Contrary to the naive rhetoric of the “flat tax” pushers, simplifying and restoring fairness to the federal income tax code does not mean flattening our current seven rates to one rate. Before Reagan came along, we had 25 rates and much less income inequality. TurboTax or an online calculator can easily figure out your blended rate, so there’s no real complexity or paperwork there.
And when it comes to fairness, a 15% income tax rate on a family with annual income of $30,000 would likely mean foregoing necessary healthcare, food or rent, while the same is not true for a 15% rate on a household with annual income of $300,000 or $3 million.
What makes our federal tax code ridiculously complicated and unfair are not the seven brackets, but rather all the special deductions, breaks and credits that reduce the amount of household income subject to tax (aka "taxable income"). Think of them as government discount coupons that are used to favor one activity or group over another.
For better or worse, each is a government social engineering program... Why do we subsidize home loan debt, but not auto loan debt? For a country that screams about debt, why do we encourage more debt with the mortgage interest deduction? Why not a home down payment deduction instead? That would encourage saving, but it would not benefit the banks, the builders or the brokers. Perhaps that’s what this deduction is really about.
And why do we favor families with more children over those with fewer or none? Why do we favor capital over labor? President Lincoln famously said, “Labor is the superior of capital, and deserves much the higher consideration.” But Wall Street lobbyists make sure our tax code gives special perks to non-productive plutocrats.
Here are the top 20 individual income tax breaks, which constitute 90% of the $1.1 Trillion in lost revenue EVERY SINGLE YEAR. When you hear politicians refer to “spending in the tax code” or reducing “tax expenditures” this is what they are talking about. Eliminating the coupons for only the Top 1% would recoup more than $200 Billion in one year (= $2 Trillion over ten years). Compare that to the draconian sequester cuts, which only save $1.2 Trillion over ten years.
See how the Top 1% gains the most from these IRS discount coupons:
http://www.nytimes.com/...
Note that the Top 1% alone enjoys 75% of the benefit of the capital gains/dividend special rate. Now fortunately, as of Jan 1st 2013, the Top 1% will go back to paying the Clinton capital gains rate of 20% instead of 15%. At least their discount coupon got reduced, if not eliminated. That’s a start.
You sometimes hear Republicans say they are willing to close tax loopholes as long as rates are reduced so no additional revenue is generated. That’s just a stupid waste of time. What is the point of the whole “tax reform” endeavor if not to bring in more revenue to reduce the deficit and/or invest in something more worthwhile like infrastructure or education?