporation. These tax-free repatriated profits under a territorial taxation system will never be used to create better paying jobs in the US.

Others have argued that we should lower tax rates from 35% to 25%. This to will not work. Look at China with a business tax rate of 25% with a low labor costs. Can one really be serious and think that by lowering our US business tax rate to 25% will create decent paying jobs in the US when the Chinese have low labor cost and business tax rates of 25%?  No, this is a foolish notion.


Currently

Tax Rates

Labor Costs
US Corporate Rate

35%

higher cost
China Tax Rate

25%

lower cost





Failed Solution: Lower US Rate to 25%




US Corporate Rate

25%

higher cost
China Tax Rate

25%

lower cost





Solution: Lower rates below 25%




US Corporate Rate

below 10%

higher cost
China Tax Rate

25%

lower cost


We need to keep the top tax rates at 35% but reward businesses with a phantom deduction for decent compensation paid to its employees. Compensation would include wages and employee benefits such as pension, health insurance, life insurance and education benefits. The government would reward US businesses that pay compensation to its US employees that exceeds $40,000 and would be capped at $60,000. A business would be allowed a phantom deduction at 25% of qualifying compensation (wage and employee benefits paid by a US business). A study could be done by Treasury to determine the applicable rate (higher or lower than 25%) and to determine the appropriate compensation range (if it should be higher than $40,000 - $60,000) of a phantom deduction that would create the desirable effective business tax rate (well below 25%). The phantom compensation deduction should be called Compensation Income Exclusion (CIE) which is allowed as an extra deduction above compensation already paid.



Compensation



Compensation


Package

Normal

Income


wage & benefits

Compensation

Exclusion (CIE)

Total
per employee

Deduction

25% of Comp

Deduction
 $               30,000

 $            30,000

 $                  -0-

 $           30,000
 $               40,000

 $            40,000

 $             10,000

 $           50,000
 $               50,000

 $            50,000

 $             12,500

 $           62,500
 $               60,000

 $            60,000

 $             15,000

 $           75,000
 $             100,000

 $          100,000

 $             15,000

 $         115,000
 $             200,000

 $          200,000

 $             15,000

 $         215,000

In another write-up called Rate Study Table an analysis was performed to see what rate would benefit the government, workers, and US businesses and that rate came out to 25%. The analysis was based on an existing worker’s wage being increased by $10,000.

The purpose of the Compensation Income Exclusion (CIE) is to lower the effective tax rate of a business that pays decent compensation to a rate in the single digits or to zero. Businesses in the US need to be competitive with foreign nations that have a low wage base. The only way to do this is to implement the CIE. The US needs a taxation system that rewards US businesses that create US jobs and create economic wealth within the US with very low tax rates. The more US individuals we have employed with decent wages and creating tangible wealth within our nation will create more tax revenues to Federal and state governments. Also, the increase of middle class disposable income will create demand of goods and services from US businesses. The other item needed to make US businesses competitive is to eliminate the collection of FICA and Medicare tax and go to a Value Added Tax System (VAT) to help fund Social Security. Allowing businesses to take the Compensation Income Exclusion (CIE) and eliminate businesses paying into social security will greatly improve the profitability of a business.

Value Added Tax

We need radical change to the US tax system to keep us globally competitive in the 21st century. We burden our goods and services with the employer’s share of FICA and Medicare tax and expect to be competitive in a global market. Congress should eliminate collection of FICA and Medicare tax and enact a 15% Value Added Tax (VAT) to all goods and services to help fund FICA and Medicare. This change will enable our US goods and services to be more competitive since US exports will not have the cost of VAT and will not have the FICA/Medicare cost burden either. US products sold domestically will not have the added cost burden of FICA/Medicare and will have the same VAT as foreign imports.

