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Tax Reform


Our tax system requires serious reform which broadens the base and lowers the rates. In 2013, federal government revenues were $2.77 trillion with nearly $1.8 trillion coming from individual and corporate income taxes and the rest coming from payroll taxes (Social Security and Medicare), Federal Reserve earnings, excise taxes, and other revenues. At the same time, the value of individual and corporate income tax deductions, exemptions, credits, and exclusions was almost the same as the amount of income tax that was paid. Many on the left see these loopholes as lost revenue, but I view these loopholes as the cause of higher tax rates. If we reduced the value of these loopholes, we could lower the tax rate and government would bring in the same amount of revenue. Lower rates and broader bases make the tax system fairer and reduce the distortion on economic decision making that the tax system imposes.

Are Taxes Too Low?

The spending lobby argues that tax revenues are at historic lows and therefore need to be increased. While federal tax revenues as a percent of GDP decreased significantly during the Great Recession, recent tax increases and a very slow economic recovery have led to higher federal revenues. The Congressional Budget Office projects federal tax revenues as a percent of GDP to reach the historical average of 18% by fiscal year 2015[1]. Unfortunately, for the president, this is not enough. In his FY2015 budget, the president proposes increasing taxes to nearly 20% of GDP[2], well in excess of historical averages[3].

The federal government really does have a spending problem, and entitlement reform is needed to get federal spending under control. When reforming entitlements, a good place to start would be Social Security. You can view my Social Security reform proposal here.

Do The Rich Pay Enough Taxes?

The Left claims that "the rich" do not pay enough taxes. Some even claim that high-income households have a lower tax burden than average households. However, data from various groups indicate that such claims are not correct. The following three studies calculate the effective tax rate for various income groups. These analyses include all federal taxes such as Social Security, Medicare, individual income, corporate income, and excise.

According to the Congressional Budget Office, the top 1% pays an effective federal tax rate of 29.4% of income while the middle quintile of households pays an effective federal tax rate of 11.5%[4]. In the CBO study, income includes untaxed benefits such as employer-paid health insurance. The CBO study is based on data from 2010 which excludes the impact of two large tax increases (ATRA and ACA) that largely impacted higher-income households.

The Joint Committee on Taxation comes to a similar conclusion although its data are presented slightly differently. According to JCT, households earning more than $1 million paid an effective federal tax rate of 32.0% in 2013 while households earning between $75,000 and $100,000 paid an effective tax rate of 14.2%. [5]

According to the Tax Policy Center, households earning more than $1 million will pay on average an effective tax rate of 34.6% in 2014 while households earning between $75,000 and $100,000 will pay on average an effective tax rate of 15.7%.[6]

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[1] http://www.cbo.gov/sites/default/files/cbofiles/attachments/45229-UpdatedBudgetProjections_2.pdf

[2] http://www.whitehouse.gov/sites/default/files/omb/budget/fy2015/assets/tables.pdf

[3] Table 1.2—Summary of Receipts, Outlays, and Surpluses or Deficits (-) as Percentages of GDP: 1930–2019

[4] http://www.cbo.gov/sites/default/files/cbofiles/attachments/44604-AverageTaxRates.pdf

[5] https://www.jct.gov/publications.html?func=startdown&id=4528

[6] http://www.taxpolicycenter.org/numbers/displayatab.cfm?DocID=3930&topic2ID=40&topic3ID=41&DocTypeID=1
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