WASHINGTON, March 31, 2017 — While Congressional leaders say they are still working to fix healthcare, President Trump says his attention is now on income tax reform; he wants to cut income taxes for all Americans.
While Trump is likely to face opposition to any plan he proposes, if everyone can agree on the key policy goals, the solution for a new federal income tax policy is obvious.
What are the goals?
The first is to raise enough revenue to cover federal spending. The federal budget hasn’t been balanced in almost 20 years, and only three times in the last 55 years. Still, a balanced budget should be the ultimate goal.
About half of federal revenue comes from personal income taxes. Whatever tax plan is finally enacted, tax revenue should not decrease, and, in fact, should increase. Since it is extremely difficult to cut government spending, a policy that increases tax revenue without putting a drag on economic growth would be welcome.
The new tax policy should be equitable and generally perceived as such. This goal is perhaps the most elusive one, since definitions of fairness vary greatly with political and social philosophy.
The new policy should create a tax code that is easy to administer; that is, it should be easy for taxpayers to compute their tax liability and easy for the government to check their accuracy. The current tax code runs to about 4 million words. There is probably no one who knows and fully understands the current tax code, including those responsible for adding to its burdens.
The new code should cause no market distortions. Most economists agree that a tax policy that creates market distortions usually leads to more problems than those that it solves. Market distortions occur when the government decides it should encourage or discourage consumption of products by changing their market price by means of targeted taxes or tax credits.
So there should be near unanimous agreement on five key goals. A new tax code should:
- Raise sufficient revenue;
- Conform to generally accepted notions of fairness and equity;
- Be easy to administer;
- Cause no market distortions;
- Encourage economic growth.
There is only one tax policy that meets these goals: a single rate tax of 15 percent on all income above a livable minimum (twice the poverty level) with no deductions for anything. All income is treated the same whether earned from wages, salaries, rent, interest, profit, dividends or capital gains. The corporate tax rate should also be 15 percent.
This year, $1.7 trillion will be raised through personal income taxes. The 15 percent single rate plan would raise about the same amount and be very easy to administer. A household simply adds up all income earned from every source, subtracts the livable minimum (about $50,000 for a family of four) then multiplies the remainder by 15 percent. That’s the family federal income tax liability for the year.
Since there are no deductions and no tax credits, there are no market distortions. For instance, a household that freely chooses to rent a home is treated exactly the same as a household that chooses to buy one.
This plan would double the growth rate of the economy. Instead of being stuck with a 2 percent growth rate as has been the case in the U.S. for the last decade, growth would accelerate to 4 percent or more.
This plan is (arguably) equitable, since every income earner is treated exactly the same and since tax liability increases proportionately with income. This differs considerably from the current “progressive” tax system where income tax liability increases disproportionately with income.
This plan meets all the key goals. It is, in fact, the only plan that meets all the goals. It is also the only plan that makes sense and will lead to long-term stability in the tax system. It is now the time to implement this plan.Click here for reuse options!
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