The competitive disadvantage of FICA and Medicare Tax on Goods and Services

Employer's share of FICA

6.20%
Employer's share of Medicare

1.45%
Subtotal before tax deduction @ 35%

7.65%
Tax Deduction of payroll @ 35%

-2.68%
Added Cost Burden on Goods & Services

4.97%

Compensation Income Exclusion: CIE Rate Could Be Higher than 25%

At a 25% CIE rate there is benefit to the worker, employer, and government. The concern is that the Compensation Income Exclusion at a 25% rate might not be enough incentive for businesses to hire US workers. The CIE rate may have to be increased above 25% to incentivize businesses to hire US workers at decent compensation packages. CIE rates above 25% will cost the Government but will benefit the businesses paying decent compensation through the CIE and the workers receiving such compensation. We may have to look at funding a CIE rate at 30%-40% to be competitive with nations like China. The only way the do this is to change the way we tax dividends and long term capital gains to fund CIE (may have to eliminate other individual income tax deductions too).

Compensation




Package

  


(wage & benefits)

 Compensation

 CIE Rate
per employee

 Range to Consider

 to Consider
 $                40,000

 in effect at 25%

 (30% -40%)
 $                50,000

 in effect at 25%

 (30% -40%)
 $                60,000

 in effect at 25%

 (30% -40%)
 $                70,000

may consider

 (30% -40%)
 $                80,000

may consider

 (30% -40%)

Individual Dividends and Long Term Capital Gains

The effective tax rate on personal long term capital gains and dividends should be increased from where they are now. Basically these reduced rates have done nothing to stimulate the US economy. The current investing activity only benefits wealthy individuals and foreign entities that provide low wage base (for outsourcing of US jobs or cheap imports into the US). The double taxation argument of the dividends can be put to rest due to the CIE. Corporations with the new Compensation Income Exclusion will not have all its earnings and profits taxed. Of course investing in corporations that do not pay decent compensation under my new plan, there is a high risk of double taxation (we do not want to reward bad business behavior that does not benefit our nation).  There should be a balance struck between investing activities and allowing businesses tax breaks that benefit the US economy. The individual tax rate for dividends should be taxed at ordinary income tax rates. As for long term capital gains, individual tax rates should be taxed at ordinary income rates with a 15% exclusion from income (This is to compensate for the risk of investing). The tax breaks granted to businesses creating jobs have to be offset from revenues from other sources such as increased taxes on dividends and capital gains. Of course investors will benefit from the growth of the businesses (based on the Government subsidy through the Compensation Exclusion) in which they hold an investment. Tax Revenues from dividends and long term capital gains is needed to reduce the deficit.



(LTCG)






Long Term




Current Tax Law

Capital Gain

LTCG Rate

Tax
Individual at Ordinary Rate 25%

 $               1,000

15%

 $                150
Individual at Ordinary Rate 35%

 $               1,000

15%

 $                150









 $1,000 LTCG 






 with a 15%

Ordinary


New Proposed Law

 Exclusion

Tax Rate

Tax
Individual at Ordinary Rate 25%

 $                  850

25%

 $                213
Individual at Ordinary Rate 35%

 $                  850

35%

 $                298


Small Business Benefits from Compensation Income Exclusion

Small Businesses or Closely Held Entities should receive tax benefits for creating decent paying jobs like large businesses. The Compensation Exclusion is available to all businesses (C-Corps, S-Corps, LLCs, and sole proprietorships). Small Businesses or Closely Held Entities will be able to take the Compensation Exclusion on compensation/earnings of an owner (subject to IRC 267 and IRC 318) if there are qualifying Compensation Exclusions for unrelated individuals. Such Compensation Exclusion for such business owners and their relatives will be limited to the qualified Compensation Exclusion of unrelated individuals.





Compensation




Compensation

Exclusion @ 25%


Owner

 $                 120,000

 $                15,000

limit at $60K x 25%
Owner's Wife

 $                   40,000

 $                10,000


Owner's Son

 $                   40,000

 $                10,000


Owner's Daughter

 $                   40,000

 $                10,000


Total Related CIE



 $                45,000


Total Related limited to

 Unrelated CIE Amt. 

