Three principles for fair reform

The federal tax code is broken. It is failing at its most fundamental task: generating sufficient revenue to cover the costs of running the government that the American people want. But that is not its only failing — it is complex, it is inefficient, it is unfair. And over the past several decades, a dense thicket of spending programs disguised as tax breaks has grown wild in the code. If we are going to reform the tax code, we must address each of these failings. 

First and foremost, our tax system doesn’t raise enough revenue. Taxes exist to pay for the public investments that promote economic growth, including infrastructure, education and scientific research. Taxes support services that only the government can effectively perform, such as national defense and ensuring clean food, safe consumer products and clean water. Taxes make it possible to meet our societal obligation to care for our veterans, our elderly and disabled and our impoverished. And taxes have funded some of the greatest achievements in American history, from putting a man on the moon to inventing the Internet.

Today, federal revenue is at its lowest level since the 1950s. Even with the recent moderate revenue increases, tax levels are still expected to stay far below projected spending levels for the next decade and beyond, even after assuming significant spending cuts. The recent plan put forward by Rep. Paul Ryan (R-Wis.), which purports to balance the budget by 2023 with spending cuts alone, actually proves this point. Only by relying on gimmickry and unrealistic cuts can he even make such a claim. Furthermore, cuts of that magnitude would likely produce such economic harm and human suffering so as to make them self-defeating. Like it or not, reform must lead to higher revenue.

Secondly, our tax system has become less progressive over the last several decades. A foundational principle in developing the American tax system is that those with higher incomes should pay a higher share of their income in taxes because they have benefited the most from our civil society and public investments, and because their ability to contribute is so much greater. But in recent years, the trend has been to ask less and less of those at the top. The very highest-income households have enjoyed substantial tax cuts, even as their incomes have risen: From 1979 to 2007, before the start of the recent recession, the pretax incomes of the top 1 percent more than tripled while their tax rates declined by about one-fifth. As a result, there are too many high-income households who now pay lower federal tax rates than middle-income Americans. 

A big part of the problem here are the myriad special tax breaks that the current code bestows upon higher-income households. Even broadly taken breaks like the mortgage interest deduction are skewed to those at the top. For example, if two families both deduct $10,000 in mortgage interest paid from their taxable incomes, their actual tax benefits could vary greatly. For a high-income family in the 39.6 percent tax bracket, that deduction would lower their tax bill by $3,960. For a middle-income family in the 20 percent tax bracket, that same deduction results in only $2,000 in tax savings. Tax reform should address the upside-down nature of these breaks.

And don’t forget, the federal income tax is just one piece of a larger national tax system, many elements of which aren’t progressive at all. Excise, payroll and state and local taxes all ask much less of high-income households than they do of low- and moderate-income households. This is why it is even more important for tax reform to make sure our federal income tax is progressive. 

Finally, our existing tax code is just too complex. It contains too many narrowly targeted special-interest breaks that have either outlived their usefulness or simply never had any real economic justification at all. The fact that two families earning similar amounts can pay widely divergent tax bills erodes Americans’ faith in the fairness of the tax code. Tax reform should simplify the filing process and streamline the code so that everyone can trust that each taxpayer is being treated fairly.

Tax reform is an admirable goal. It is by no means our most pressing economic challenge; that would be the continuing task of healing the labor market. But fixing the code so that we reduce government debt, eliminate inefficiencies and improve fairness and transparency is certainly worth pursuing. “Reform” that fails to address those failings is no reform at all. 

Linden is managing director for the economic policy team at the Center for American Progress.