…FOR THE WAY AMERICA WORKS
When a group of architects its down to design a new building, they don’t start by picking out the draperies and choosing the color of the carpet. They begin by creating the basic outlines for the structure to come. Similarly, the charge and purpose of this commission is not to dictate the finishing touches of finalized legislation. Instead, it is to establish the foundation upon which a new system can be raised.
The commission’s six working principles for a 21st century tax system are not isolated ideas, randomly grouped, but rather principles that link together to form a sequence – a chain of economic DNA – that can renew the health of our economy and release the potential of the American people.
ECONOMIC GROWTH, the engine of opportunity and prosperity, can only be unleashed by a tax code that encourages initiative, hard work, and saving.
Such a system must be based on FAIRNESS, treating all citizens equally.
The system should achieve SIMPLICITY so that anyone can figure it out.
A fair tax system also requires NEUTRALITY, because the tax code should not pick winners or losers, or tax saving more heavily than consumption.
The new tax system also needs VISIBILITY so that everyone gets an honest accounting of government’s cost.
A visible tax system will have STABILITY so that people can plan for their futures.
…Because expanding opportunity, prosperity, and social mobility form the foundation of a free and healthy society.
None of the myriad challenges confronting our nation — be they poverty, crime, racial tension, welfare dependence, or the budget deficit – can be solved without strong economic growth. Therefore, any new tax system must be predicated, first and foremost, on a commitment to revitalizing the American economy and lifting barriers to opportunity.
No nation has ever taxed its way to prosperity. Indeed, one of the world’s fastest growing economies over the past 20 years, Hong Kong, has one of the lowest marginal tax rate systems — 15 percent or less — on labor and capital. Throughout the ages, higher taxes have been inversely related to higher productivity and higher growth. Our own history provides evidence of this axiom.
There is an inverse relationship between revenue collections from the wealthy and high marginal tax rates.
America has experienced three periods of very strong economic growth in this century: the 1920s, the 1960s, and the 1980s. Each of these growth spurts coincided with a period of reductions in marginal tax rates. In the eight years following the Harding-Coolidge tax cuts, the American economy grew by more than five percent per year. Following the Kennedy tax cuts in the early 1960s, the economy grew by nearly five percent per year and real tax revenues rose by 29% from 1962 to 1968 (after having remained flat for a decade). In the seven years following the 1981 Reagan tax cuts, the economy grew by nearly four percent per year while real federal revenues rose by 26 percent.
Over the years, we have seen economic output rise as tax rates fell (and fall as tax rates rose). But federal revenue raised as a percentage of national output has remained flat. As the accompanying chart indicates, the federal government historically collects about 19 percent of gross domestic product – regardless of how high the tax rate has been pushed.
The top line represents the top personal tax rates from 1952 to 1995. The bottom line shows revenue to the federal government expressed as a percentage of total economic output.
High rates simply mean a smaller economy – and less income to tax. Clearly, 19 percent of a small economy brings in less revenue than 19 percent of a big economy. One more reason why economic growth should be the goal of any new tax system.
FAIRNESS …Because democracy is based on the principle of equality before the law.
One of the main themes the commission heard in hearings around the country is that taxpayers are willing to shoulder their share of the burden, as long as others pull their own weight as well. The current tax code – with its confusion of proliferating rates, deductions, exemptions, and transfers of wealth from one constituency to another – contributes to the overwhelming conviction of many Americans that the present system is unfair.
The definition of fairness that emerged from hours of testimony before the commission was clear and unambiguous: Any new system must satisfy three simple goals:
Tax equally: Does it treat taxpayers equally?
True progressivity: Is it compassionate to those least able to pay?
Lower tax rates: Does it keep the tax rate low?
To most Americans, fairness means that the rules apply to everybody and everybody plays by the rules. Christine Perkowski of Richboro, Pennsylvania, wrote to the commission: “I do not mind paying my fair share as long as everyone else does, but I feel that many, many people and companies are not paying their fair share because they have the money to hire smart accountants and lawyers.”
