Phil Gramm Offers GOP Guide Map to Tax Reform

Now that Congress appears ready to face tax reform this year, former Sen. Phil Gramm is offering a series of policy guidelines he hopes GOP lawmakers will follow as the debate heats up.

In a Wall Street Journal op-ed piece, the Texas Republican, now a senior partner at US Policy Metrics, lays out his list essentially of seven do's and don'ts and encourages his fellow party members to compromise if necessary but to be cautious in how they go about it.

If he were still negotiating tax issues in Congress, Gramm writes that his map of 7 guideposts would look something like this:

1. "Under no circumstances should Republicans agree to make the tax system even more progressive than it already is," he says, noting that the top 5 percent of American income earners pay 59.1 percent of taxes, while 41.6 percent of earners pay no federal income taxes. "The more progressive the tax system becomes, the more unstable the country's public finances get."

2. "Government should collect the minimum revenues needed to support and protect a free society. In its purest form, this means no individual deductions, credits or tax expenditures," Gramm says, noting that the government shouldn't be promoting social values through the tax code.

3. "Republicans should require all similarly structured firms be treated the same. If sweat equity is taxed as a capital gain for a mechanic who opens a garage with a financial partner, it should be treated the same for a hedge fund or private-equity manager who shares in the gains of his investors."

4. "Business subsidies and credits should be eliminated," he notes, adding that combining that idea with lower tax rates "improves the efficiency of capital allocation."

5. "All income should be recognized at the time it is actually earned and taxed only once," he continues, also noting that all things being equal, "the efficiency of a nation's corporate tax system can be measured by the lack of special-interest provisions in the code and how low the tax rate is. "But things are never equal," he adds, "and a fixation with achieving a given corporate tax rate is dangerous."

6. "Tax reform should move toward the elimination of taxes on the foreign earnings of American companies, whose profits are already taxed abroad." By taxing foreign earnings when they're brought back to the United States, the government "has incentivized companies not to repatriate earnings, Gramm says. "As a result, U.S. companies park huge amounts of cash abroad while domestic investment lags."

7. And finally, he advises, "Compromise is fine if it moves you in the right direction. But don't compromise on things that will only make rational reform harder in the future."

But even with the Texans guide map in hand, Senate Minority Leader Mitch McConnell appears to be skeptical of the tax overhaul effort in the Senate headed by Senate Finance Committee Chairman Max Baucus. According to Politico, McConnell is concerned Democrats will use the opportunity to raise taxes.

Baucus pledged to Democrats Tuesday that he is determined to boost taxes as part of the process. But Republicans insist any tax reform must be revenue neutral.

"The dilemma we have here is that the president and a significant number of Senate Finance Committee Democrats have indicated this is mostly about raising revenue," McConnell said. "So I don’t see how we get anywhere."