1 Center for American Progress | Who Wins and Who Loses?
Who Wins and Who Loses?
Debunking 7 Persistent Tax Reform Myths
By Alexandra Thornton and Harry Stein October 22, 2015
Policymakers agree ha he U.S. ax sysem needs reorm. America’s curren ax code is ou o sep wih he imesbu no necessarily in he way ha some poliicians wan voers o believe. Ani-ax slogans and oo-good-o-be-rue proposals o replace he curren ax sysem are a smoke screen o avoid he realiy he Unied Saes aces oday: rapid income growh and profis a he op end o he income scale, as well as an aging populaion. Combined, hese issues will presen increasing challenges or he U.S. economy and he ederal budge over he long erm. Te curren ederal ax sysem includes an income ax on individuals and corporaions; a payroll ax on wages and salaries ha unds Social Securiy and par o Medicare; an esae ax ha, in 2013, only affeced he wealhies 0.18 percen o esaes
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; and a se o ederal excise axes argeing specific purposes or producs, including he sale o cigaretes, gas, and alcohol.
Boh he individual and corporae income ax, as well as he esae ax, are progressive: Higher-income households pay a higher percenage o heir income or hese axes han low- and middle-income earners. Federal payroll and excise axes, however, are regressive, placing a heavier burden on low- and middle-income axpayers han on upper-income individuals.
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Te ederal ax sysem is sill progressive overall.
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However, some o his progressiviy is eroded by sae and local axes, many o which are regressive.
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Since enacmen o he las major reorm, he ax Reorm Ac o 1986, Congress has inseredor in some cases re-insereda wide range o ax breaks ino he ax code.
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Tese breaks are also known as ax expendiuresgovernmen subsidies or various purposes delivered hrough he ax codeand here are now more han 250 such expen-diures buil ino he income ax sysem.
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As wih spending programs, some o hese ax expendiures efficienly suppor imporan policy goals, while ohers are less effecive. In 2015, he oal value o all ax expendiures was abou $1.5 rillion8.1 percen o he oal size o he U.S. economy as measured by gross domesic produc, or GDP.
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Because ax expendiures largely benefi upper-income individuals and corporaions, hey collecively reduce he overall progressiviy o he ederal ax sysem.
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Tese sub-sidies also reduce ederal ax revenues and mus be offse by increasing axes elsewhere, cuting spending, or incurring addiional ederal deb.
2 Center for American Progress | Who Wins and Who Loses?
Any ax reorm plan mus be considered wihin he broader conex o he ederal budge, which includes Social Securiy, Medicare, Medicaid, inrasrucure, naional securiy, educaion, scienific and medical research, job raining, and oher social saey ne programs. ax policy deermines how much unding is available or all o hese purposes. In he long run, ax revenues generaed under curren ax law will no be enough o susain Social Securiy, Medicare, and Medicaid as he U.S. populaion ages. Tereore, ax reorm will need o raise addiional revenues in order o avoid seep cus o hese programs and oher invesmens ha srenghen and expand he middle class.Bu he ax sysem isel is no undamenally broken. Any ax sysem is subjec o erosion as he poliical process generaes excepions and special rules and as he digial economy changes he speed and naure o how people and companies earn income and ransac business. Tis, however, does no mean ha he enire ax sysem mus be hrown ou. I does mean ha we need o re-evaluae he coss and benefis o individual and business ax expendiures and make oher changes in order o rebalance he sysem so ha everyone pays heir air share and he ax sysem operaes efficienly wihin he global economy. In many cases, hese reorms will have he added benefi o simpliying he ax code.Since he adopion o he 16h Amendmen in 1913, which gave Congress he power o impose axes on incomes,
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mos Americans have undersood ha axaion should be based on each individual’s abiliy o pay.
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Tus, when considering proposals o reorm personal income axes, business axes, or any oher par o he ax sysem, he mos imporan quesion o ask is: Who wins and who loses? I he winners are hose who have he abiliy o pay more, or i he losers are hose who have less abiliy o pay, policy-makers and ciizens should be skepical. Wih ha quesion in mind, his repor examines seven claims commonly employed in he ax reorm debae and separaes myh rom realiy. Poliicians requenly use hese claims o dodge he undamenal quesion o who wins and who loseswho would pay more, and who would pay lessunder heir respecive ax agendas.
1. We cannot close any tax loopholes until Congress takes up comprehensive tax reform
Te las major ax reorm effor occurred in 1986, when Ronald Reagan was presiden and ip O’Neill was speaker o he House o Represenaives. During he negoiaions leading up o passage o he ax Reorm Ac o 1986, much o he consensusand, ulimaely, he reducion in individual and corporae income ax raeswas achieved by inflicing a litle pain on everyone.
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Nearly every special ineres gave up a ax break in order o achieve he shared goal o lowering ax raes overall. Te vision o repeaing ha comprehensive process a a hypoheically ideal momen in he uure leads some poli-cymakers o argue ha even egregious loopholes should no be reormed or eliminaed unil Congress is prepared o ake on comprehensive ax reorm.
3 Center for American Progress | Who Wins and Who Loses?
Unorunaely, his raionale allows undeserving recipiens o widely recognized ax loopholes o coninue paying ar less han heir air share o axes or years on end. While reorming cerain ax breaks mus awai comprehensive reorm due o he need o work ou complex ineracions beween ax provisions, ohers are simply hidden orms o spending hrough he ax code ha benefi specific special ineress. Te so-called car-ried ineres loopholeenjoyed by invesmen und managersis a perec example o his sor o ax spending.
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Oher examples include he $4 billion o annual ax spending on he maure and exremely profiable oil and gas indusry.
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Proposing cus o ederal programs ha benefi sruggling amilies while leaving hese ax expendiures off he able simply makes no sense.
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Tis is especially rue given he hidden naure o many ax spending measures. ax spending is no subjec o rigorous annual reviewnor is here any regular process o coordinaion beween he ax-wriing commitees in he Senae and House and he com-mitees ha handle similar explici spending programs.
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For example, he congressional commitees and execuive deparmens ha oversee and adminiser governmen spend-ing on housing programs generally do no coordinae heir acions wih he commitees and deparmens responsible or large housing ax breaks.
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Lawmakers should no coninue o suppor waseul governmen spending or years or decades unil sufficien poliical momenum builds o pursue comprehensive bud-ge reorm. Likewise, preserving waseul ax breaks unil he poliical will exiss o underake comprehensive ax reorm is equally misguided. Egregious ax loopholes, once brough o ligh, should be eliminaed in order o make he ax code incremen-ally more air and efficien.
2. Economic growth depends on tax cuts for the wealthy because they are job creators
Many proposals or reorming he ax code would reduce ax raes on he wealhy. Proponens o hese reorms claim ha ax cus or high-income axpayers would encourage hem o work harder or ree up capial ha would be invesed in job-creaing enerprises, which, in urn, would increase economic growh. Tis is he logic ha underlies he old “ax cus pay or hemselves” heory,
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whereby ax cus generae so much economic growh ha ax receips acually increase enough o overcome he revenue los rom he ax cu.Bu his heoryha ax cus or he rich will dramaically increase economic growhhas been consisenly reued by experience. In realiy, economic growh in he Unied Saes since World War II has ended o be greaer in imes wih relaively high op marginal income ax raes.
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Tis is no o say ha high ax raes promoe economic growhcorrelaion does no prove causaionbu his daa makes i hard o believe
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