A report that my organization, Citizens for Tax Justice, released this week provides some answers. First, senators can start by identifying the tax expenditures we should not have, those that are most regressive and that accomplish no policy goal at all. The top candidate for this category is the preferential tax rates for capital gains and dividend income. No tax expenditure comes close to being this targeted towards the wealthy; 68 percent of the benefits will go to the richest one percent of Americans this year. This tax expenditure is the reason extremely wealthy people like Mitt Romney and Warren Buffett pay a lower effective tax rate than some middle-income people.
Second, senators can identify those tax expenditures that are progressive and that accomplish an important policy goal. The Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) meet this definition. Low-income Americans pay federal payroll taxes, state and local sales taxes, and other taxes that are regressive, meaning they take a larger share of income from a poor family than from a well-off family. Our report explains that when you consider all the taxes that Americans pay, our tax system overall is just barely progressive, and would be seriously unbalanced if we lost those tax expenditures like the EITC and CTC that provide some progressivity. What’s more, there is a great deal of research demonstrating that these breaks achieve the policy goal of encouraging work.
Third, there are many tax expenditures that fall in between these extremes of very regressive and unjustified and very progressive and justified. There are several ways Congress can reform these. Lawmakers could enact an overall limit on tax expenditures to reduce the benefits that go to the best-off Americans, as President Obama proposes with his plan to limit the tax savings from each dollar of deductions and exclusions to 28 cents.
Or Congress could reform each individual tax expenditure. Some reforms might involve dramatically restructuring them so that they really do encourage whatever behavior they are supposed to encourage. For example, the Congressional Budget Office has already analyzed options that could (in theory, at least) reduce the revenue cost of the charitable deduction while boosting the amount of charitable contributions made.
Or Congress might propose narrow reforms to prevent certain abuses of tax expenditures. For example, Congress could limit deductions for charitable donations of property to the cost paid by the donor. This would mean that wealthy people would no longer be able to buy a painting for $1,000, have it appraised for $10,000, and then donate it and deduct the full $10,000.
Finally, senators need to be clear that the revenue savings achieved through reducing or eliminating certain tax expenditures should not go entirely towards paying for reductions in tax rates. Our current tax laws will collect tax revenue equal to 19.1 percent of GDP in a decade. Spending reached 23.5 percent of GDP during the Reagan administration. The U.S. collects lower taxes, as a percentage of GDP than every OECD country save Mexico and Chile. We cannot continue to underfund public investments that build our nation and our country because of an ideological opposition to taxes.
Wamhoff is legislative director of Citizens for Tax Justice.