Tax Reality vs. Liberal Propaganda

Want to help make a huge step towards balancing the budget, make the tax code fair and equitable, and improve the economy? According to President Obama, Massachusetts Senate candidate Elizabeth Warren, and other liberals, the way to do this is to raise taxes on the wealthy:

From a CBS partial transcript of the 2012 State of the Union address: "Tax reform should follow the Buffett Rule. If you make more than $1 million a year, you should not pay less than 30 percent in taxes."

More famously, from a 2011 Warren town hall: "You [wealthy people] moved your goods on roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police forces and fire forces the rest of us paid for."

These are great arguments to run on in an election cycle focused on jobs, economic fairness, and government reform.  Unfortunately, they run into the slight problem of not being based in reality -- especially Warren's statement, since she dishonestly implies that wealthy people don't pay taxes.

As described here, the first fact ignored by the tax-increasing crowd is that upper-income-earners pay both more federal taxes than lower-income Americans.  This is true both for the percentage of income taxed and as a percentage of the total federal taxes paid to the IRS.  This has been the case for decades.  Additionally, taxing millionaires at 30% would be a mere 1% increase in their average tax rate, and it would bring in less than $10 billion in additional revenue.

The second thing ignored in these arguments is a simple step that would make the tax code actually fairer while increasing both federal revenues and economic growth.  Of course, it would probably result in a lot of members of Congress being out of a job, which is perhaps why it has never happened: cut out the $1 trillion in annual federal tax loopholes.

Once this is done, myriad options present themselves.  One politician might want to lower rates correspondingly to keep the tax code revenue-neutral.  Another might want to explicitly put the extra revenue towards balancing the budget within two or three years.  Or we could take a middle ground.

Last month, the Congressional Budget Office's 2012 alternative fiscal scenario (read: political reality) budget report estimated that the federal government would spend $47.136 trillion from 2012 to 2022 and collect $36.154 trillion in tax revenues.  If we took half of the value of all loopholes over ten years and put them toward deficit-reduction, we could take the rest and lower the tax burden on all Americans by about 13.8%.  If put toward deficit-reduction, the remaining $5 trillion would cut about 45.5% of expected deficits over this period.  Not only would this be a strong step in the right direction fiscally (always good for our barely existing AAA credit rating), but it would also help create a stronger economy, which would in turn bring in more tax revenues to the government.

These solutions would accomplish far greater reduction in the deficit than the Democrats' ideology-infused proposals.  Furthermore, they would promote economic growth and thus address the most important issue to Americans: jobs.  Unfortunately, recent news informs us that Democrats on the Hill plan on doubling down on raising taxes, in the interest of "tax fairness" and "economic fairness."  Never mind the economy and exploding deficits -- there's an election to win!

P.S. To this author, the best tax system is one that takes away the coercive/gun-to-the-head component of the current tax code, as the Fair Tax does.  However, as a political compromise, the nation would do fine with a flat tax of 20% on individuals and a 20% corporate tax with no exemptions or loopholes (this would include the current payroll tax).  According to the Bureau of Economic Analysis (BEA), about $2.2 trillion was collected in individual and payroll tax revenue in 2011.  Using BEA measurements of taxable income related to a flat tax and a corporate tax, a 20% rate of each would bring in slightly more to the federal government in revenues than the current system does.  Of course, the economic boom that would come from this reform of the tax code would bring in an incredible amount of increased tax revenue, which could then be used to help balance the budget.

Paul Revere is a political and policy blogger who has contributed to, Conservative Home USA, and Reason Foundation's Out of Control blog.

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