Creating Sustainable Tax Reform

Big Picture

Tax policy is one of the most important tools our government can use to bridge the gap between federal revenue and spending. It is also important for combatting income inequality. To do this sustainably and effectively, our current tax system must be simplified and reformed.

Operative Definitions

1. Tax code: The federal laws that determine how much money individuals and corporations owe in taxes.

2. Internal Revenue Service (IRS): The U.S. government agency responsible for tax collection and the enforcement of the tax code.

3. Income tax: A tax levied on income earned by workers. The U.S. has collected a federal income tax since 1913.

4. Corporate tax: A tax levied on the profits of a corporation.

5. Capital gains tax: A tax levied on income from the sale of a property or investment.

6. Value-added tax (VAT): A tax levied on goods and services at every point of their production.

7. Sales tax: A tax levied on goods and services at their point of sale that is collected by the retailer.

8. Progressive tax: A tax that increases in percentage as an individual or corporation’s earnings increase.

Important Facts and Statistics

1. In 2019, the federal government collected $3.5 trillion in tax revenue.

2. The U.S. currently has seven income tax brackets, ranging from 10% for the lowest earners to 37% for those making over half a million dollars. Income is taxed marginally, meaning only earnings above each bracket’s threshold are taxed at that rate. For example, if you earn $501,000, only the last $1000 earned is taxed at 37%.

3. The current corporate tax rate in the U.S. is 21%.

4. U.S. corporations currently hold $2.1 trillion in profits in offshore tax havens.

5. Closing corporate tax loopholes will increase government revenue by up to $90 billion per year.

Four-Point Plan

(1) Simplify the tax filing process and promote tax literacy.

Large tax preparation companies have continued to successfully lobby the government to keep the tax filing process as confusing as possible. Offering return-free federal tax filing, in which the IRS calculates and withholds taxes for individuals, would save Americans $2 billion a year in tax preparation expenses. On the state level, mandating basic tax literacy classes in high schools will provide Americans with the basic tools they need to understand the tax system and successfully file taxes independently.

(2) Simplify the tax code. 

The various current tax deductions and credits can be confusing, and many taxpayers miss out on credits to which they may be entitled. Consolidating tax credit provisions for families and increasing education on these programs will help to close that gap. The Tax Cuts and Jobs Act of 2017 increased the standard deduction that taxpayers are eligible to receive. Maintaining this increase in standard deduction amounts will discourage itemizing, which will both simplify the filing process for 90% of Americans and reduce their tax burden.

(3) Phase out tax deductions for interest paid on mortgages. 

Currently, taxpayers can deduct interest paid on their first and second mortgages from their taxable income. Eliminating these deductions over 10 years will generate $270 billion federally by 2030.

(4) Reform the current tax structure and close loopholes. 

Currently, gains from stocks, bonds and real estate between a purchase and an owner’s death are not taxed. Closing this loophole will generate $280 billion over 10 years. In addition, a couple can currently leave $10.6 million to heirs and not be required to pay federal estate or gift tax. Lowering this cap to $5 million will encourage people to spend their assets and inject money into the economy, generating $249 billion over 10 years.

Why This Initiative is Important

Simplifying the tax process increases the system’s efficiency and reduces costs for individuals and organizations. This plan includes changes to income, estate and capital gains taxes that help combat income inequality, an aspect that tax simplification alone falls short of addressing. Keeping the tax system progressive and preventing undue influence from special interests are vital to the pursuit of financial equity. The federal spending outlined above will provide returns on investment. Amending the 2017 Tax Cuts and Jobs Act, without fully reversing it, will help curb tax loopholes while maintaining bipartisan support and avoiding polarization.

Acknowledgments

The following student(s) worked on this nonpartisan proposal: Linda Meyerson, University of California, Berkeley; Adam Brasher, Fordham University.

The following individuals worked with our student interns and contributed expertise, wisdom and moral support in the development of this proposal: 

1. Leo Martinez: Professor of Law, University of California, Hastings, San Francisco, CA.

2. Jeffrey Hoopes: Research Director, University of North Carolina Tax Center; Associate Professor of Accounting, University of North Carolina, Chapel Hill, NC.

3. Karl Smith: Vice President of Federal Tax Policy, Tax Foundation, Washington, D.C.

4. Chris Edwards: Director of Tax Policy Studies, CATO Institute, Washington, D.C.

Note: Not all participants necessarily agree with every aspect of this proposal.

The opinions expressed in this article are those of the individual author(s).

Sources

“Fact Sheet: Offshore Corporate Loopholes.” Americans for Tax Fairness. https://americansfortaxfairness.org/tax-fairness-briefing-booklet/fact-sheet-offshore-corporate-tax-loopholes/#:~:text=U.S.%20corporations%20dodge%20%2490%20billion,been%20taxed%20in%20the%20U.S. 

“How Much Money Has the Federal Government Collected and Spent in Fiscal Year 2023?” U.S. Department of the Treasury. https://fiscaldata.treasury.gov/americas-finance-guide/#:~:text=In%202022%20the%20federal%20government,pay%20interest%20incurred%20from%20borrowing.

Lawder, David. “Explainer: The $4 trillion U.S. government relies on individual taxpayers.” Reuters, 28 Sept. 2020. https://www.reuters.com/article/us-usa-trump-taxes-revenue-explainer/explainer-the-4-trillion-u-s-government-relies-on-individual-taxpayers-idUSKBN26J30F. 

Orem, Tina. “2020-2021  Tax Brackets & Federal IncomeTax Rates.” Nerdwallet, 12 Apr. 2021. https://www.nerdwallet.com/article/taxes/federal-income-tax-brackets. 

“Tax Policy Center Briefing Book: Key Elements of the U.S. Tax System.” Tax Policy Center. https://www.taxpolicycenter.org/briefing-book/how-does-corporate-income-tax-work#:~:text=The%20United%20States%20imposes%20a,from%209%20percent%20in%202017.