There's gotta be a better way: Tax reforms to please the masses

Article Highlights

  • In reality the Buffett Rule only builds another barrier to sensible #taxreform.

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  • Implementing reform will not be easy when Congress takes votes more often to measure allegiance than to solve problems.

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  • The top 5% of income earners in 2009 paid 59%of all income taxes while the bottom 50% paid just 2%

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With tax day deadline here, Congress returned to Washington Monday to vote on the "Buffett Rule," a proposal to impose a minimum 30 percent tax on people earning more than $1 million.

The proposal, which failed in the Senate, resembles the alternative minimum tax (AMT) in one way -- it was created to ensure the wealthy pay a "fair share" of taxes, but in reality it only builds another barrier to sensible tax reform.

AEI resident fellow Alex Brill explained in a recent AEI Tax Policy Outlook that the AMT needs to be repealed as part of a larger plan to reduce compliance costs associated with paying taxes while also broadening the tax base and removing distortions and uncertainty in the tax code.

Some of his suggestions include reducing loopholes and deductions that benefit job creators while still lowering the overall U.S. corporate tax rate, for which the U.S. has the dubious distinction of having the highest in the world.

 

Brill's argument neatly summarizes another issue, noted by AEI scholars Kevin Hassett and Aparna Mathur that shows the higher the taxes on corporations, the bigger the burden on workers' wages.

 

But implementing reform will be no easy task, particularly in a Congress that takes votes more often to measure party allegiance and build an election-year platform than to solve problems. AEI resident scholar Alan Viard explains that the barrier to finding solutions can be attributed in part to complex provisions adopted to accommodate special interests as well as to "ensure that they will function appropriately in every specific situation that might arise."

Writing recently for NPR Planet Money, Viard called that goal laudable, but taxing, so to speak.

"When Congress adopts new provisions to address specific issues, it often pays little heed to how they interact with existing provisions. Once complexity creeps in, it's hard to get rid of it.," he wrote.

Of course, it is no surprise that politicians would vote on talking points, especially when polls show that most Americans think their wealthy neighbors should pay more in taxes. That has been a consistent position for more than 30 years of poll-taking, says AEI senior fellow Karlyn Bowman, who recently released an extensive evaluation of polling data on taxes over the last 75 years.

 

In reality, the top 5 percent of income earners in 2009 paid 59 percent of all income taxes while the bottom 50 percent paid just 2 percent of total U.S. income taxes, according to the IRS. Still, with the federal budget deficit expected to climb past $1 trillion this year -- for the fourth year in a row -- and with little agreement on where to claw back on spending, Brill warns that Congress must make a first step toward tax reform if the U.S. is to move from a system that encourages debt over equity and taxes income rather than consumption -- both habits that impede incentives for saving and sap revenue that could spur economic growth.

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