The author of the policy study, Alex Brill, points out that: “The US tax code has eroded over time with the explosion of endless special provisions, such as distortionary deductions and ineffective credits”. The study “outlines simple - and bipartisan - changes that can help the country move toward a tax code aimed towards economic growth and away from complex regulations and political favoritism”.

The proposed changes would, it is said, “level the playing field for capital investment, simplify the tax system for individuals, and improve (US) global competitiveness while curtailing distortionary political favouritism, social engineering, and industrial policy".

Designed to bridge the gap between Democrats and Republicans in the US Congress, the plan “maintains revenue neutrality, reduces rates for job creators, broadens the base, and makes the code more progressive without raising tax rates for high-income earners”.

Firstly, Brill proposed a cut in the corporate tax rate over this decade from 35% to 25% to promote global competitiveness and foster domestic investment, while also reducing the tax code’s bias in favour of debt relative to equity (and its propensity to encourage financial leverage) by disallowing 10% of C Corporations’ (a corporation that is taxed separately from its owners) interest expense deduction.

With regard to corporate taxes, the AEI programme would also make permanent the 50% bonus depreciation provision now in effect but scheduled to expire at the end of 2012; but would eliminate the effective 32% rate for “qualified domestic production activities” (primarily manufacturing) income, once the corporate rate is phased down to that level.

However, Brill’s plan also strays into suggested individual income tax reforms. It would, for example, encourage the flow of capital away from the housing sector into the business sector by gradually limiting the tax benefit for home mortgage interest deductions. The mortgage interest deduction would be replaced with a 12% credit, and the amount of mortgage principal on which the deduction could be claimed would be reduced from USD1m to USD500,000.

Additionally, the federal tax incentive for higher state and local taxes would be phased out by removing the state and local tax deduction, and the alternative minimum tax (AMT) would be repealed to eliminate its compliance burden.

It is acknowledged that the proposed revenue-neutral reforms are a compromise that would not solve every problem within the tax code. Brill states that “the most important task for policymakers in the years ahead will be to move from income taxation to consumption taxation. This will eliminate the saving disincentive and insulate the tax base from the revenue-sapping effects of international tax competition.”

He also considers that certain other issues remain to be resolved. For example, the US tax system’s rules for taxing foreign-source income should be overhauled; and the complexity of the individual income tax system should be unwound by fundamental tax reform or more aggressive cuts to tax expenditures to reduce compliance costs.

The Committee for a Responsible Federal Budget makes its comment that “Brill's plan is not intended to be comprehensive, but to some extent, he tries to appeal to both sides of the political spectrum by reducing marginal rates for corporations but raising effective rates - in this case, on the individual side - in a progressive manner by eliminating tax expenditures.”