Tax reform

Tax reform is the process of changing the way taxes are collected or managed by the government. Tax reformers have different goals. Some seek to reduce the level of taxation of all people by the government. Some seek to make the tax system more progressive or less progressive. Others seek to simplify the tax system and make the system more understandable or more accountable.

Numerous organizations have been set up to reform tax systems worldwide, often with the intent to reform income taxes or value added taxes into something considered more economically liberal. Other reforms propose tax systems that attempt to deal with externalities. Georgism claims that various forms of land tax can both deal with externalities and improve productivity.

United States

"'Revenue Reform' Train Stopped by 'Vested Interests,' 'Local Issues,' 'Trusts,' and other poles" — Political cartoon from 1880–1900 commenting on tax reform.

There have been many movements in the United States to reform the collection and management of taxes.

During the late 19th century American economist, Henry George, started a global movement for tax reform whose aim was the abolition of all forms of taxation other than the Single Tax on land value. The effects of the movement on taxation policy, although diminished can still be seen in many parts of the world including Australia, New Zealand, Hong Kong, Taiwan and Singapore. Efforts to promote this form of tax reform in the United States continue under the aegis of organizations such as The Henry George Foundation of America.

In 1986, landmark tax reform was passed in the Tax Reform Act of 1986. In the 1990s, reform proposals arose over the double-taxation of corporate income, with a large report in 1992 by the IRS.

During the Bush administration, the President's Advisory Panel for Federal Tax Reform recommended the removal of the Alternative Minimum Tax. Several organizations are working for tax reform in the United States including Americans for Tax Reform, Americans For Fair Taxation and KillYourTaxes.com. Various proposals have been put forth for tax simplification in the United States, including the FairTax and various flat tax plans and bipartisan tax reform proposals.

In 2010, Fareed Zakaria proposed what he described as a "grand bargain" with tax reform for economic adversaries Paul Krugman and Niall Ferguson; an attempt to bridge their political divide with the creation of a simple and indirect Federal Sales Tax. Representative Chaka Fattah of Pennsylvania introduced a bill, H.R. 4646, called the Debt Free America Act that would introduce a 1% financial transaction tax and eliminate federal income tax. He has introduced bills calling for similar tax reform since 2004, but the bills have never made it out of committee.

President Obama’s tax reform proposals are highlighted in his administration’s fiscal year 2013 federal budget proposal and in a framework for corporate and international tax reform presented by the administration. While some of these proposals have become irrelevant due to “The Fiscal Cliff” agreement at the end of calendar year 2012, these policies are important to highlight as they present a center-left approach to tax reform. In general, the proposals involve some marginal tax rate increases, some marginal tax rate decreases, and base broadening by closing, canceling, or limiting loopholes, deductions, credits, or other tax expenditures for top income earners and corporations.

The Congressional Budget Office and Congressional Research Service describe the President’s tax reforms as

1. Extending and modifying the 2001 and 2003 Tax Reductions, popularly known as “The Bush Tax Cuts.”

a. The FY2012 tax rates, resulting from the tax reductions of 2001 and 2003, would be made permanent on income, capital gains, and dividends for individuals with income below $200,000 and on couples who file joint tax returns with income below $250,000. Both income thresholds would be adjusted for inflation.

b. The tax reductions would expire for individuals earning over $200,000 and couples who file joint tax returns with income above $250,000. For these income earners, the federal income tax rate would increase from 35%to 39.6%, personal exemptions would be phased out, and limits on itemized deductions would take effect. Taxes on capital gains and dividends would also increase from 15% to 20%, and to 23.8% when including the investment tax from “The Affordable Care Act” of 2010. Essentially, tax law for individuals and couples above this threshold would return to tax law from 2000.

c. The President would maintain the Child Tax Credit at $1,000 and the reduced earnings threshold put in place for qualification to some or all of this tax credit.

2. Expiration of the Social Security payroll tax reduction

a. The payroll tax reduction for individuals and households signed into law by President Obama for 2011 and 2012 would expire in 2013 under this plan. The Social Security payroll tax for individuals and households would increase from 4.2% to 6.2%, which is the permanent rate last implemented in 2010. The Social Security payroll tax for business was not reduced as part of the temporary tax relief and will remain at 6.2%.

3. Relief from the Alternative Minimum Tax

a. The administration proposes to reduce the total number of taxpayers who are subject to the alternative minimum tax by permanently setting the parameters of the tax at levels that were in effect in calendar year 2011, while indexing those parameters for inflation in the years ahead.

4. Setting Limits on Deductions and Exclusions

a. This proposal would limit the extent to which higher income tax payers, defined by the previous thresholds of $200,000 for individuals and $250,000 for couples, can reduce their tax liability through certain deductions and exclusions to 28 percent of those current deductions and exclusions.

5. Modifying Estate and Gift Taxes

a. The amount of an estate or gift that will be tax exempt will be set permanently at $3.5 million dollars per individual and $7 million per couple in most cases. Any amount of an estate or gift set above the exemption threshold would be taxed at a rate of 45%.

