WASHINGTON, October 25, 2017 — A single rate tax plan would stop a lot of the bickering inside the beltway. House minority leader Nancy Pelosi, D-Calif., and virtually every other Democrat have blasted the Trump/GOP tax cut plan. They say that the plan benefits the wealthy, adds to the deficit and short-changes the middle class. They claim it is unfair to people who will lose many of their deductions.
They say that because this plan lowers the corporate tax rate, it is a tax break for the wealthy, who already do not pay their “fair share.” They argue that the entire plan is unfair.
High-income earners will get a larger tax cut in terms of dollars; but equal in terms of percentage.
While the GOP plan would result in about a 10 percent tax cut for just about every American, the wealthy would get a larger tax cut when measured in dollars. A 10 percent tax cut for a wealthy individual who pays $200,000 in taxes would be $20,000. A 10 percent tax cut for the average middle-class American who pays about $8,000 in taxes would be $800.
People living in high tax states will lose their deduction for state taxes, which Democrats say is also unfair. In fact, they could argue that every deduction granted benefits some people while being unfair to others.
A single rate tax plan is a simple solution for tax policy that is equitable (fair) for everyone, simplifies the tax code, eliminates all unfair deductions, raises more revenue in the long term, causes no market distortions and won’t add to the deficit.
A single rate tax plan that works for the middle class
That plan would be:
A 15 percent single rate tax on all income above a livable minimum (twice the poverty level) with no deductions for anything. All income is treated exactly the same whether earned from wages, salaries, rent, interest, profit, capital gain or dividends. The corporate tax rate would also be 15 percent.
For a family of four, twice the poverty level is about $50,000. So if the average middle-class head of household earned $80,000 annual income from all sources, they would simply subtract the livable minimum of $50,000. That would leave taxable income of $30,000. Multiply that by 15 percent and the tax liability is $4,500. It’s that simple.
In addition to simplicity, this plan treats all income earners exactly the same and doesn’t cause any market distortions. The current system and the GOP proposal allows for deductions of home mortgage interest expense.
That means homeowners are treated differently than home renters. It also distorts the housing market.
Corporations and a single rate plan
Corporations would be taxed at 15 percent so they are treated exactly the same as individuals. Labor is taxed at the same rate as capital. Under the current system and the GOP proposal, higher income labor is taxed at a higher rate than capital, since capital gains tax rates are lower than income tax rates. There is no valid reason for that to occur.
Why should labor be taxed at a higher rate than capital?
A single rate plan will lead to economic growth of 4-4.5 percent
While there may be a slight dip in tax revenue for perhaps a year or two, this policy would accelerate annual economic growth probably to 4 to 4.5 percent at least for the next four or five years. That will lead to more tax revenue and will result in future tax revenue growing at a faster pace.
Some will argue that deficits increase substantially during prior tax cuts. A look at the data shows that tax revenue did sometimes decrease for a year or two after each tax cut, but then tax revenue grew at a faster pace than before the tax cut.
The increase in the deficits was due to rapid increases in spending. Had the government held the line on spending or allow just reasonable increases, as President Clinton did after his capital gain tax cut in 1997, deficits would not have increased.
The era of big government is over
After President Bill Clinton cut taxes and declared, “The era of big government is over,” the federal budget ran a surplus for the next four years. That was the last time the budget had a surplus.
The only possible argument to this plan is that it is not fair that someone who earns millions in annual income pays the same rate as someone who earns just thousands. The response to that is people pay dollars, not percentage points.
A lower income earner would have no tax liability. As income increased, the tax rate would stay constant but the tax dollars paid would increase proportionately with income, not disproportionately as we have now with our very progressive tax system.
All households are treated exactly the same.
To truly implement a tax policy that reaches all of the tax policy goals and accelerates economic growth, a single rate tax plan is needed.