 $                30,000




















Compensation




Compensation

Exclusion @ 25%


Unrelated Person #1

 $                   70,000

 $                15,000


Unrelated Person #2

 $                   60,000

 $                15,000


Unrelated Person #3

 $                   30,000

$                      -0-


Unrelated Person #4

 $                   30,000

$                      -0-


Total Unrelated



 $                30,000









Compensation Exclusion






Related Individuals CIE



 $                30,000


Unrelated Individuals CIE



 $                30,000


Total Amount CIE Allowed



 $                60,000



Item to note, related entities by common ownership (affiliated) will be treated as one entity in applying and computing the Compensation Exclusion. Earned income for computing other items on an individual tax return will add back the Compensation Exclusion. An example in computing the earned income credit (EIC) of an owner, the owner’s small business had $15,000 in taxable income but a Compensation Exclusion of $85,000. The earned income from such business is $100,000.

Flow-through entities, such as S-Corps, LLCs, and partnerships can only use the Compensation Exclusion to reduce business profits of all flow-through entities of an individual and can not be used to create flow-through losses. Any Compensation Exclusion that creates flow-through losses may be carried forward to offset future business profits of all flow-through entities of such individual.

 Earned Income Tax Credit and Child Tax Credit

Businesses that do not pay decent compensation to its employees basically have the US taxpayers subsidize some of their employees who have families through the Earned Income Credit (EIC). So if you go into the Mega-Discount Store and buy goods cheap, you really are paying more for the goods than you think because of the taxes you pay subsidizes the EIC program for that low level Mega-Discount employee who has a family. As for EIC, I am not a very big fan of it. EIC is riddled with fraud ranging from 23%-28% of total EIC paid out by the Government. There needs to be more IRS oversight on EIC. Hopefully, the Compensation Income Exclusion offered to businesses will move more workers away from EIC or reduce the amount EIC paid out by the Federal Government and save the Government money.

The individual tax credit that needs to be eliminated is Child Tax Credit. Again, we need to balance the budget. If we are to allow workers to exclude their medical insurance from their W-2 wages (both the employer share is excluded and the employee share is excluded through the cafeteria plan rules) then we need to eliminate the Child Tax Credit. We can only allow one of these tax benefits. As for EIC low wage earners, they already receive EIC based on the number of children they have and should have no need of the Child Tax Credit. As for the other credits such as the Child Care Credit enabling a low wage earner to work, I agree with such credit as it currently exists. As for the high cost of earning a college degree, I support the Education Credit for individuals as it stands. A person who receives a higher education will earn more income in the future and will benefit the government through the taxes it will collect on such income.

US Entities Foreign Source Income Not Being Taxed

Next, we need to focus on US multi-national corporations that do business overseas. US multinationals are not taxed on income earned by foreign subsidiaries (Controlled Foreign Corporation – CFC) until it is repatriated to the US parent as dividends, although some passive and related company income that is easily shifted is taxed currently under anti-abuse rules referred to as Subpart F income.

Many tax analysts argue that the US should go to a territorial system of taxation. I disagree. Such taxation regime does not eliminate the shifting of jobs to low wage base foreign countries. The US multinationals will just set up operations in such foreign countries causing a loss of decent paying jobs in the US. Then the foreign profits repatriated tax-free into the US will only benefit a few of the higher ups in the US multinational corporation. These tax-free repatriated profits under a territorial taxation system will never be used to create better paying jobs in the US. 

The solution to this problem is to have a taxation system that taxes all world-wide profits of a US taxpayer currently. The foreign income (non-subpart F) that is actively earned outside the US by a CFC will be taxed to the US shareholder (the US multinational corporation) currently under my new plan. With the taxation of the active foreign source income (non-subpart F) of a CFC, the taxpayer will be allowed an offset against its active foreign source profits of a CFC by the US Compensation Exclusion. So the same amount of US Compensation Income Exclusion (CIE) used to offset US Source income will be allowed to be used again to offset the active foreign source income of a CFC (such income was not previously taxed under the existing tax law unless it was repatriated). US Corporations that pay decent compensation to its US workers will be rewarded by having its active foreign source income of its CFC greatly reduced. Corporations that do not pay decent US compensation will be greatly taxed on their active foreign source income of a CFC. Those US corporations who do not benefit or help the US economy will be taxed heavily as compared to US corporations who do benefit the US economy. Below is an example of an entity that pays decent compensation to its US employees.  

