A Fair and Simple Tax System for our Future: A Progressive Approach to Tax Reform
Are you interested in what a comprehensive Democratic tax reform plan might look like? Here is a summary and explanation of just such
a plan devised by the Center for American Progress, a center-left think-tank headed by former Clinton Chief of Staff John Podesta.
This is a prettly long diary, but my detailed comments don't need to be read to understand the plan. In fact, unless your truly interested in tax-policy wonkiness, I would recommend reading just what's in the colored boxes, and perhaps any other sentences that are in bold, checking my detailed comments as desired. If you wanna skim, just the bold titles and sentences should suffice.
:)
All the content in the boxes is quoted or paraphrased from Center for American Progress's
A Fair and Simple Tax System for our Future.
Full Report (PDF),
Summary (PDF). All the details are either my comments, or reworded content from the above linked reports.
Here's their introduction:
We propose a plan that would tax each kind of income
according to the same rate ... Our plan shifts the share of taxes away from
the regressive payroll tax and onto a restructured income tax. It [establishes] a simpler, more progressive three-rate structure and it
eliminates the Alternative Minimum Tax, in addition to closing corporate and
individual loopholes. Our plan enhances opportunity by reducing the deficit to
strengthen the economy and it promotes retirement savings ...
Our plan improves the Earned Income Tax Credit and expands the
number of families eligible to receive the federal child tax credit. Ultimately, [our] plan increases the take-home pay of
low- and middle-income families and generates the funds our country needs ...
Overall, the plan will reduce taxes for about 70 percent of tax filers earning under $200,000 a year...
Here's the details:
Restoring Fairness:
After four years of policies that have shifted the tax share onto work and the middle class, hardworking families need real reform that increases after-tax incomes without bankrupting our economy. We propose fundamentally changing our tax structure in three ways:
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Tax Each Source of Income the Same
Each source of income--whether from dividends, capital gains, wages, or salaries--should be taxed according to the same progressive rate structure.
Reduce the Dependence on Regressive Payroll Taxes.
We propose removing the employee component of the Social Security payroll tax, immediately reducing by 6.2 percent the tax rate all Americans pay on the first $90,000 of earnings. At the same time, we propose removing the cap on the payroll taxes paid by employers, making income above the current cap subject to the employer-side tax, thus making the remaining payroll tax less regressive.
This speaks for itself,
the payroll tax is highly regressive (accounting for nearly 10% for the middle 20% or tax-payers, and ~2% for the top 1%),
becoming a smaller percentage of your tax bill the more money you make. Though I would personally like to see the remaining, employer paid portion of the tax made more progressive, this is a
good start. There is no data concerning what removing the cap would do to higher salaries (I assume many would be cut), or how
this would affect revenue, so I must just assume that it's factored into their calculations.
Cutting the employee-side of the payroll tax cuts revenues by 3,663 Billion over the next 10 years, removing the cap on the employer side adds 686 Billion, leaving us at 2,977 Billion, bringing us to...
Maintaining our Full Commitment to Financing Social Security
We would dedicate a portion of general revenues to the Social Security trust fund. By setting aside 2.25 percent of gross domestic product per year, we would solidify the financial status of the Social Security system--closing half of the current long-run shortfall--but in a fairer, more sustainable manner.
This would replace the revenues lost from the employee side payroll tax (2,977 Bill over the next 10 years) and would increase contributions to the trust fund by $421 billion (over 10 years). Congress would then pass legislation that commits ~2.25 percent of our GDP from our general revenues to funding Social Security, to prevent Republican plunder of said funds. (There is more on savings incentives below)
Reinstate the Estate Tax:
It raises needed revenue, encourages charitable giving, and affects less than 2 percent of the population... We
would increase the exemption to $2.5 million; married couples would thus be able
to shelter twice this amount ... This would ensure that virtually all small business owners, farmers, and ranchers could pass on their assets without being subject to the estate tax.
As Bill Gates Sr. famously said "Once exemptions rise above $3 million, it becomes impossible to find a credible and photogenic farmer or restaurant owner who will complain about what opponents call the "death tax." It's hard enough to find them now. The pro-repeal American Farm Bureau was asked to produce an example of a farmer who had lost a farm because of the estate tax. It could not identify a single one."
