A Plan for Federal Tax Fairness

Tax reform is hard. It can be complicated, dull, and politically difficult. But that doesn’t change the fact that taxes are one of the most important issues facing Americans today, and progressives should take an active role in the debate. Closing loopholes, reforming rules, changing rates, creating and abolishing taxes- all of these matters play a huge and defining role in economic inequality, poverty, and social mobility. With the Republican congress taking up this issue, the time to push for progressive tax reform is now. 

Tax Policy Center GraphHouse Republicans recently passed their “Tax Cuts and Jobs Act,” a proposed overhaul of the American tax system. With the goal of “deliver[ing] real tax relief to Americans across the country - especially low- and middle-income Americans…,” the bill proposes lowering both individual and corporate tax rates, eliminating deductions, and making a variety of other reforms. The stated goals are laudable, and the bill itself contains a number of reasonable ideas, but as a whole the proposal would do very little of what it promises, with critics already deriding the fact that the wealthy will be its biggest benefactor.

An analysis by the Tax Policy Center found that almost 57% of the plan’s benefits would go to the wealthiest fifth of Americans next year. 21% of the benefits go to the bottom 60% of Americans, while another 21% goes to the wealthiest 1% alone. This would grow even worse over time: by 2027,the 1%’s share of benefits swells to 47%, while the bottom 60%’s share shrinks to just 10%. Analysis of the Senate GOP’s alternative plan suggests it’s just slightly better, with more of the benefits will go to the upper-middle class rather than the wealthy, but the poor and middle class are still only left with a fraction of the total benefits. Worse yet, healthcare is being drawn into the debate as well: the Senate bill would repeal the Affordable Care Act’s individual mandate, and passage of the House bill would automatically trigger over $136 billion in sequestration cuts, including $25 billion in Medicare cuts.

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As Republicans push forward with their plans, it will be important for progressives to not only resist any tax reform proposal that puts the wealthy first, but also to articulate our own alternative proposals. Just as many took the opportunity to push for universal healthcare when the Republican Party was trying to push its “repeal and replace” of Obamacare, now is the time to ask: what would progressive tax reform look like?

A progressive tax reform framework should have a number of goals. First and foremost, it should promote fairness in the tax system, asking the rich to pay their fair share instead of placing burdens on the poor and middle class, along with eliminating tax breaks for special interests and the wealthy. Second, it should seek to raise revenues necessary for greater public investment, creating new social programs, and improving the government programs we have now. Third, it should seek to simplify the tax code, making filing taxes easier for everyone. Last, but certainly not least, it should do everything it can to promote economic growth that benefits everyone.

(Jump to:  Income Taxes  Corporate Taxes   Payroll Taxes   Capital Gains Taxes   Estate Taxes   Carbon Taxes)


Income Taxes

2c.pngTo further progressivize income taxes, new tax brackets should be created for the extremely wealthy- say, a 45% tax rate on income above $1 million dollars a year, and a 50% rate on income above $10 million dollars a year. This could be paired with a reduction in the tax rate for the lowest tax brackets or an increase in the value of the personal exemption, reducing income taxes for the majority of Americans.

Next on the list should be a major reform of tax expenditures- all of the credits, deductions, and exemptions riddled throughout the tax code which complicate it and, in many cases, serve as stealth tax breaks for the the wealthy. Two of the largest tax expenditures serve as perfect examples of these problems. The mortgage interest deduction provides tax benefits to homeowners, and the charitable contributions deduction provides tax benefits to those who donate their money to charitable causes. Both of these are worthy goals; the problem, however, is that they both almost exclusively benefit the rich.

As deductions, these policies provide more benefits to the wealthy than anyone else- owners of expensive or multiple homes get more benefits than regular homeowners, and the wealthy get a larger tax break for donating the exact same amount of money as anyone else. These policies together cost $109 billion dollars in 2013, but 54% and 71% of their benefits went to the top 10%, respectively. Combine this with someresearch questioning whether these policies’ benefits even come close to their costs in their current forms, and it seems clear that we should shrink these expenditures and turn them into refundable tax credits, both saving money and redirecting greater benefits to lower and middle class Americans.

For further simplification of the tax code, the wide variety of tax benefits for things like college education and child expenses can be consolidated and either turned into larger, simpler benefits or turned into direct public spending (direct funding for public colleges, a universal child allowance, etc.) Many otherexpenditures for individual taxes can be reduced or entirely eliminated to save taxpayer money. When the trimming of tax expenditures is done, it may also make sense to reduce the value of the itemized deduction, though not to the point that it would result in a net tax hike for poor and middle class taxpayers.

