Reform 1: Broaden the individual income tax base by eliminating loopholes
Eliminating the dozens of loopholes, deductions, exemptions, exclusions, and credits from the tax code would raise government revenue almost enough to close the annual budget deficit. This reform would eliminate most of these individual income “tax expenditures”, including the special lower tax rate for capital gains and dividends, while at the same time consolidating tax brackets and reducing marginal tax rates for individuals (and businesses that are taxed as individuals). This comprehensive tax reform approach can help to enhance economic growth, simplify the tax system, improve fairness, and generate more revenue.
Tax expenditures cost the government more than the biggest spending programs. In 2012, the United States is projected to lose out on about $942 billion of tax revenues because of the dozens of loopholes in the individual income tax code, according to the Tax Policy Center.
Tax expenditures disproportionately benefit special interests and wealthy Americans. The Tax Policy Center estimates that, in 2011, households with over $103,000 in income received 67% of the benefits of tax expenditures.
Tax expenditures make our tax system more complex and subject to greater abuse.
Reform 2: Make income tax more inclusive and progressive by asking more people to pay something but the wealthy to pay more
According to a Tax Policy Center estimate, 46.4% of American households did not pay any federal income tax in 2011. About half of these households were exempted from paying federal income tax through “standard” provisions in the tax code, such as the personal exemption for dependents. The other half of households took advantage of “special” loopholes in the tax code, such as itemized deductions, which lowers their taxes owed to zero. This reform would establish a ceiling level of income below which no household would be expected to pay federal income tax. The tax code would then be reformed so that all households with income above this stated level would pay some amount of federal income tax under a new simplified progressive tax system, whereby the “wealthy” would also have higher effective tax rates.
Many of the households currently paying no income tax are not low-income. In 2011, 30% of households making between $33,542 and $59,486 paid no income tax.
In a fair tax system, everybody who is able to contribute to paying the cost of government operations should. Although many households pay local, state, and payroll taxes, the federal income tax is the main source of funding for the U.S. government’s constitutional responsibilities and central operations.
Reform 3: Make the corporate tax code more competitive
Major multinational corporations have many options of where to locate their operations and invest their resources. Public companies are legally obligated to maximize returns to their shareholders, making countries with lower corporate taxes more likely to attract business, along with the jobs and investment that come with it. This reform would lower the top corporate income tax rate, eliminate all taxes on corporate profits earned outside the United States, and allow corporations a deduction for the dividends they distribute. To make up for some of the lost revenue this reform would also eliminate or reform most existing loopholes in the corporate tax code.
The United States statutory corporate tax rate is currently the highest of any major developed nation. The Tax Foundation estimates that U.S. corporations pay an average effective rate of 27.9%, one of the top five highest rates in the world. The average corporate tax rate of all other developed nations is 20.3%. The United States is also one of the only countries to tax corporate profits earned outside its borders (although it does offer companies a credit for profits that have already been taxed abroad).
The U.S. corporate tax code is especially hard on small businesses. Many small businesses are taxed as individuals, but if they are incorporated they often do not have the time and resources to take advantage of loopholes in the corporate tax code like large corporations do.
In 2012, the U.S. federal government is projected to forgo $151 billion in corporate tax revenue as a result of loopholes, deductions, and credits
81% support reforming the Tax Code (both individual and corporate) to make taxes simpler and fairer while also increasing tax revenue (81% supported package of tax reforms)
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