US Source Income (Domestic)
 $ 10,000

CFC Active Income (non-subpart F)
 $  7,000
 now  taxable
Subpart F Income
 $   2,000

Foreign Branch Income
 $  1,000

US Source and Subpart F
 $ 12,000

Active Foreign Source
 $  8,000

US CIE (new law)
 $ (6,000)

US CIE (new law)
 $(6,000)

Subtotal
 $   6,000

Foreign Active Income (new law)
 $  2,000

Foreign Active Income (new law)
 $   2,000




US Taxable Income
 $   8,000










In the above example the US Compensation Income Exclusion (CIE) is assumed to be $6,000. This $6,000 is allowed to be used twice. The CIE is allowed once to offset US Source Income and Subpart F Income. The $6,000 of CIE is allowed again to offset the Active Foreign Source income (non-subpart F income) which would be currently taxable under the new law change (previously, such CFC active foreign source income was not taxed until it was repatriated).

A US corporation that pays decent compensation to its US employees but has a lot of its activities overseas will have some Foreign Active Income that is taxable. A US corporation that pays decent compensation to its US employees but has most of its activities in the US probably will not have any Foreign Active Income that is taxable.

For US Taxable Income under the existing current law, the US Compensation Income Exclusion (CIE) shall be applied to US Domestic Source Income first then if there is any left over it will be applied to foreign source Subpart F. This will have an effect on how foreign tax credit is computed. 

Foreign Tax Credit (FTC) computation law needs to be revised too. The top formula is basically how FTC is computed now (current tax law) and the bottom formula is the revision of tax law with a  FTC ratio added to the existing tax law.

Foreign Sourced
---------------------------   x   US Tax before Credits = FTC Limitation
Total Taxable Income


Foreign Sourced
----------------------------  x  US Tax before Credits = Tentative FTC  x  FTC ratio = FTC Limitation         Total Taxable Income





CFC Active Income (non-subpart F)
 $  7,000



Foreign Branch Income
 $  1,000



Active Foreign Source
 $  8,000





US Source Income (Domestic)
 $ 10,000

Active Foreign Source
 $  8,000
US CIE (new law)
 $ (6,000)
< 
US CIE (new law)
 $(6,000)
US Source
 $   4,000

Foreign Active Income (new law)
 $  2,000





Subpart F Income
 $   2,000



US CIE (new law)
 $       -0-
< 
all used against domestic source

Subpart F Foreign Source
 $   2,000



Foreign Active Income (new law)
 $   2,000



Total Foreign Source
 $   4,000








US Source
 $   4,000



Foreign Source
 $   4,000



US Taxable Income
 $   8,000



US Tax Rate
35%



US Tax before FTC
 $   2,800

Foreign Taxes Paid
 $  2,500


Foreign Sourced
---------------------------   x   US Tax before Credits = FTC Limitation
Total Taxable Income

$4,000
---------  x  $2,800 = $1,400
$8,000

Next step we need to compute the FTC ratio which does not account for the Compensation Income  Exclusion (CIE).

FTC Ratio without Compensation Exclusion

US Deemed Amount

Foreign Taxes
CFC Active Income (non-subpart F)

 $                  7,000


Foreign Branch Income

 $                  1,000


Subpart F Income

 $                  2,000


Total Foreign Source

 $                10,000


US Tax Rate @ 35%

35%


Tax Amount for Ratio

 $                  3,500

 $           2,500





FTC Ratio $2,500 / $3,500

71.429%


(amount not to exceed 100%)





The Foreign Tax Credit (FTC) is to be computed as follows;

Foreign Sourced
----------------------------  x  US Tax before Credits = Tentative FTC  x  FTC ratio = FTC Limitation         Total Taxable Income

$4,000
---------   x  $2,800  =  $1,400  x  71.428%  =  $1,000  FTC Limitation
$8,000

Effective World-wide Tax Rates


with Compensation Exclusion

World-wide
US Source Income (Domestic)

