Tax Day By The Numbers
“Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending, and Restore Prosperity,” Heritage Foundation, May 10, 2011 by Stuart Butler, Ph.D. , Alison Acosta Fraser and William Beachis one of the finest papers I have ever read. Over the next few days I will post portions of this paper, but I will start off with the section on tax reform.
Tax Reform
Summary
The existing tax system is manifestly indefensible, especially in its
complexity and its drain on economic vitality. The complexity of the tax system
plagues taxpayers in all walks of life. Low-income citizens must navigate the
enormously complex Earned Income Credit. Those who save must sort through
multiple tax rates and tax regimes for different kinds of returns on those
savings, and there is a multitude of phaseouts of various credits, exemptions,
and deductions. As if this were not bad enough, Congress created a parallel
income tax called the Alternative Minimum Tax, so millions of taxpayers must
figure their taxes two different ways before they can know what to pay. Yet
these difficulties suffered by taxpayers are relatively minor compared to some
of the tortuous rules and exceptions inflicted on businesses large and
small.
The drain inflicted on economic vitality is even worse than the tax code’s
complexity. High marginal rates discourage all manner of productive activity.
The U.S. corporate income tax rate is the second-highest in the industrialized
world and much higher than the average tax rate of our international
competitors.
The current tax system actively discourages citizens from saving enough for
retirement, emergencies, or the large purchases in life, thus driving them
toward consumer debt. In turn, it artificially depresses the level of national
savings and makes domestic investment more dependent on foreign investment.
For decades, Congresses have tweaked and twisted a fundamentally flawed
system into knots, each time creating two new problems while attempting to solve
one old one. The income tax was a poor choice from the outset, and Congress
after Congress has consistently made it worse. The federal tax system need not
be so complex or damaging to our economy, nor should it be.
A stronger economy means higher wages for American workers and better returns
for America’s savers. A stronger economy means better opportunities for college
graduates and better economic security for families. It means that American
companies and workers can compete more effectively in the global economy. And a
stronger economy is a more resilient economy, able to withstand and overcome the
inevitable economic shocks of tomorrow.
A stronger economy also plays a vital role in improving federal finances. It
means sustained, normal levels of tax revenues and a lower level of spending to
meet the needs of those who are temporarily distressed because of unemployment.
A stronger economy offering better wages and better job opportunities is also
the most powerful antidote to persistent poverty, and less poverty reduces the
demands for anti-poverty spending.
Without a stronger economy, we will not solve our long-term problems of
federal overspending and overborrowing. Thus, tax reform to spur economic growth
is a critical component of the Heritage plan.
In broad terms, to promote growth, the federal tax system must be:
- A single, low rate system to collect needed revenues
without unnecessarily distorting economic decision making. - Simpler and far more transparent. A simple, transparent
tax is needed so that taxpayers can anticipate and plan for the tax consequences
of their actions and easily understand the full extent of their tax burden. It
also provides greater confidence that other taxpayers are not exploiting tax
complexities to underpay their taxes. - Neutral between savings and investment. Unlike the
current system, it must not impose multiple levels of taxation on saved income.
Treating savings neutrally gives individuals greater control of their economic
futures while ensuring that the economy has the raw financial material to grow
and encourages Americans to invest their savings in the most productive
ventures. - Levied in a way that minimizes tax distortions and perverse
incentives. This allows prices and market forces—not intentional or
inadvertent government meddling—to decide how best to grow the economy. It also
helps to keep the tax system simple. - Capable of collecting revenues equivalent to 18.5 percent
of the economy. The modern average of tax revenue under normal economic
conditions is approximately 18.5 percent of GDP. This is the upper limit that
Americans have over many decades indicated to politicians they are prepared to
accept. Thus, the tax system should be capped at collecting no more than this
amount both to ensure a strong economy and to restrain the growth of government.
Using these essential elements, the Heritage plan will transform the current
tax system into a modern flat tax that taxes individual income only once and
replaces all federal income taxes, all payroll taxes, the death tax, and
virtually all excises. Specifically, for individuals, the current system will be
replaced with a new flat-rate tax applied to income after deducting all savings.
Taxable income will be reduced by the net amount contributed to savings, and
savings will be taxable only when spent. This eliminates the current-law bias
against saving and ensures that individuals pay taxes only on what they withdraw
from the economy and not on savings that they make available for investment in
the economy by others.
Today’s business tax code will be replaced by a flat business tax on domestic
sales of goods and services with deductions for labor costs and purchases from
other businesses, including expensing of capital purchases. All business
activity, including corporate, will be taxed under the new flat business
tax.
The Daily Hatch 