A Tax Reform Plan that Both Parties Can Like

October 22, 2013

America's tax system is unfair, distortionary, wasteful and a user's nightmare. Most important, it's limiting our country's economic potential. But can we have a far simpler tax system that generates at least as much revenue and is more progressive, ask John Goodman, president and CEO of the National Center for Policy Analysis, and Laurence J. Kotlikoff, a senior fellow at the National Center for Policy Analysis and a professor of economics at Boston University.

Yes, it's called the Common Sense Tax (CST). It's designed to be revenue neutral and kick start our ailing economy. It features just two taxes.

  • One is a payroll tax that taxes all labor earnings at a flat 13 percent rate.
  • The other is a personal income tax with a 25 percent tax on household income above $100,000, in the case of married households, and $50,000, in the case of singles.

The CST has no explicit corporate income tax and no explicit estate and gift tax. But the CST income tax base includes imputed corporate profits and gifts and inheritances received.

Why is the Common Sense Tax fairer? Consider payroll taxation.

  • Today's FICA tax is highly regressive, taxing wages at 15.3 percent up to $113,700, but then at 2.9 percent for a range, before rising to 3.8 percent.
  • True, the FICA tax is divided 50-50 between employers and employees. But economists don't believe this distinction matters, at least in the long run.
  • This said, to ensure that middle- and low-wage workers benefit immediately from the reduction in the FICA tax rate, the Common Sense Tax levies its 13 percent payroll tax only on employers.

Consider next the Common Sense Tax's personal income tax. By setting high thresholds for taxable income, the Common Sense Tax would instantly end the income taxation of all households of low or modest means -- about two thirds of American households.

But how can cutting the payroll tax rate and taxing incomes only above high thresholds be revenue neutral?

  • First, the change to the payroll tax comes close to breaking even.
  • Second, the Common Sense Tax's income tax is comprehensive --it taxes all income above the thresholds no matter how or where it's earned and eliminates all deductions and other tax breaks, with three exceptions (the charitable deduction, the Child Tax Credit and the Earned Income Tax Credit).

In addition to being simple, transparent and fair, the Common Sense Tax would improve incentives to work and save, and eliminate an entire army of corporate and personal tax accountants and lawyers. Most important, the Common Sense Tax would help grow the economy and provide, at long last, the American people with a tax system they understand, respect and deserve.

Source: John Goodman and Laurence Kotlikoff, "A Tax Reform Plan that Both Parties Can Like," Fiscal Times," October 20, 2013.

 

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