If you can afford a well-connected lobbyist, then the U.S. tax code may reflect your
interests. But most American families -- especially those in the middle class and those
aspiring to get there -- aren't so lucky. For them, America's tax system is both unfair
and overly complicated, and polls show the depth of their ill will toward it. One poll,
conducted for The Associated Press by Ipsos-Public Affairs, actually found that a slim majority of Americans would rather go to the dentist than prepare their tax returns.
President Bush plans to take full advantage of that bitter public sentiment. In his 2005
State of the Union address, he announced the formation of "a bipartisan panel to examine
the tax code from top to bottom." When the panel delivers its recommendations -- this summer -- Bush said he will push for reforms to "give this nation a tax code that is pro-growth, easy to understand, and fair to all."
Unfortunately, the president's panel is widely expected to endorse the idea of replacing income taxes -- either entirely, or in part -- with some form of consumption tax, such as a
national sales tax. The idea will undoubtedly be billed as a bold reform for a system in need of radical reinvention. But the truth is that it would be a raw deal. It would be horribly regressive, and it would leave most Americans worse off than they are now.
That's saying something, because in the guise of reform, the Bush administration and the Republican Congress have already enacted a staggering series of tax cuts that heavily
favor wealth over work and entrenched privilege over basic fairness. Republicans have not only riddled the code with new loopholes -- thousands of pages of new tax breaks
every year -- but also whittled away at the heretofore non-negotiable concept of progressive taxation. The middleclass share of the nation's tax burden has risen while the wealthiest Americans' share has dropped. Today, middle-class families earning up to $117,250 can pay income tax rates as high as 25 percent, plus another 7.65 percent in payroll taxes. Yet, corporate executives can sell millions of dollars in stocks and pay a capital gains tax of just 15 percent.
How would a national sales tax actually make matters worse? Its advocates have long argued that by taxing the things we buy instead of the salaries we earn, such a tax would both simplify the tax code and promote personal savings over material consumption. But the reality would be far different. Consider this: A family making $50,000 would pay the same amount in taxes as a family earning $500,000 for such basic items as food and clothing. For the lower-income family, sales taxes would
add up to a big chunk of the family budget. For the wealthier family, taxes would barely be a consideration. That's hardly fair.
Some proponents say that food and clothing could be taxed at lower rates -- or exempted altogether -- while luxury goods could be taxed at higher rates. But that could turn out to be more complicated than the current system. And while some have argued that a national sales tax would eliminate the need for the Internal Revenue Service, they overlook the fact that we would need a new agency to collect tax
revenues from businesses.
Worst of all, a national sales tax would have to be much higher than its proponents admit. In fact, the
Brookings Institution's William Gale estimates that it would take a sales tax rate of about 60 percent to fund the federal government at its current levels, because taxable retail sales account for less than one-third of all U.S. economic activity.
There is another hearty perennial tax reform idea that is beloved by some Republicans and likely to make an appearance in this summer's debate: the idea of a flat tax -- one theoretically low income-tax rate for everyone. But that, too, would be a raw deal. As former Undersecretary of Commerce
Robert Shapiro has calculated, maintaining current federal revenues would require a 21 percent flat tax, with an initial exemption so as not to tax low-wage families into poverty. That would be cold comfort, when you consider that today less than one-quarter of all taxpayers are in brackets above the
15 percent rate. A flat tax would thus represent a substantial tax increase for a large majority of taxpayers.
The national sales tax and the flat tax are both odious reform ideas. But the Republicans' insistence on proposing them gives progressives a golden political opportunity to offer Americans a clear alternative. They should champion a bold set of reforms that would correct the current bias toward wealth and entrenched privilege and tip the scales back in the other direction -- harnessing the tax
code as an instrument for expanding middle-class opportunity.
The Progressive Policy Institute has unveiled just such a plan. It is completely different from the Republicans' regressive and counterproductive schemes, but it is no less ambitious. It is designed to shore up the very pillars of middle-class aspiration: paying for college, buying a first home, raising children, and saving for retirement.
The PPI proposal, called "family-friendly
tax reform" (see ppionline.org), would bring $436 billion in net new tax relief to American families. It calls for eliminating 68 tax breaks that are redundant, unnecessary, or targeted primarily to special interests, from the timber industry to NASCAR track owners. Those breaks would be replaced by four generous new tax incentives that would be easily understandable, available to the vast majority of taxpayers, and consistent with the progressive values of work and family.
The first new incentive would be a refundable college tax credit that would substitute for five existing education tax breaks and provide a $3,000-a-year incentive to students for four years of college and two years of graduate school. That would be enough to pay for almost all of the average annual tuition at public colleges and universities.
The second major incentive would be a home mortgage deduction that would be available to all homeowners, not just those who itemize. By allowing non-itemizers to claim the deduction, we can increase homeownership while reducing the number of Americans who must file the more complicated 1040 tax form.
Third, a new family tax credit would replace three existing tax incentives -- the Earned Income Tax Credit, the Child Credit, and the Dependent Care Credit -- and provide more benefits to more families than all of them combined.
Finally, a universal pension (UP) would replace 16 existing IRA-type accounts with a single
portable retirement account for all workers. It would provide a $500 stake and tax-deferred saving to workers, who could roll their 401(k) plans into their UPs when they change jobs. Universal pensions
could also offer a progressive alternative to Bush's plan to divert Social Security payroll taxes into
private accounts.
The advantages of this type of reform would be considerable. By removing the clutter of existing tax
incentives, we can not only make the code easier to understand, but also make it fairer and more powerful.
Most significantly, the system envisioned by PPI would be more generous for middle-class and low-income families than the current system. It would provide more money for college, for retirement, and for raising children, while making the home mortgage deduction available to everyone. Instead of complicating the system, it would streamline the tax code and require taxpayers to do less paperwork. (Creating a single family tax credit would, by itself, eliminate 200 pages from the code, resulting in less confusion for taxpayers.) There would be no need for most families to hire accountants or
lawyers just to find the right IRA or to determine whether or not they are eligible for college tax breaks.
This approach would also restore basic fairness to the system by treating everyone the same. Millions of middleclass and low-income families are not able to take advantage of the existing mortgage deduction because they don't itemize, and millions more don't contribute to an IRA or 401(k) because
they can't afford it. By making all four of these broad new tax incentives available to non-itemizers and making the incentives for college and retirement refundable, everyone will get a tax break.
Finally, this plan would be budget-neutral; it need not add a single dime to the federal deficit. The new cost of the four incentives would be fully paid for by consolidating or eliminating 68 existing tax breaks that together are worth more than $2.5 trillion over 10 years.
Progressives should not miss their chance to seize control of the tax debate this summer. For too long,
they have sat on the sidelines defending the status quo, while Republicans have sold snake oil to the middle class. The tax code was last overhauled in 1986, with Democrats like Sen. Bill Bradley (N.J.) and Rep. Dick Gephardt (Mo.) helping to build the consensus for reform. It is time for a new generation of progressives to pick up the mantle of tax reform and once again make it a key part of their agenda.
