Taxing the American people fairly

Overview

The optimal federal tax rate is zero plus whatever is necessary to mount a strong national defense, fund critical infrastructure, and perform any other constitutional function.  Today’s tax code, however, not only forces working families to finance some ineffective and duplicate government programs, but also shifts dollars from local innovators, job creators and problem solvers to interest groups who have the resources to lobby for special treatment.   Not surprisingly, the tax code’s complexity disproportionately burdens middle class families who lack the means and time to navigate the IRS swamp.

Our complicated tax code disproportionately burdens middle class families

Our tax code should maximize economic growth in a way that is fair to middle and lower income Americans.  The best pro-growth tax code is as flat and fair as possible while encouraging economic mobility.  Credits and exemptions should be used sparingly and judiciously – and they should be directed to working families who struggling to climb that ladder rather than to well-connected special interests who are already at the top.

  • American workers pay a significant share of their income in taxes

    From the Tax Foundation:

    “In 2015, the OECD found that the average worker in the United States faced a tax wedge of 31.7 percent, which includes income and payroll taxes.  The OECD estimated that in 2015 the average U.S. worker paid an effective individual income tax rate of 16.5 percent and an additional 15.1 percent effective payroll tax rate (7 percent on the employee side and 8.1 percent on the employer side).  The average worker in this case is a single worker without children who earned an annual income of $50,964.” 

  • The way we tax individuals keeps the economy from growing as fast as it could

    Former Congressional Budget Office Director Douglas Holtz-Eakin argues that the United States can achieve meaningful economic growth by implementing real tax reform policies. Writing at American Action Forum, the economist details how overhauling the “complicated, outdated, inefficient, burdensome, anti-growth” tax code would create prosperity for everyone.

    Overhauling the complicated and out-dated tax code would be good for everyone

    Here are Holtz-Eakin’s four principles for tax reform:

    1. The tax system should be based on core values, specifically the need for more economic growth to support jobs, wages, and investment.
    2. The tax code should be a simple, transparent reflection of those values. Complexity breeds noncompliance and suspicion, particularly suspicion that the tax code has been manipulated to benefit insiders and special interests.
    3. Spending does not belong hidden in the tax code. The goal of taxes is to raise revenues, and if the government wants to spend money, it should do it outside of the IRS.
    4. Growth and international competitiveness are the key imperatives. Strong incentives for saving and investment, no biases in how capital should be allocated, and moving towards territorial taxation are key.

     

    Read more about Douglas Holtz-Eakin’s principles for tax reform here.

  • Simplify our tax code and enact a "fair tax"

     

    Jack Kemp was an leader on a number of issues, including blazing the trail for the Reagan tax cuts of 1981 and the Tax Reform Act of 1986. He was also an early proponent of reversing the tax "recomplication" that followed, again increasing the incentives to work and invest. His idea -- often referred to as the "fair tax" -- would simplify how individuals and families pay their taxes, which is currently a cumbersome, costly process.

    One fair tax proposal has been drawn up by John Mueller, a veteran of the Reagan and Kemp tax debates and currently a scholar at the Ethics and Public Policy Center. The Fair and Simple Tax Reform plan would create a flat tax on all labor and property income. It would eliminate all tax credits and exemptions except for one universal credit, adjusted based on family size. The credit would be designed to ensure low-income families receive extra support.

    The tax would be collected at the time of sale, rather than on when income is earned. This means individual families would have the burden of filing their taxes with the IRS greatly reduced or eliminated and income taxes would only be collected from businesses. Burdens for families would also be reduced by eliminating the Alternative Minimum Tax, the separate estate tax, and other tax code complexities.

    Investments and property would be taxed at the time of purchase, and capital gains would also be taxed. This plan differs from other flat tax proposals by taxing labor and property income exactly alike, thereby creating the broadest possible tax base and allowing the lowest possible marginal income tax rate, and solving the "Warren Buffett Secretary Problem" -- much higher marginal tax rates on workers than investors.

    You can read about the Fair and Simple Tax on the Kemp Foundation's website here. You will also find Mueller's proposed changes to Social Security, along with several other essays from scholars and leaders continuing the Jack Kemp legacy.

    Beyond the details of his tax reform proposals, John Mueller has a keen understanding of the moral underpinnings of our often technical economic debates. Mueller's scholarship emphasizes providential aspects of economics, how we provide for ourselves and others we love using scarce resources. You can read more in his well received book "Redeeming Economics: Rediscovering the Missing Element (Culture of Enterprise)".

     

  • Allow full business expensing to raise wages and spur growth

    Business investment helps drive the economy, create jobs, boost wages and increase worker productivity. Unfortunately, the United States taxes investments not when they are made, but according to a complicated depreciation schedule full of  special interest provisions. In fact, the IRS depreciation schedule runs a full 114 pages. This level of complexity works to depress business investment, and thus hurts jobs and wages.

    The Conservative Reform Network has a solution:

    If we want the economy and wages to grow faster, we need to stop discouraging business investment. The solution is radically simple: get rid of all the complex schedules, and let businesses deduct the full amount of their capital investments in the same year they make them. This simple reform is often referred to as “expensing.”

    For more details on how business expensing can help the economy, along with responses to common arguments against expensing and a state-by-state breakdown of potential job and wage gains, read the full Conservative Reform Network briefing here.

