Making taxes simple -- and fair
I think it is time to restructure the US tax code - increasing fairness, simplicity, and efficiency.
Our tax code is far too complex as a result of repeated attempts to use it as a vehicle for political favoritism and social engineering. Even lawyers and accountants often cannot make sense out of the maze of deductions, exclusions, and credits in the code.
The availability of so many tax preferences also reduces the size of the tax base. Maintaining high tax rates is no remedy. High tax rates only serve to limit incentives to work more, to save more, and to invest more. In addition, tax preferences encourage people to invest in enterprises or activities with rates of return which are inflated by the tax code. This causes inefficient allocation of our economy's resources and impedes growth. Finally, a majority of the nation's 103 million taxpayers believe the tax code is unfair. I think they are saying that certain groups avoid paying their fair share and that somebody else with the same income is doing better by the tax code than they are. Many, in fact, are losing respect for the integrity of the tax laws.
We should have a tax code in which all citizens with equal incomes are treated essentially the same way. We should have a tax code that is simple enough for all citizens to have at least a basic understanding of how the system works and how their own tax obligations are determined. We should have a tax code which allows taxpayers to make their economic decisions on the basis of real value in the marketplace - with little, if any, regard for the tax implications.
The best way to achieve these goals is to lower the tax rates and broaden the tax base.
Specifically, I propose that we drop the tax rate to 14 percent for single taxpayers with incomes up to $25,000 and for couples with incomes up to $40,000, and that we apply a progressive surtax ranging from 6 percent to 14 percent for incomes above those levels. This would reduce the maximum tax rate to 28 percent from the current top of 50 percent.
To make sure that we have sufficient revenues from these reduced tax rates, I propose that we eliminate most tax credits, exclusions, and deductions except for the few claimed over many years by the majority of taxpayers or those needed to alleviate genuine hardship. These are charitable giving, home mortgage interest, some medical expenses, state and local income and property taxes, and social security and veterans' benefits. Interest earned on state and municipal general obligation bonds also should remain tax-exempt to facilitate raising revenues for appropriate public purposes.
To ensure fairness for taxpayers at the low end of the income scale, part of the rate reduction should be accomplished by increasing the personal exemption from the current $1,000 to $1,500 and by lifting the zero bracket amount for joint returns from the current $3,400 to $4,600.
Along with Rep. Richard Gephardt (D) of Missouri, I have introduced The Fair Tax Act of 1982 to implement this proposal, and I believe the same basic approach can be applied to corporate taxes as well. This proposal would maintain the current law's distribution of tax liabilities by income group, rather than cause a redistribution of the income tax burden, although 60 percent to 70 percent of the taxpayers would be paying less tax.
Some benefits of this tax system are obvious. Tax computation would be easier for all taxpayers, especially those in the low and middle income brackets. Marginal tax rates would drop for nearly all taxpayers. Repeal of many special provisions would simplify the forms and the instructions. By reducing the number of tax brackets, we would virtually eliminate ''bracket creep'' due to inflation. For the same reason, the so-called marriage penalty would be cut substantially.
But because we would be collecting the same amount of revenues in a different way, some people would end up paying less in taxes and others would have to pay more. Under this system, most of the nation's 60 million taxpayers claiming the standard deduction instead of itemizing will pay less than they would under existing law simply because their rates will be lower. Citizens claiming relatively few itemized deductions either will be better off under the proposed system, or, at worst, see their tax burden remain about the same as it would be under existing law. Those with the most significantly increased tax liabilities under the proposed system would be the taxpayers who make the greatest use of deductions, credits, and exclusions in the present law. And, many of these taxpayers would give up their preferences, along with the problems and time spent trying to avoid taxes, in exchange for a lower marginal rate.
If we take this approach, we would be correcting structural problems in the current code - not papering over those problems, as Congress did last year by approving the administration's request for a 25 percent across-the-board rate cut for individuals.
That 1981 tax-cut legislation actually compounds the unfairness, inefficiency , and complexity of our tax system. It is one reason why I voted against the bill.
To generate an investment boom with dramatically reduced marginal rates, we must recognize that it is not just cutting taxes that is important. What matters most is the way we cut taxes. There is no free lunch. We cannot afford to lower taxes unless we close loopholes at the same time. That is the lesson of this year's record budget deficit. It is also the lesson of the biggest tax increase in history currently before the Congress.
Unless we reverse the trend set in the 1981 tax cut, the only people paying income taxes in the future will be those whose wages and salaries will be subject to withholding. That prospect is simply unacceptable in a democracy.
On the other hand, if we lower tax rates and broaden the tax base, I think we can have a tax system that really encourages the productive work and investment needed for sustained economic growth.