 $                10,000
CFC Active Income (non-subpart F)

 $                  7,000
Foreign Branch Income

 $                  1,000
Subpart F Income

 $                  2,000
World-wide Income

 $                20,000



US Tax before FTC

 $                  2,800
less; FTC

 $               (1,000)
US Tax Paid

 $                  1,800
Foreign Taxes Paid

 $                  2,500
Total Taxes Paid World-wide

 $                  4,300



Effective World-wide Tax Rate

21.50%

With the Compensation Income Exclusion (CIE)
The effective US tax rate paid on world-wide income is 9% ($1,800 / $20,000).
The effective foreign tax rate paid on world-wide income is 12.5% ($2,500 / $20,000).

The following page will take the same example I presented before; but it will involve a US Corporation that does not pay decent compensation under the new proposed tax law change. Accordingly, such entity will not receive the US Compensation Income Exclusion (CIE) and pay more tax.

US Source Income (Domestic)
 $ 10,000

Active Foreign Source Income
 $  8,000
US CIE (new law)
 $    -0-  
< 
US CIE (new law)
 $   -0-  
US Source
 $ 10,000

Foreign Active Income (new law)
 $  8,000





Subpart F Income
 $   2,000



US CIE (new law)
 $       -0-
< 
all used against domestic source

Subpart F Foreign Source
 $   2,000



Foreign Active Income (new law)
 $   8,000



Total Foreign Source
 $ 10,000








US Source
 $ 10,000



Foreign Source
 $ 10,000



US Taxable Income
 $ 20,000



US Tax Rate
35%



US Tax before FTC
 $   7,000

Foreign Taxes Paid
 $  2,500

Foreign Sourced
----------------------------  x  US Tax before Credits = Tentative FTC  x  FTC ratio = FTC Limitation         Total Taxable Income

$10,000
---------   x  $7,000  =  $3,500  x  71.428%  =  $2,500  FTC Limitation
$20,000

Effective World-wide Tax Rates


without Compensation Exclusion

World-wide
US Source Income (Domestic)

 $                10,000
CFC Active Income (non-subpart F)

 $                  7,000
Foreign Branch Income

 $                  1,000
Subpart F Income

 $                  2,000
World-wide Income

 $                20,000



US Tax before FTC

 $                  7,000
less; FTC

 $               (2,500)
US Tax Paid

 $                  4,500
Foreign Taxes Paid

 $                  2,500
Total Taxes Paid World-wide

 $                  7,000



Effective World-wide Tax Rate

35.00%

Without the Compensation Income Exclusion (CIE)
The effective US tax rate paid on world-wide income is 22.5% ($4,500 / $20,000).
The effective foreign tax rate paid on world-wide income is 12.5% ($2,500 / $20,000).

Prior Year’s Earnings and Profits of a CFC before Tax Law Change

As for CFC earnings before the tax law change regarding undistributed earnings and profits (E&P) of a CFC not previously subject to US taxation, a US multinational corporation may make an election to repatriate such earnings tax-free if they have US Compensation Income Exclusion (CIE) to cover such repatriation. So let us say in tax year 2014 the US Corporation has $6,000 in Compensation Income Exclusion on its US employees and makes an election to repatriate these earnings in 2014. The US Corporation may make a third use of this $6,000 Compensation Income Exclusion (relating 2014 US compensation) to repatriate previous earnings and profits (pre 1/1/2014 E&P) of a CFC tax-free up to $6,000. The US Corporation may distribute these earnings and profits tax-free before the filing of its 2014 tax return in this example which would be due 9/15/2015. Again, the Government wants to greatly reward US businesses that promote growth within our nation.

If a US Corporation does not have any US Compensation Income Exclusion  and repatriates any E&P (pre 1/1/2014) from a CFC then that distribution will be taxed at a 35% tax rate.

A US multi-national corporation may take great tax breaks if it hires US employees and pays decent compensation wages and benefits to such employees. The US multi-national corporation gets the tax break of the Compensation Income Exclusion (CIE) and gets to use that same CIE three times.