  • Combat the double taxation of savings with "Universal Savings Accounts"

    Veronica de Rugy of the Mercatus Institute describes one innovative idea to combat the double taxation of savings in the following piece posted at Creators Syndicate:

    "Republican presidential contenders have staked out different positions on tax reform. Sens. Rand Paul of Kentucky and Ted Cruz of Texas and neurosurgeon Ben Carson favor a flat tax. Wisconsin Gov. Scott Walker supports lower marginal tax rates. Former Arkansas Gov. Mike Huckabee would like a 30 percent tax on consumption. Sen. Marco Rubio of Florida favors a huge child tax credit and business tax cuts.

    In spite of their differences, all of them agree that our tax code should be reformed to lift the financial pressure on the middle class and stop discouraging savings. The good news is that there is one reform idea that would do just that and should appeal to these leaders and the public: universal savings accounts, or USAs.

    The idea was first proposed in 2002 by the Cato Institute's Chris Edwards and Washington lawyer Ernest Christian. As Edwards, who is a fervent advocate of the reform, explains in a recent piece for The Federalist, the idea is simple: "Such accounts would be like Roth Individual Retirement Accounts (IRAs), but for all types of savings, not just retirement savings. People would contribute after-tax income to USAs, and then all earnings and withdrawals would be completely tax-free."

    This policy would go a long way toward addressing one of the main problems of our current tax code — the double taxation of savings. More savings would add to personal financial security. And more savings would help the economy because when people save, they expand the amount of credit available for companies and innovators to start or expand businesses. Thus, savings are a powerful source of economic growth.

    Too often, politicians and reporters lament the weakness of consumer spending and praise policies that stimulate consumption. But consumption — no matter how pleasurable it is in the short run — will not make our economy grow in the long run.

    It is saving that does that by supplying the investment capital needed for new businesses, such as Uber and Airbnb.

    America needs to reduce barriers to saving, and Canada and Great Britain have shown the way with their versions of universal savings accounts. According to Edwards, in Canada, the government created tax-free savings accounts in 2009 and recently expanded them. Canadians can now put away up to CA$10,000 ($8,400) per year in the accounts. In Britain, individuals can now save up to 15,240 pounds (about $24,000) per year in individual savings accounts.

    This reform is pro-growth, pro-family and pro-freedom, with a much-needed side of simplification and flexibility. The simplicity of having only one account encourages savings, all savings, not just the type favored by the government at the time. Also, the key to these accounts is that all earnings grow tax-free and can be withdrawn at any time for any reason, free of taxes and penalties. In other words, the USAs encourage more savings because they are more liquid and flexible.

    As a result, data from the British government show that these savings accounts have a wide appeal across the entire income spectrum, especially moderate-income earners. For example, more than half of account holders earn less than $31,500 per year. All in all, almost half of Britons now own an account.

    Universal savings accounts help people help themselves in our shaky economy. And they do so without giving special treatment to favored interest groups through the tax code like the giant child tax credit favored by Sen. Rubio. That social engineering is not only unfair but also inefficient.

    The bottom line is that USAs are a reform idea that all candidates — Republicans and Democrats — could get behind."

  • Scott A. Hodge
    Advocate for the taxpayer and for pro-growth tax policies

    Image uploaded from iOS

    “Time is the most valuable thing we have, and we should not be forced to waste it complying with IRS ...

    “Time is the most valuable thing we have, and we should not be forced to waste it complying with IRS forms.”
    Why They Matter

    From his Tax Foundation bio:

    Scott A. Hodge is president of the Tax Foundation in Washington, D.C., and is recognized as one of Washington’s leading experts on tax policy, the federal budget and government spending. During his tenure, the Tax Foundation has more than doubled in size and become one of the most influential organizations on tax policy in Washington and in state capitals. He was the creative force behind the Tax Foundation’s Taxes and Growth Dynamic Tax Modeling project and the State ...

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  • Douglas Holtz-Eakin
    Economist & former CBO director who's mastered the art of figuring out how public policy will actually impact real people

    Doug-Holtz-Eakin

    “The tax system is ripe for an overhaul, an effort that could simultaneously enhance the nation’s growth outlook, staunch ...

    “The tax system is ripe for an overhaul, an effort that could simultaneously enhance the nation’s growth outlook, staunch the flow of corporate inversions, and improve public perceptions of fairness.”
    Why They Matter

    From his bio at the American Action Forum:

    “Douglas Holtz-Eakin has a distinguished record as an academic, policy adviser, and strategist. Currently he is the President of the American Action Forum and most recently was a Commissioner on the Congressionally-chartered Financial Crisis Inquiry Commission. Since 2001, he has served in a variety of important policy positions.”

    You can read Holtz-Eakin’s full bio here.

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  • Mike Lee
    Co-author of a recent plan to replace our disjointed tax code with pro-growth, pro-family policies

    Image uploaded from iOS

    “...As I began looking at tax reform, I took the same approach. I asked myself what are the artificial, unfair ...

    “...As I began looking at tax reform, I took the same approach. I asked myself what are the artificial, unfair obstacles standing between the American people and their pursuit of happiness today? How does the federal tax code create or contribute to those obstacles? And how can we change those parts of the tax code in a way that makes the system more fair and more free for everyone?”
    Why They Matter

    From his U.S. Senate bio:

    “Elected in 2010 as Utah’s 16th Senator, Mike Lee has spent his career defending the basic liberties of Americans and Utahns as a tireless advocate for our founding constitutional principles.

    Senator Lee acquired a deep respect for the Constitution early on. His father, Rex Lee, who served as the Solicitor General under President Ronald Reagan, would often discuss varied aspects of judicial and constitutional doctrine around the kitchen table, from Due Process to the ...

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