Tax Code
solutions
Simplify the tax code to promote fairness and encourage economic growth.
Within the current system, there are numerous tax expenditures which are, in truth, just more spending (a tax expenditure is revenue that the federal government does not receive because of a special exclusion, exemption, deduction, special credit, preferential rate of tax, or deferral of tax liability).
Tax expenditures cost us a fortune. For example, in December 2020, Congress finally came to an agreement on a second stimulus package in response to the economic fallout from the pandemic. The 5,593-page spending bill contained numerous tax breaks for various industries. The Joint Committee on Taxation estimated these “tax extenders” – which are made to look temporary but are renewed year after year – will by themselves cost $100 billion over the next ten years.
The Peter G. Peterson Foundation says that, in 2024, just five tax provisions – by themselves – cost over $1.1 trillion: exclusion of pension contributions and earnings ($395 billion); exclusions of and reductions on dividends and long-term capital gains ($283 billion); exclusion of employer contributions for medical insurance and care ($218 billion); Child Tax Credit ($127 billion); and subsidies for insurance purchased through health benefit exchanges ($114 billion).
Really think about that for a second. That’s more than the annual budget of every single department in the United States government besides the Social Security Administration (which administers Medicare and Medicaid).
Eliminate Corporate Tax Expenditures
Not only do tax expenditures need to go for all the reasons above, but they also unfairly subsidize some economic activities and sectors over others. The whole thing is ridiculous.
Follow the advice of The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform said this about tax reform.
In December 2010, the Obama administration released The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform, a report that the president and the leaders of both major parties commissioned to address our nation’s fiscal challenges. The Commission is sometimes called Simpson-Bowles in a reference to its co-chairs Senator Alan Simpson (former Republican Senator from Wyoming) and Erskine Bowles (Chief of Staff to President Clinton). The Commission had 18 members and an executive director appointed by President Obama. Members included six members of the U.S. House of Representatives and six members of the U.S. Senate.
The introduction to the Comprehensive Tax Reform section says: “Tax reform should lower tax rates, reduce the deficit, simplify the tax code, reduce the tax gap, and make America the best place to start a business and create jobs. Rather than tinker around the edges of the existing tax code, the Commission proposes fundamental and comprehensive tax reform that achieves these basic goals…”
Lower rates, broaden the base, and cut spending in the tax code. The current tax code is riddled with trillions of tax expenditures: backdoor spending hidden in the tax code. Tax reform must reduce the size and number of these tax expenditures and lower marginal tax rates for individuals and corporations – thereby simplifying the code, improving fairness, reducing the tax gap, and spurring economic growth. Simplifying the code will dramatically reduce the cost and burden of tax preparation and compliance for individuals and corporations.
Reduce the deficit. To escape our nation’s crushing debt and deficit problem, we must have shared sacrifice – and that means a portion of the savings from cutting tax expenditures must be dedicated to deficit reduction. At the same time, revenue cannot constantly increase as a share of the economy. Deficit reduction from tax reform will be companied by deficit reduction from spending cuts – which will come first.
Maintain or increase the progressiveness of the tax code. Though reducing the deficit will require shared sacrifice, those of us who are best off will need to contribute the most. Tax reform must continue to protect those who are most vulnerable and eliminate tax loopholes favoring those who need help least.
1787’s first eight Tax Code recommendations borrow heavily from The Moment of Truth’s comprehensive tax reform recommendations.
Reduce the number of tax rates to three.
Eliminate all tax expenditures for businesses. Embrace a true territorial system.
Capital gains and dividends should be taxed as ordinary income rates.
Eliminate all income tax expenditures except the Earned Income Tax Credit, Child Tax Credit, mortgage, health, and retirement benefits.
Eliminate all itemized deductions. All individuals take standard deductions.
Eliminate the Alternative Minimum Tax. It’s too complicated and, with many of the other changes we are making, it is unnecessary.
Make interest taxable as income for newly issued bonds.
Make a 15 percent non-refundable tax credit available to all taxpayers for charitable giving.
1787’s additional recommendations include:
Do not increase the $10,000 cap the Republican tax bill imposed on the state and local tax deduction (SALT). For one, SALT is essentially a federal subsidy for cities with high tax rates. Second, the Committee for a Responsible Federal budget says doubling the cap, as is being discussed, would reduce federal revenue by $170 billion, with 94 percent of the benefit going to households making $200,000 or more per year.
Require banks to provide an annual account statement for any customer with a taxable income of over $500,000, much like the 1099 tax form that investment firms already provide their clients.
Implement the new 1787’s Family Leave policy. This will be funded through an additional payroll tax, with employers and employees each contributing 0.25 percent of wages. However, workers can opt-in or opt-out.
Give the IRS the resources necessary to identify and investigate wealthy tax cheats.
Update U.S. Securities and Exchange Commission (SEC) rules governing stock buybacks to ensure that corporate executives use the correct incentives to create long-term value.
Move to pre-filled or pre-populated tax return forms.
Streamline the IRS to create a more agile culture. Address organizational design and management infrastructure.
Protect the Johnson Amendment. Fortify the IRS’ Exempt Organizations Division to keep political activity by charities and nonprofits in check.
Tax Shelters: Stop large-scale anonymous ownership by creating public registries of the real owners of companies and/or trusts.