Senators Mike Lee (R, UT) and Marco Rubio (R, FL) offered a tax reform plan in a Wall Street Journal op-ed earlier this week. It’s a fine start, I think. Highpoints are presented below, together with my comments on improvements that should be added over the succeeding few Congressional sessions (they really shouldn’t need more than this Congress and the next one) to get us to a proper, balanced, and unbiased national tax code.

First, by consolidating the corporate tax system into a single layer and lowering the maximum rate to 25% on both corporate and pass-through entities, our plan eliminates double taxation of capital gains and dividends, and establishes parity among large and small businesses. And under our proposal, firms with overseas operations will no longer be taxed twice (once abroad and again at home), but only in the country where income is actually earned.

This is an excellent first step. However, it’s necessary to keep in mind who actually pays the bulk of a business’ taxes. It’s not the business; it’s the business’ customers, in the form of higher prices, elevated to recoup to the business the bulk of this cost. The corporate tax should be eliminated altogether—not all at once, though, but in graduated steps over the succeeding few years.

Our plan also removes the current bias against capital investment that discourages businesses from investing in their own growth and expansion. So when a business wants to buy new equipment, upgrade its inventory, or make infrastructure improvements, it will immediately be able to deduct 100% of those expenses.

Again, this is a sound initial step. However, to eliminate the “current bias against capital investment” and to eliminate the differing treatments between the sale of debt and the sale of equity as tools for raising capital for a business, these must receive the same tax treatment. And then that tax treatment must disappear altogether in accordance with my comment above.

Eliminating our corporate tax code, in addition to simple fairness, would give American businesses a critical competitive advantage over their foreign competitors. This also would give our economy a critical competitive advantage over our nation’s foreign competitors as we seek to attract foreign businesses to our shores.

We seek to simplify the code and lower rates for families and individuals, by consolidating the seven existing tax brackets into two simple groups—15% and 35%….

Another excellent first step. But to complete the fairness, the remaining two brackets—which still punish success—should be consolidated into a single bracket. If that bracket were a 10% bracket, using 2007 numbers, the Federal government still would see a net increase in revenue of some $600 billion (and this is before the accelerating effects on economic activity are considered under dynamic scoring). All that money, those extra 5 and 25 per centage points, left in taxpayers’ pockets—hmm….

…—and by making remaining deductions available to all filers.

Still another excellent first step, and an overtly fair one, too. However, our tax code should not be used for social engineering. Eliminate all of the deductions and exemptions; apply the tax to all income, regardless of source without preferential treatment of any of it (vis., capital gains and dividends)—perhaps allow an exemption equal to half the then-year Federal Poverty Guideline, since the first tax dollar is so much more important to a poor man than it is even to a middle-class man. But no other distortions to the tax code.

No deductions!? The purpose of those, aside from their social engineering bent, was to lower the tax cost to preferred groups of individuals. At a 10% tax rate, the tax cost is trivial and needs no further reduction, for government-preferred groups or otherwise.

[T]o equalize the tax code’s treatment of working parents, our plan would create a new, $2,500 per-child tax credit. This credit—like the correction of the marriage penalty—eliminates an unfair distortion in the code and helps level the playing field for working families.

Only initially might this prove useful. Countering this hypothetical usefulness, though, is our experience under the old Aid to Dependent Children program (among others), which increased welfare payments to families as they had more children. It turned out that as the government paid families to have more kids, they…had more kids. However, the increased welfare payments didn’t begin to cover the actual costs of having and raising another child; all those payments did was to deepen the families’ dependency on government. $2,500 won’t begin to pay for today’s costs of having and rearing a child, either, though those dollars will risk deepening dependency.

See above re the single bracket and the elimination of deductions and (most) exemptions. After the first year, get rid of this altogether. Or don’t do it at all; the “parent penalty” will disappear, anyway, with enactment my recommended improvements.

Congress should move promptly to begin debate and enactment of the Lee-Rubio plan, and then in the succeeding years, move with similar alacrity to implement the evolutions I’ve described.