FEDERAL TAX REFORM AND SIMPLIFICATION:

PROPOSAL FOR A SIMPLE PROGRESSIVE TAX

Politicians in recent years have made “tax cuts” a major political issue.   Because nobody likes to pay taxes, many politicians have been able to gain significant political mileage using this issue.

Unfortunately, the only taxes being cut are progressive taxes such as the income tax, capital gains tax, and estate tax.    Lower income taxpayers have received no benefit whatsoever from the tax cuts; middle income taxpayers have received small benefits; but the highest income taxpayers have received enormous benefits. 

It did not have to be this way.  Rather than limiting the tax cuts to progressive taxes (assuming that tax cuts were appropriate), regressive taxes such as excise taxes and employment taxes could have been cut.   Or a rebate could be made for regressive state and local sales and property taxes.   This would have allowed everyone to benefit from the tax cuts, not merely the very wealthy.

The day may someday come when voters realize the gross unfairness of the tax cuts that are being passed by Congress, but that day has not yet arrived.  Candidates will probably not be highly successful running on a platform of opposition to the tax cuts.

Those who seek a more responsible fiscal policy can, however, run on a platform of tax reform and tax simplification.   A sub-title of this platform can be tax fairness.

The centerpiece of this platform should be a proposal for a responsible, well considered alternative to the current personal income tax.  This alternative might be called: the Simple Progressive Tax.  Ideally, the characteristics of the Simple Progressive Tax would be as follows:

• To the maximum extent possible, all income from all sources (except inheritance) should be subject to the tax.   This would allow the tax rates to be kept as low as possible.
• The number of deductions, credits, and exclusions should be kept to an absolute minimum.
• The income level at which tax liability is incurred should be set such that the tax will not drive families into, or further into, poverty.
• Tax rates should be progressive, with those receiving greater income taxed at a higher rate.  This would offset the regressive nature of payroll and state & local taxes.
• The tax rates should be set such that in good economic times the revenues generated would cover normal government expenses and amortization of whatever debt may have been incurred during times of recession.

The tax would be simple because there would no longer be the many tax breaks and loopholes added by Congress over the years at the urging of special interests.   There would be no need for an Alternative Minimum Tax.   By being honest about the fact that it is progressive, it avoids the problem encountered by the Gephardt “Ten Percent Tax Plan”  several years ago, which sounded like a flat tax but was not.

The arguments against the Simple Progressive Tax are predictable and easily countered on the basis of fairness, simplicity, and putting an end to our habit of passing the costs which we are incurring on to our children and grandchildren, with interest. 

The Simple Progressive Tax would give responsible politicians of both major parties an opportunity to demonstrate fiscal responsibility.  And it would give taxpayers a fairer and simpler tax system.

Edward Lawrence, EdFairhope@bellsouth.net

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