Under a simpler, fairer system, no one will get out of paying their share – no matter how many “smart accountants and lawyers” they can afford to hire. By streamlining the current Rube Goldberg contraption of multiple rates and rules, we can reduce the number of moveable parts that are manipulated by those who seek to take advantage of the system. Clearly, under the current multiple-rate system, any tax “loopholes” – deductions, exemptions, and credits – are more valuable to the wealthy than to those in lower brackets, reinforcing the perception that the rich do not pay their fair share. A single-rate system would level the playing field by eliminating the current distortion in which tax breaks are worth more when a person’s income is higher.
Melvin Barlow of Las Cruces, New Mexico, argued this definition of fairness in a letter to the commission: “It is not right that the harder a man works, the more he is taxed” because the government imposes a higher rate on each additional dollar he earns. A single-rate system keeps pace with the taxpayer as he climbs the hill of economic opportunity and does not weigh him down more heavily with higher rates at every step he tries to take.
For taxable income above the personal exemption, if one taxpayer earns ten times as much as his neighbor, he should pay ten times as much in taxes. Not twenty times as much — as he would with multiple and confiscatory tax rates. Not five times as much — as he might with special loopholes. Ten times as much income, ten times as much taxes. That’s the deal.
TRUE TAX PROGRESSIVITY
Americans must first be able to feed, clothe, and house their families before they are asked to feed the federal spending machine. A generous personal exemption will allow those citizens at the bottom of the economic ladder to gain a foothold and begin their climb before taxes take effect.
Today, those who try to move from welfare to work face the highest marginal tax rates in America when lost benefits are included — facing effective tax rates that can actually exceed 100 percent. For example, if a single mother on welfare takes a job, she stands to lose more than a dollar for every dollar she earns. Her first paycheck may be more than canceled-out by the economic hits she takes when she loses Aid to Families with Dependent Children, Medicaid, Food Stamps, and public housing allowances. In addition to losing benefits, she now also must pay Social Security and Medicare taxes, federal and probably state income tax, while facing a host of work related costs, including transportation and child care.
We need a tax system that expands opportunity and furthers economic independence by strengthening the link between effort and reward, not by slapping poverty-inducing tax rates on people as soon as they get their heads above water. True progressivity can be achieved by a single tax rate with a generous personal exemption. With an exemption, a “single rate” does not mean that everyone pays the same percentage of income in taxes. A generous personal exemption would remove the burden on those least able to pay; as incomes rise, the average tax rate would gradually rise up to the single rate.
LOWER TAX RATES
The consensus of the majority of witnesses who wrote to the commission can be summed up in two words: lower taxes.
Historians may point to America’s beginnings and a revolution deeply rooted in reaction to taxation of the original thirteen British colonies. Others reference religious traditions, including Moses’ warning to Pharaoh that he may tax up to one fifth and no more — before demanding that he “let my people go.” Indeed, Commissioner Dean Kleckner of Iowa touched a chord with many when he observed, half-jokingly, that “the Bible says we ought to tithe and give 10% to the Lord. I have a hard time with the concept of giving more to government than we’re asked to give to God.”
We suspect that most taxpayers have reached their conviction that taxes are too high not by consulting their history books or the Scriptures, but simply by comparing their weekly paychecks to their family budgets and counting all the sacrifices they must make simply to pay the government. While any new tax code must raise sufficient revenue to run the government, it must also be mindful of the burdens these taxes place on America’s working families. One way to reduce this burden would be to restrain government spending. By restoring the balance of power between the federal government and the citizens who pay its bills, we can restore basic faith in the system and keep the tax rate low.
…Because life is too short and peace of mind too precious to waste your time and lose your temper trying to figure out your taxes.
Filing tax returns will never be anyone’s favorite pastime, but neither should it be what it has become: one of life’s most nerve-wracking, gut-wrenching, and mind-numbing chores. With a simpler system, taxpayers will be able to file their returns on a single piece of paper in less time than it takes to finish your morning crossword puzzle.
As detailed earlier, the current tax code is exceedingly expensive to comply with, increasingly difficult to enforce, and nearly impossible to understand. Ambiguities and inconsistencies in the current tax code increase the likelihood that taxpayers will make mistakes and fall victim to enforcement techniques considered by many to be infringements of personal liberties. Long ago the authors of the Federalist Papers warned, “It will be of little avail to the people that the laws are made by men of their own choice if the laws be so voluminous that they cannot e read, or so incoherent that they cannot be understood.” A simplified, fairer tax system will let Americans get a handle on their taxes, a grip on their government, and a hold of their future.
