Analysis of the Kasich Tax Reform Plan
ANALYSIS OF THE KASICH TAX REFORM PLAN 2
Summary of Governor John Kasich´s Tax Reform Plan
this in part by eliminating most tax deductions other than the mortgage interest deduction
and the charitable contribution deduction. It also does this by reducing the number of
personal income tax brackets from seven down to three. It also reduces marginal tax rates
across the board. Kasich´s tax reform plan would reduce the top individual income tax rate
gains and dividends from 23.8 percent to 15 percent, and completely eliminate the estate
tax (which is currently at 40 percent). It would also reduce the top marginal corporate tax
rate from 35 percent to 25 percent. It is unclear what the bottom two marginal income tax
rates will be under Kasich´s tax reform plan at this juncture although Governor Kasich has
stated that all marginal income tax rates will be lower than what they currently are.
Kasich´s tax reform plan also increases the earned income tax credit by 10 percent, a
feature designed to benefit lower-income taxpayers. Kasich´s plan also includes a
provision in it to double the research and development tax credit for small businesses
(Peoples, 10/15/2015). The plan also encompasses full expensing of business investments.
Specifically, it allows all business investments in plant and equipment to be completely
written off during the initial year after it is purchhased. This replaces the current provision
in the tax code which stipulates a long, multi-year deduction process currently in place
called depreciation. The Kasich tax reform plan also deals with a current provision in the
tax code that deals with taxing income that is generated overseas. The U.S. is one of the
few industrialized countries which desires to tax both income earned in the US as well as
income that is generated overseas by U.S. companies. The Kasich plan transitions such a
¨worldwide¨ tax to a more standard and sensible provision. Under the new provision only
ANALYSIS OF THE KASICH TAX REFORM PLAN 3
income that is actually generated in the U.S. will be taxed by the U.S. In order to facilitate
this transition, overseas deferred earnings will be subject to a one time levy at a low rate
(¨ATR Analysis of John Kasich´s Tax Plan¨, 10/15/2015).
John Kasich´s tax and spending reform plan aims to balance the federal budget within
eight years (by 2025). Governor Kasich stated in Nashua, New Hampshire on October 15,
2015 ¨I will immediately put us on a path to a balanced budget and I will get it done in
eight years¨. He concedes that his across-the board tax cuts would initially result in a
reduction in tax revenue which would cause the budget deficit to grow in the first few
years after they are enacted. However, his economic advisors forecast that the tax cuts
would spur a significant increase in economic growth. Additionally, the elimination of
many tax deductions would also help offset the reduction in federal tax revenue caused by
the across-the-board reductions in marginal tax rates, the adding of certain tax credits, and
the elimination of the estate tax. This, coupled with cuts in the rate of increase in Medicare
and Medicaid and an eight-year freeze on most non-defense discretionary spending would
be more than enough to offset the lost tax revenue and balance the federal budget for the
first time since the Clinton administration. This would be further aided by the fact that
Kasich´s reform proposals significantly decrease federal spending on and role in education,
transportation, and job training. The only area of the federal budget that gets increased
under Kasich´s plan is defense spending, which gets increased by $102 billion (17 percent)
between 2017 and 2025. Nevertheless Kasich remains confident that he will be able to
balance the budget within eight years, even with the sweeping tax cuts and increases in
defense spending. Naturally, the Kasich tax reform plan has its critics. Robertson
Williams, who is a Senior fellow at the Brookings Tax Policy Center, was quoted as saying
¨this looks like a pretty big tax cut for the top end and a little bit at the bottom. There´s not
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much going to the middle class¨ (Peoples, 10/15/2015).
Critique of Governor John Kasich´s Tax Reform Plan
I largely support Governor John Kasich´s tax reform plan. I have long supported
tax reform that have lower across-the.board marginal tax rates coupled with the elimination
and/or limitations of most tax deductions. Most of the historical evidence that I have seen
suggests that lower marginal tax rates do have a modestly positive effect on increasing both
the supply of and demand for labor. In other words, lower marginal tax rates on both
individual and corporate income will cause upper income people and/or business owners to
work more hours and hire more people, especially when the economy is in a weak state.
This will naturally spur economic growth. Lower tax rates will also cause people to engage
in less tax avoidance and evasion. All of these things will result in such reductions in
marginal tax rates to partially pay for themselves. Eliminating most tax deductions is the
best way to make up the difference. This is because I believe that the free market does the
most efficient job in allocating resources and economic activity. The presence of such tax
deductions and shelters distorts the market, and hence eliminating them improves economic
efficiency. So I completely support Kasich´s idea to partially pay for his tax cuts by
eliminating most of the tax deductions that are currently present in the tax code other than
the deductions for charitable contributions and mortgage interest. I also support the
provision in Kasich´s plan to reduce the top marginal tax rate on capital gains and
dividends from 23.8% to 15%. Such a reduction will have a modestly positive effect
on investment without resulting in a loss of tax revenue. This is because historically the
U.S. has generated more tax revenue when the top tax rate on capital gains has been
between 15% and 20% than when it has been higher than that. And I also support Kasich´s
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idea to completely eliminate the estate and gift tax. The fact that the estate and gift tax
generates such a small amount of revenue of only $19.3 billion (¨2015 United States federal
budget¨, n.d.) is proof of its great inefficiency and its presence in the tax code doesn´t make
any economic sense. The little revenue that it generates does not even come close to the
significant reduction in private savings and dissolution of businesses that it causes. I also
believe that doubling the research and development tax credit and allowing the immediate
expensing of capital investments will also boost economic growth.
And finally, I largely support Kasich´s ideas for budget cuts in order to balance the
budget within eight years. Since entitlements currently account for 71% of the federal
budget (¨2015 United States federal budget¨, n.d.) there is no way that the United States
will be able to balance its budget without reigning in entitlements. Therefore I approve of
Governor Kasich´s idea to slow the growth of the major U.S. entitlement programs
(Medicare, Medicaid, and Social Security). I also support his plan´s provisions to reduce
federal spending on education and job training (I am undecided about transportation) and to
send more federal funds to the states in the form of block grants. I also like his idea of
freezing all other non-defense discretionary spending.
REFERENCES
Peoples, S. (October 15, 2015). John Kasich Unveils Tax Plan, Vows to
Balance Budget Within Eight Years. Retrieved from http://www.huffingtonpost.com/
entry/john-kasich-tax.plan_us_561fce63e4b028dd7ea6ee15
Ellis, Ryan (October 15, 2015). ATR Analysis of John Kasich Tax Plan.
Retrieved from https://www.atr.org/atr-analysis-john-kasich-tax-plan
2015 United States federal budget (n.d.). Retrieved from www.wikipedia.org
.