1)      CIE used to offset Domestic Source Income and Subpart F Income.
2)      CIE used again to offset foreign branch income and CFC active income (which is now taxable under the new law).
3)      Then CIE can be used again to repatriate CFC E&P earned before the tax law change tax free.

Cutting taxes just for the sake of cutting taxes will not work. It is evident that cutting tax rates with no specific tax incentive plan will not stimulate our economy. Cutting taxes without a specific purpose does not create any good paying jobs and increasing taxes in certain circumstances will kill job creation. That is why we need comprehensive tax reform to be globally competitive.

Sourcing of Income (US Source versus Foreign Active Source)

There needs to be legislation passed to ensure the sourcing of income is based on the location of the human activity and the location of assets (fixed assets and inventory). The activity source shall be based on economic reality and not on some fictional transaction written on paper.

US Created Intangibles

US intangibles created in the US such as intellectual property shall always be US source income and the paper transfer of such intellectual property will not be recognized by the US Government. Accordingly, such royalty expenditure payments associated with a US created intangible paid to a foreign entity will not be recognized as a US deduction and foreign source income associated with such US created intangible will not be recognized as foreign source income in computing the Foreign Tax Credit Limitation.

Excessive Executive Compensation

 We may want to consider the limitation of Executive Compensation as it relates to the Compensation Income Exclusion. The Executive Compensation of these US multi-nationals is obscene. This behavior of US CEOs should not be tolerated. Even the Chinese Executives don’t rape their businesses of assets and funds like US Executives. Many US Executives are now earning over $10 million in compensation. Just think. That $10 million would take care of 200 American families at a $50,000 compensation level (wage and benefits).

Any executive compensation package exceeding $10 million should be used to reduce the Compensation Income Exclusion (CIE) benefit.

For example, a CEO makes a $19 million compensation package. $9 million should be used to eliminate the CIE benefit.







Compensation


Compensation



Income


Package

CIE Rate

Exclusion (CIE)
5,000 workers @ $50,000 Compensation

 250,000,000

25%

 $     62,500,000
CEO

 $19,000,000

25% limit to $15K

 $            15,000
Compensation Income Exclusion (CIE)





 $     62,515,000







CEO Compensation over $10 million

 $ (9,000,000)

0.25

 $    (2,250,000)







CIE after Excessive Compensation Penalty





 $     60,265,000

Other Corporate and Business Tax Items to Eliminate

With the implementation of the Compensation Income Exclusion we need to eliminate the following items;

1)      Section 199 Domestic Production Deduction
2)      All General Business Credits (including Section 41 Research Credit).

The section 41 Research and Experimentation (R&E) Credit has outlived its usefulness and should be replaced by the Compensation Income Exclusion (CIE). First, the R&E Credit is too cumbersome to compute and is open to wide interpretation by both the taxpayer and IRS. For example, one of the criteria set-forth by Congress for internal-use software qualifying for the R&E Credit is; “The software development involves significant economic risk in that the taxpayer commits substantial resources to the development and there is substantial uncertainty, because of technical risk, that such resources would be recovered within a reasonable period of time”. This legal standard is up for a wide range of interpretation. This is a tough law to implement. Another problem with the R&E Credit is that it does not necessarily promote the creation of decent paying jobs in the field of research.

For example, many large US Corporations sub-contract out software programming activities to India firms who maintain a business (offices) in the US. The India firm then brings over Asian Indians on a H1B Visa to perform coding at low wages. Accordingly, such activities may be eligible for the R&E Credit. Such activities do not benefit US citizens or the US economy. The R&E Credit should be scrapped and replaced by the “Compensation Exclusion”.  

Summary

More can be written in detail about tax reform but this is a good basic foundation in which to start the discussion about tax reform. We need to build our tax system on a good foundation that will help us compete in the 21st Century.

There are many business deductions and individual deductions that need to be changed too.

Many argue the Government has a spending problem. That is true. But the big problem is not spending; it is we have a jobs problem in our country. My tax plan is one way to get us out of this mess. We need decent paying jobs to create tax revenues and get individuals off welfare and reduce earned income credit (EIC) paid by the Government.