Finally, tax credits which benefit the poor or marginalized communities should be expanded and reformed to ensure they serve their purpose. For example, the Earned Income tax credit, which provides tax benefits to the working poor, has been highly successful and should be expanded and reformed to provide even greater benefits to childless workers and other groups currently disadvantaged under its current structure.

(Jump to:  Introduction  Income Taxes  Corporate Taxes   Payroll Taxes   Capital Gains Taxes   Estate Taxes   Carbon Taxes

 


Corporate Taxes

3c.pngContrary to the common but misleading claim, the US does not have the highest corporate tax rate in the industrialized world- but it does have a high one. This misconception comes from the fact that our statutory tax rate- how much the law says companies should be paying- is higher than our effective tax rate- how much companies actually wind up paying. A report by the Congressional Research Service found that effective corporate tax rates is about 6 points higher than average of other OECD countries. Similarly, a review of 2012 data by the Congressional Budget Office found that the average corporate tax rate was also less than 7 points above the average among 17 of the world’s other largest economies. This, along with most economics research suggesting that corporate tax cuts do little to nothing to raise wages or create new jobs, suggests that our priority in reforming corporate taxes shouldn’t be tax cuts for corporations.

A problem our corporate tax code does have is this: it’s complicated and unfair. A variety of complex provisions make the corporate tax code difficult to navigate for anyone except the largest businesses who can afford teams of tax lawyers to find them every tax break available. The progressive Institute on Taxation and Economic Policy found that 100 different Fortune 500 companies paid zero or less in corporate taxes for at least one year from 2008 to 2015. That’s right: “or less”- companies can find ways of paying negative tax rates at times, meaning the government is simply handing them money. From 2008 to 2010, General Electric paid a corporate tax rate of -45%: the government gave them more than $8 billion dollars when they “paid” their taxes. Given these sorts of issues, progressive tax reform should aim for a revenue-neutral simplification of the corporate tax code: eliminating costly and unnecessary provisions in order to lower our statutory rate without lowering revenues. This will treat US companies more fairly, taking away favors for special interests while lowering corporate taxes for the businesses who have been playing fairly.

The first step, as with income taxes, is to eliminate or reform a variety of problematic or unnecessary expenditures: special accounting methods (LIFO and LCM), “check the box” rules, like-kind exchanges, the loophole for deducting the costs of legal settlements, the countless benefits given to specific industries who have been able to lobby for special treatment (from fossil fuels to racing horses), and more. In another, particularly egregious example, the tax code exempts “performance-based pay” from the deductibility cap on executive income; in English, this means the government subsidizes soaring CEO pay to the tune of billions of dollars a year. There are a variety of ways in which the tax code promotes absurd levels of CEO pay, all of which are worthy of eliminating.

Next to deal with is international taxation. Currently, multinational corporations must pay taxes on profits made overseas, but with two big caveats. First: corporations get a tax credit for the corporate taxes they have to pay to the foreign governments. This makes sense, as it ensures that the US government isn’t taxing these companies twice for the same activity (though this provision should be changed to eliminate companies’ current ability to dodge taxes by claiming tax credits against income that wouldn’t even be subject to US taxes). The second caveat makes far less sense: corporations can put off (“defer”) paying taxes on profits made overseas until they bring those profits back the US. This both encourages companies to locate factories and offices in foreign tax havens and discourages them from reinvesting their profits back to the US. According to the Congressional Budget Office, “eliminating deferral would boost both efficiency and tax revenues,” producing an average of $10 billion dollars a year.

Finally, tax rules should be reformed to prevent corporations’ ability to dodge paying taxes through the use of tax havens, a process that is currently so easy all you need to is to claim an address in another country. Changes should be made to prevent scams like this, corporate “inversions,” and more

Once all of these unnecessary expenditures and abusive loopholes are dealt with, revenue from corporate taxes would increase dramatically, revenue which could be used to lower the statutory tax rate paid by all the small businesses without their own squad of lawyers and lobbyists.

(Jump to:  Introduction  Income Taxes  Corporate Taxes   Payroll Taxes   Capital Gains Taxes   Estate Taxes   Carbon Taxes)  

 


Payroll Taxes

4c.pngAccording to current projections, the trust funds for both Social Security and Medicare are going to begin facing serious financial problems in coming decades. Instead of accepting deep cuts to these programs, progressives should be seeking to preserve and expand them. A few changes to the payroll tax system can help us do this.