…Because the tax code should not pick winners or play favorites, but allow people freely to make decisions based on their own needs and dreams.
The tax code should be used to raise revenue to run the government while doing the least possible damage to the economy. This means leaving individuals free to make decisions and to set priorities based on economic reality – not on the bureaucratic whims of Washington, D.C.
Taxes cannot help but raise the cost of everything they fall on. But at least they should fall on things neutrally without penalizing one form of economic behavior and promoting another. As Senator Robert Bennett of Utah recently pointed out, “Neutrality means that the tax code should not be used to punish the bad guys and reward the good guys. We have other laws for that.” Unfortunately, the current code strives to act as economic traffic cop — giving green lights to certain economic activities and red lights to others.
The result of the biases and distortions in the current system is to make the market less free, the system less fair, and families less financially secure. As Frank Hayes, a public accountant who testified before the commission in Omaha, remarked: “If there’s a way to make things simpler and take the tax aspect out of making day-to-day decisions, I think everybody would become productive.”
Perhaps the single most irrational and economically damaging aspect of today’s code is the layer upon layer of taxes on saving and investment. By hitting income saved and invested harder and more frequently than income consumed, the current system prompts taxpayers to spend today what they might otherwise save for tomorrow. This is particularly alarming considering the problems facing public retirement programs and the need to strengthen private retirement saving. The Bipartisan Commission on Entitlement and Tax Reform offered analyses and proposals on this subject.
…Because those who pay the price of government have a right to see the bill.
The history of hidden taxes, rapidly rising rates, and perpetual budget deficits proves that what you don’t know can hurt you. The current system hides the cost of government behind a chronic deficit and a maddening multiplicity of taxes – many of which are virtually invisible to the taxpayer who pays them. How much did we pay in payroll taxes last year? What excise taxes were hidden in the prices of the products we bought? What are the tax cost of exclusions, deductions, and corporate income taxes? Few of us know the answers.
When it comes to these hidden levies, ignorance is expensive bliss indeed.
One of the biggest political fictions in American history is the progressive taxation of “Mr. Nobody” – the illusion that “painless” taxes can be levied on businesses and on the goods and services they sell. But goods and services do not pay taxes. People do. While businesses collect taxes, the burden of paying the “business” taxes ultimately falls on each one of us as investors, workers, or consumers.
Moreover, the invisibility of many taxes perpetuates the fantasy that government is free — even as its real costs shrink our paychecks, sap our savings, drain our economy, and inflate the budget deficit to ominous proportions. Bob Genetski, an economist and author who testified at hearings in Omaha, told the commission: “The cost of government is not obvious to people. If you hide the cost of government, people are going to demand more government than they otherwise would.” By severing the connection between government’s cost and its consumption, the current system deprives citizens of the information they need in order to make rational choices about what they want to buy from Washington and how much they are willing to spend.
A visible system gives taxpayers an honest accounting of government’s expense and will make it far more difficult for politicians to tinker with the tax code without the democratic consent of those taxed.
The incurable cynic H.L. Mencken once said, “Conscience is the inner voice which warns us somebody may be looking.” By making taxes visible, we can ensure that someone always will be.
…Because taxpayers should be able to plan for their future without the rules being changed in the middle of the game.
Everyone has heard the old saw that there are only two things in life that are certain: death and taxes. Given the constant changes to the tax code over the past few decades, the certainty of taxes has taken a perverse twist. Like walking blindfolded down a ship’s gangplank, you know the end is out there — you just don’t know when it’ll arrive, how far you’ll fall, or how long you’ll be able to keep your head above water.
This uncertainty has a debilitating effect on the economy, making it very difficult for families and businesses, particularly small businesses, to plan for their future with confidence. This exacts a tremendous cost from those taxpayers and business owners who must struggle to keep up with ever-shifting rules and regulations. The retroactive tax increases passed in 1993 packed a double-whammy – changing the rules when the game was half over. A stable tax code must allow individuals to start a business, buy a house, take out a loan, put money into savings, or plan for their children’s education without fear of what might lurk behind the next election cycle.