At this level of taxation roughly ~6,000 so-called estates worth ~17 Million on average, wind up paying these taxes, and raising tens of billions of dollars.
Enhance the Take-Home Pay of Lower-Income Taxpayers
First, to ensure that single working parents who currently receive the Earned Income Tax Credit (EITC) do not risk losing that benefit if they marry, we propose altering the tax code to eliminate this disincentive to marriage.
Second, we would reduce the income threshold for the receipt of the Child Tax Credit to $5,000 and eliminate inflation indexing.
Currently the income
threshold for receiving the Child Tax Credit is set at over $10,000, which is well below the poverty line, and indexed to
inflation, which the minimim wage is not.
Lowering the income threshold and eliminating inflation
indexing would immediatelly allow millions of working families to access the full or benefit.
Over time this would increase the number of people who would receive the full benefit from the credit, since it's not indexed to inflation.
Simplifying the Tax Code
Recent tax policy changes have increased the complexity of our system while shifting the tax share to middle-class taxpayers. We would reverse this trend with three reforms:
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Reduce the Number of Income Tax Brackets
We would cut the number of income tax brackets in half, establishing a simpler, more progressive three-rate structure with rates at 15 percent, 25 percent, and 39.6 percent. The three tax rates would apply to brackets of taxable income of $0 to $25,000; $25,001 to $120,000; and $120,001 and above. These brackets would be indexed for inflation. The standard deduction would be raised slightly to $10,000 for a married couple and also indexed for inflation.
One additional simplification is a $250 exemption for capital income to reduce taxes for small investors who mostly only see piddly interest from their savings accounts, and it would make tax filing easier.
Close Corporate and Individual Loopholes
By broadening the base of the corporate tax structure we can enhance the overall efficiency of the system, keep rates at relatively low levels, and increase revenues. By closing some of the most egregious loopholes, we would also ensure that our tax code no longer offers affirmative incentives for wealthy individuals to shelter taxable income or for corporations to shift production outside the United States.
Eliminating corporate tax loopholes and special giveaways to the wealthy would provide an estimated revenue gain of
$30 billion annually. Closing such loopholes is much easier said than done, their plan includes creating a Bipartisan Commission on Corporate Subsidies which would be modeled on the federal military base-closing process. This commission would give a bipartisan
group of senior officials the leeway to identify wasteful loopholes and subsidies and develop a comprehensive proposal to be presented to the Congress for an up-or-down vote.
Ending deferral. "Deferral," which allows U.S. corporations to
avoid paying taxes on profits earned abroad as long as those profits are not brought
back into the U.S. Yes, we insanely pay corporations to take their profits away from
our country. Ending deferral would raise about $8 billion a year in revenue.
Closing the Bermuda tax loophole. U.S. firms can move their headquarters to foreign tax havens to avoid paying taxes in the United States. Closing this loophole would raise about $2.6 billion a year in revenue.
Clarifying the definition of offshore tax shelters. There is no single definition
of what a "tax shelter" is, meaning the Treasury Department and the IRS have to look at them
on a case-by-case basis. Clarifying the definition of tax shelters would reduce time consuming investigations,
make it harder for new shelters to be developed, and raise ~$13 billion a year.
Eliminate the Need for the Alternative Minimum Tax
The Alternative Minimum Tax (AMT) will impact 36 million Americans by 2010. By overhauling the entire income tax code and eliminating personal income tax loopholes that are currently limited by the AMT, we would eliminate the need for an AMT...
The AMT was established in 1969 to ensure that the very wealthiest do not avoid paying their
share of taxes, however, its income limits are not indexed to inflation. The AMT only applied to 9,000 people in 1970, meanwhile this number grew to 1.3 million in 2000. The government is becoming increasingly dependent on it, and it is a complex addition to the tax code that basically requires folks to fill out their tax forms twice.
Increasing Economic Opportunity
Unlike the old, failed right-wing supply-side policies, this plan embodies a new progressive growth strategy based on restoring fiscal discipline and expanding savings incentives to the middle class.
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Restore Fiscal Discipline
Restoring confidence and economic growth requires addressing the record deficits ... We would put our country back on a path toward closing our fiscal gap, thus increasing confidence in our economic future and allowing for productivity-enhancing investments in education and research that are keys to our nation's economic success.