6. Corporate Tax Reform

a. This proposal would lower the corporate tax rate from 35% to 28%, and broaden the corporate tax base by eliminating tax expenditures. Specifically, the administration would end favorable treatment of carried interest, remove expenditures for the depreciation of corporate jets, end subsidies to oil and gas companies, move from last-in-first-out to first-in-last-out accounting, and end expenditures for COLI, a provision related to corporations that purchase life insurance.

b. International Corporate Taxes: For the foreign operations of U.S. corporations, the administration proposes a tax on excess intangibles, a minimum tax on foreign source income in low tax countries, disallowing a deduction for the cost of moving operations abroad, the allocation of interest for deferred income, and a 20% tax credit for the costs of moving an operation to the United States from abroad.

Evaluation of President Obama's Plan

Simplicity: President Obama’s tax plan, while ending or capping some tax expenditures for upper income Americans and corporations, fails in truly simplifying the tax code. The plan’s level of simplicity or lack thereof, is remarkably similar to the status quo, although it remains slightly simpler given that it will end a few complex corporate tax expenditures in exchange for reducing the federal corporate tax rate. This policy will marginally simplify corporate taxation, but leave the vast majority of tax expenditures for most corporations in place. However, the plan fails remarkably in simplifying the tax code for all other stakeholders, including individuals and households. While the President will cap most deductions at 28% of the current deduction rate for individuals and households earning $200,000 and $250,000 or more respectively; the plan keeps all existing expenditures for individuals and households in place. Therefore, there is no simplification of a vast majority of the 70,000 pages of internal revenue code and IRS rulings. While the President’s plan ever so slightly simplifies the tax code, it receives a very low score of simplification precisely because the United States arguably has the most complex tax code in the World, and marginal changes will make little difference in altering this reality.

Economic Growth & Efficiency: The President’s tax plan, which contains some elements that are conducive to greater economic growth and efficiency, will marginally harm economic growth when weighing costs and benefits. According to economists Young Lee and Roger Gordon, in study that covered seventy countries and was published in the peer-reviewed Journal of Public Economics, a 1 percentage point reduction in the corporate tax raises annual GDP growth by 0.1-0.2%. Given that President Obama’s plan would lower corporate taxes by 7 percentage points, the possibility of boosting annual GDP growth by 0.7%-1.4% exists according to this study. However, the study does not account for the elimination or reduction of corporate tax expenditures, which is akin to a tax increase for corporations. Given that the President’s plan is revenue neutral regarding corporate taxation if the size of the economy was held constant, the effective tax rate on corporations is likely to remain in line with the status quo despite the fact that the tax would be collected differently. Therefore, any total cost or benefit to the U.S. economy as a result of President Obama’s corporate tax policy would be minimal or non-existent when modeled after economists’ Young Lee and Roger Gordon’s peer-reviewed study.

Income and payroll taxes will increase under the President’s plan and this has negative implications for economic growth and efficiency according to several empirical and peer-reviewed economic studies. The payroll tax increase for social security is a 2 percentage point increase on all income earners up to $113,700 of income. This payroll tax increase is widely expected to decrease economic growth by 0.6 of a percentage point, and cost the average worker $700 in 2013. Moody’s economist Mark Zandi expects that 400,000 jobs that would have otherwise been created, will not be created as a result of this tax increase.

The marginal federal income tax rate increase would increase marginal tax rates on the top 2% of income earners, from 33% and 35%, to 36% and 39.6%. According to the Congressional Budget Office, this specific tax increase will marginally decrease economic growth by 0.25 percentage point and reduce job growth by 200,000 jobs in 2013. The CBO also found that extending the tax reductions for the top 2% of income earners would increase economic growth by 0.1 percentage point. Therefore, the negative effect of this specific tax is smaller when compared to the expiration of the payroll tax reduction, however; these increases in marginal rates for the top 2% do slightly and adversely impact economic growth.

President Obama’s alternative minimum tax (AMT) relief does not promote economic growth, but it does prevent what would otherwise amount to a tax increase on millions of middle class taxpayers in 2013, which would have adverse effects on economic growth. When the alternative minimum tax was created in 1969, it was meant to force wealthy elites, who paid little or no federal taxes due to tax expenditures, to pay more in federal taxes. However, in the over four decades since its passage, the tax has not been indexed for inflation, meaning it effects a higher percentage of taxpayers, and raises more than fourteen times the revenue it raised in 1969, when adjusted for inflation. President Obama’s plan will prevent the AMT, which currently increases taxes for 4.3 million taxpayers, from increasing taxes on a total of 34 million tax payers in 2013 and 55 million taxpayers in 2022. Therefore, while this policy provision will not improve the status quo, it prevents substantial economic harm in the years to come.

