WASHINGTON, November 26, 2016 — President-elect Donald Trump campaigned on the promise of tax cuts for all American taxpayers. According to his website, he will “reduce taxes across-the-board, especially for working and middle-income Americans who will receive a massive tax reduction.”
But according to the nonpartisan Tax Policy Center, that’s not true.
They found that under the Trump plan, an increase in standard deductions for middle-class tax payers will be offset by the elimination of some exemptions and changes of some filing statuses. Many families will pay more in taxes.
Middle-class, married couples with three or more children would see a tax increase of $1,000 to $2,000 per year.
The Tax Policy Center says that middle-class families would see an average tax cut of about 2 percent, while the top 1 percent of income earners would see about a 13.5 percent cut. The mainstream media will likely emphasize this point, noting that Trump is raising middle-class taxes so that he can cut taxes for the wealthy.
It is important that organizations like the Tax Policy Center bring out information like this, which could influence the final tax bill. If it is known that the current proposal actually raises taxes for some middle-class households, the final bill will have to be modified to correct this.
The reason for the relatively small size of the tax cut for the middle class relative to the tax cut for the wealthy is simple. The middle class already pays a small portion of the total income taxes collected, so their cut will obviously be smaller. The top 1 percent of income earners (about 3 million people) currently pay 46 percent of all personal income taxes. The lowest 50 percent pay virtually nothing.
While Trump and the Republican Congress will come up with a tax plan that cuts taxes for all Americans, cuts budget deficits, and stimulates the economy so that growth increases from the 2 percent rate of the past 10 years to more than a 4 percent, there may be a simpler plan that does more to reach the goals.
What are the goals of federal income tax policy?
The goals should be to fairly raise sufficient revenue to pay for government expenditures while having little, if any, market-distorting impact. It should be flexible enough to easily modify when economic conditions call for rate changes. The policy should be easy to administer and make it easy for taxpayers to comply. And the policy should encourage growth, full employment and price stability. The current policy fails to reach many of the goals.
Trump’s plan would be better, but the single rate tax plan would reach all the goals.
The plan is simple: 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, rent, interest, profit, dividends or capital gains. The corporate tax rate is also 15 percent, but business would pay the entire 12.6 percent social security tax.
Since all Americans are taxed at exactly the same rate on all income earned above the tax-free livable minimum, the plan is fair.
For a family of four, the livable minimum would be about $50,000. If that household had income of $70,000, they would subtract the livable minimum of $50,000 leaving a taxable balance of $20,000. Just multiple that by 15% and they would pay $3,000 in federal income tax, no matter whether they owned or rented a home.
This plan is revenue neutral; it will raise the same amount of personal income tax revenue that the current plan raises. Since there are no deductions for anything, every American is treated the same and there are no market distortions created. In fact, any that we have now are completely eliminated.
The plan is easy to modify in case a tax cut or tax increase is needed in the future. Simply change the 15 percent rate or change the livable minimum.
Because of the increase in consumption and the low tax rate on capital gains, demand would increase, investment would boom and economic growth would accelerate at least to 4 percent, and perhaps even more. That would lead to full employment and, with the supply-side incentives, price stability.
The Single Rate tax plan is a bold departure from existing policy that was pieced together over the last 100 years. It is time to start over, rather than just further modify the existing tax code. Maybe with a Republican Congress and a bold Republican president who claims to really want change, bold action can be taken.