Currently, the amount of payroll that an individual has taxed is capped at $118,500. This means that the vast majority of Americans have the entirety of their income subject to payroll taxes, but the wealthy only have part of their income taxed. Worse yet, this cap hasn’t increased at the same rate as income growth for the wealthy, so the amount of the wealthy’s income subject to payroll taxes has fallen over time. Eliminating this cap and taxing the full income of the wealthy without providing them additional benefits would extend Social Security’s solvency for an extra 40 years.

Also on the checklist would be to close loopholes used to dodge paying payroll taxes. For example: the so-called “Gingrich-Edwards loophole” by which high-income earners can legally transform much of their individual income into corporate income and thus avoid paying payroll taxes on it. Changing the rules to crack down on these tax cheats could add billions in revenue to our underfunded social programs.

(Jump to:  Introduction  Income Taxes  Corporate Taxes   Payroll Taxes   Capital Gains Taxes   Estate Taxes   Carbon Taxes

 


Capital Gains Taxes

5c.pngCapital gains taxes are taxes paid on the money made from selling a stock, bond, or other type of financial good for more than they were bought for. Dividends and long-term capital gains are taxed at a far lower rate than regular income is, costing an average of almost $68 billion dollars a year. Because they own most financial assets, this tax break almost exclusively benefits the wealthy: 68% of it goes to the top 1%, and less than 2% of it goes to the bottom half of America. Giving preferential treatment to rich people for buying and selling things rather than working for their income is unacceptable. This doesn’t make much sense from the standpoint of the economy either, as evidence suggests capital gains taxation has few significant negative effects on economic growth. Capital gains and dividends should be taxed at the same rates as income.

This has the additional benefit of eliminating a number of loopholes used to avoid paying taxes by reclassifying various types of income as capital gains. For example, the famous carried interest loophole, which allows hedge funds and other private equity companies to avoid nearly $2 billion (and possibly far more) a year in taxes by pretending a certain type of income is actually capital gains. When capital gains are taxed the same as income, such a loophole for Wall Street investors will be closed automatically.

Another major strategy for the wealthy to dodge taxes will need to be eliminated manually. The stepped-up basis allows for the wealthy to avoid paying any capital gains taxes on their investment when they leave them to their heirs, thus giving a massive tax break to those lucky enough to have rich parents.

(Jump to:  Introduction  Income Taxes  Corporate Taxes   Payroll Taxes   Capital Gains Taxes   Estate Taxes   Carbon Taxes

 


Estate Taxes

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The estate tax is perhaps the single most progressive tax we have. Only the wealthiest 0.2% of estates are taxed, and despite myths perpetuated by the well-funded critics of the tax, only 1% of that 0.2% are small farms and businesses. The estate tax is an effective way of raising revenue by taxing the type of unearned inheritances that lead to aristocratic dynasties of wealth, and has the beneficialside effect of incentivizing the wealthy to donate to charity. Any progressive tax plan should work to expand the estate tax: increase the number of wealthy estates the estate tax applies to; institute higher, graduated rates for the largest estates; and close loopholes like GRATs.

(Jump to:  Introduction  Income Taxes  Corporate Taxes   Payroll Taxes   Capital Gains Taxes   Estate Taxes   Carbon Taxes

 

 


Carbon Taxes

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Along with modifying existing taxes, creating a few new taxes could also go a long way towards promoting a fair tax system and a government which provides for the public good. Though the matter of financing large programs like universal healthcare should be a debate all its own, there’s one new tax that progressives should insist on: a carbon tax.

A carbon tax is a tax levied on each metric ton of carbon dioxide emitted by polluters. This both gives businesses a profit incentive to cut down on their pollution and, by raising the prices of environmentally harmful goods, incentivizes consumers to buy greener products as well. But these higher costs don’t mean the taxes will fall on regular Americans: along with investments in clean energy research and environmental protection, part of the enormous revenues that this tax could produce could go to lower income taxes and corporate taxes. This way, most people will have about the same amount of money in the end, but they’ll have incentive to spend it on less environmentally-harmful products.

By shifting taxes like this, punishing the biggest polluters and rewarding the greenest, carbon taxes can improve the environment while having little net impact on the economy in the short term. As proof, after the Canadian province of British Columbia implemented a carbon tax in 2008, research estimated that it reduced greenhouse gas emissions by 5-15% with “little net impact in either direction” on the economy in the following years. Even better, it is likely that these lower rates of pollution will lead to greater economic growth in the long-term.

(Jump to:  Introduction  Income Taxes  Corporate Taxes   Payroll Taxes   Capital Gains Taxes   Estate Taxes   Carbon Taxes

 

The time to push for progressive tax reform is now. 

 

 


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