In the final analysis, President Obama’s tax plan will reduce economic growth by at least 0.85 percentage points and reduce job growth by 600,000 jobs in 2013, when simply considering the effects of the aforementioned increases in income taxes and payroll taxes alone. While many economists and studies including a recent report from Ernst & Young LLP conclude that higher capital gains/dividends tax rates result in less saving, investment, and economic productivity by using historical and international comparisons; there is very little empirical evidence available to more concretely predict the effects of the President’s plan of a 33% increase in the capital gains/dividends tax rate. Despite these negative outcomes on economic growth and efficiency, it is worth noting that a few of President Obama’s proposals, including the permanent extension of the 2001 and 2003 tax reductions for 98% of taxpayers and the “patch” on the alternative minimum tax, prevent significant harm from befalling the United States economy in 2013 and beyond. This analysis is not claiming that the economy will contract by 0.85% and that unemployment will increase by 600,000 jobs in 2013, but that the result of this policy alternative entails lower economic growth and less employment than what would have otherwise been achieved had the income and payroll tax reductions been extended through 2013. Finally, this analysis does not include the effects of tax increases due to previously passed legislation, such as The Affordable Care Act of 2010, even though such legislation was supported by the President. This analysis merely covers the President’s tax plan from 2012.

Equity: The President’s plan will improve income inequality in the United States. The increase in marginal income tax rates and the increase in the capital gains rate to 20% will lower the post-tax gross income of the top 2% of American income earners. Since affluent Americans receive a greater percentage of their gross income from capital gains and since the bottom 40% of income earners do not have taxable capital gains; the effect of this capital gains tax increase will lower the income of affluent Americans, thereby bringing about greater income equality. The increase in marginal income tax rates will have the same effect.

While the increase in the social security payroll tax back to its normal, pre-2011 level will increase the tax for all income earners, the tax only affects income up to $113,700. Therefore, the rich are not as adversely affected by the tax increase as the poor and middle class. The average income earner in the top 1% will lose 1/10 of one percent of total income as a result of this tax increase. Meanwhile, the poor and middle class will lose 2 percentage points of total income. However, the 5% point increase in capital gains and 3-4.6% point increase in the income tax rate for the top 2% of income earners clearly reduce the income of affluent Americans by more than 2 percentage points. In addition, President Obama’s tax plan would cap major deductions for this top group of income earners at 28% of current levels. Therefore, while the social security payroll tax increase moderates the effects of reducing income inequality, the wealthy will see a larger increase in their tax liability and a greater reduction in their post-tax income in comparison to the poor and middle class when all the moving parts of President Obama’s plan are taken into consideration. Finally, if the increased tax revenue results in higher levels of government expenditure that directly benefit the poor and middle class more substantially than the upper-middle and upper class; income inequality can be further reduced.

Many groups view tax equity as government’s equal treatment of all taxpayers rather than government’s support for the greater equality of economic outcomes. From this perspective of equity, President Obama’s tax plan increases inequity for the top 2% of wage earners, who will pay an even higher and more “unfair” percentage of the federal tax burden as a result of higher rates and a cap on tax deductions and credits for this group. However, a small group of the wealthy, who earn most of their living from capital gains, dividends, and carried interest, will have to pay at the 20% (23.8% rate with The Affordable Care Act) tax rate rather than the 15% tax rate, thereby increasing their share of the total federal tax burden, and increasing equity. Overall, when considering equity from two different value perspectives, the President’s tax plan has a positive effect on increasing equity.

In conclusion, the President's tax reform plan does not substantially improve the simplicity of the tax code, reduces economic efficiency and growth, and reduces post-tax income inequality.

Reforming the tax code is reportedly a priority for the 113th Congress.

Tax choice

Main article: Tax choice

Tax choice is the theory that taxpayers should have more control with how their individual taxes are allocated. If taxpayers could choose which government organizations received their taxes, opportunity cost decisions would integrate their partial knowledge. For example, a taxpayer who allocated more of his taxes on public education would have less to allocate on public healthcare. Supporters argue that allowing taxpayers to demonstrate their preferences would help ensure that the government succeeds at efficiently producing the public goods that taxpayers truly value.

See also

• Americans For Fair Taxation
• Americans for Tax Reform
• Land Value Tax
• FairTax
• Flat tax
• Freedomworks
• OneTax
• Tax haven

External links

International

• Tax reform at the Open Directory Project
• The Tax Gap collected news and commentary at The Guardian
• Tax Evasion (international) at The New York Times
• Tax Justice Network

Australia

• Tax Reform Australia

United Kingdom

• The Chartered Institute of Taxation
• Low Incomes Tax Reform Group

United States

• Americans for Responsible Taxes
• Americans For Fair Taxation
• Americans for Tax Reform
• Citizens for an Alternative Tax System
• Citizens for Tax Justice
• Henry George Foundation of America
• Kill Your Taxes
• Libertarian Party - U.S.
• National Taxpayers Union
• Tax Foundation
• Automaticly Paid Transaction Tax