This plan raises an additional $478 billion in revenue over the next ten years compared with the
president's 2005 budget. This would go a long way towards solving our deficit problem, except for the
fact that this plan is not being enact; the president's is. ugh...
This plan also recommends the congress...
Restore PAYGO rules for new tax cuts or entitlements.The pay-as-you-go, or PAYGO, rules
require that, if Congress wants to cut a tax or create or expand an entitlement program, they have to offset the
costs by raising other taxes or cutting other entitlement programs.
Prohibit the use of budget reconciliation measures that increase the budget deficit. Under the congressional budget
process, budget reconciliation has been a key step in ensuring that committees follow through on their obligations to find
budget savings. It was never supposed to provide a quick avenue for tax cuts or other measures that would increase the
deficit. Congress should specifically prohibit the practice.
Avoid block-granting of entitlement programs. Increasingly, Congress has moved towards placing entitlement spending into
block-grants to states. This practice allows federal legislators to avoid the hard decisions required when cutting funding by
shifting this responsibility onto states. This process can also leave massive unfunded requirements on the heads of state
governments, and often means cuts in services.
End the use of massive omnibus legislation. By putting together several spending bills into one massive piece of legislation, the process is left open to excessive influence by a small minority of Congress. Spending needs to be open to public scrutiny, especially in times of excessive deficits.
Offer Tens of Millions of Americans New Opportunities to Save and Create Wealth for Retirement
We propose leaving intact all aspects of our current retirement savings structure, including IRAs and 401(k) contribution limits and non-discrimination rules. However, we propose to do away with the upside-down deduction-based incentive and replace it with an across-the-board 25 percent refundable tax credit for retirement savings.In addition, in order to encourage long-term savings, we would allow those with incomes under $1 million to exempt a portion of their long-held appreciated assets--up to 50 percent--from capital gains taxation.
So here's how the 25 percent tax credit works: An individual in the 35 percent tax bracket gets a 35 cent tax break today on every dollar saved for retirement, and can accumulate interest on that savings tax-free until retirement. Yet someone in the 15 percent bracket gets only a 15 cent incentive to save now, and low-income workers who do not make enough money to owe federal income taxes get nothing for saving.
An across-the-board 25 percent refundable tax credit for retirement savings means everyone, regardless of income, would receive 25 cents for every dollar they save in a retirement fund.
Low-income savers would receive additional matching funds for retirement savings, which would then be phased out for higher income levels above $100,000. Low-income families would also receive modest automatic contributions, to a
personal account :D, these accounts would be managed in a cost-effective manner that limits personal risk, providing an important supplement to Social
Security.
Finally, in order to encourage long-term savings and provide
additional incentives for retirement savings,
those with incomes
under $1 million would be allowed to exempt a portion of their appreciated assets from capital gains
taxation. For assets held less than a year, the full amount of the gain would be
subject to the regular income tax rates as described above. For assets held for
more than a year, an increasing percentage of any capital gains would be
exempted--beginning with 10 percent after the first year and reaching a maximum
of 50 percent after 5 years.
Average Tax Changes:
Income | Difference |
0-10k | -220 |
10-20k | -524 |
20-30k | -620 |
30-40k | -496 |
40-50k | -519 |
50-75k | -687 |
75-100k | -950 |
100-200k | -1,138 |
200-500k | 12,722 |
500-1000k | 64,752 |
1000k+ | 360,646 |
Conclusion:
I am somewhat impressed with a this plan, I think it is a really good start. Of course, everyone is going to have their individual problems with any tax-policy, for me, my main questions and complaints are:
Why should an individual living under the poverty line be paying the same tax rate as an individual making $25,000 a year?
Why should an individual living under the poverty line be paying any income taxes at all?
Why should an individual making 120k be paying the same tax rate as an individual making $2 million a year?
Is simplicity in this case really better than a more progressive tax-policy that relieves as much burden as possible from those who truly need it?
If we are going to "Tax Each Source of Income the Same", why doesn't inheritance income (re:estate tax) count as a form of income?
For me the main problem I have with this tax plan is that I think it has an over-abundance of practicality, and an under-abundance of "vision". CAP is supposed to be our "Heritage Foundation", and while I wouldn't necessarily be interested in a rigid, ideological center-left think thank (what would that be anyway?), some "big ideas" would be nice, to enhance these practical ones.