Flat Tax vs Sales Tax

The current tax code of the United States is irreversibly broken and should be repealed. The tax laws undermine the country's prosperity by imposing needlessly harsh penalties on work, savings, and investment. Although many taxpayers face confiscatory tax rates and often are forced to pay more than one layer of tax on their income, the politically well-connected can take advantage of special deductions, credits, preferences, shelters, and loopholes to minimize their own tax liability. The result of this double standard is a tax system that not only penalizes productive behavior, but also violates the fundamental constitutional principle of equal treatment under the law.

The good news is that Congress is considering two major plans to fix the tax code: the flat tax and the national retail sales tax. Replacing the current system with either of these two taxes immediately would restore the principle of fairness to the tax system because both would treat all taxpayers equally. Both the flat tax and a national sales tax would replace today's discriminatory tax structure with a single low rate. In addition, either plan would eliminate the current tax code's bias against savings and investment and promote the kind of capital formation that America needs to boost workers' incomes and raise long-term economic growth. In addition, because far fewer personnel and far less paperwork would be needed to collect "contributions" under either plan, the ultimate result would be a dramatic downsizing of the Internal Revenue Service (IRS) bureaucracy and billions of dollars in compliance costs saved each year.

How is it that these different types of taxes could produce such similar results? The answer lies in the fact that the flat tax and sales tax are almost identical in purpose and principle. Both rest on the fundamentally sound principle that all income should be taxed at one low rate and only one time, and that the tax should be collected in the least intrusive way possible. The only obvious difference between the two is the collection point of those taxes. A flat tax is collected up front, imposing a single layer of tax on income when it is earned, and a sales tax imposes one layer of tax when the income is spent. In both cases, income is taxed, but only once and presumably at a very low rate.

Throughout the United States, the debate about tax reform has changed over the past decade. No longer do politicians and the electorate ask whether the tax system should be changed; instead, they ask how and when. Members of Congress should take advantage of this win-win opportunity to eliminate the current incomprehensible system and champion the features and benefits of the flat tax and a national retail sales tax.

How Would the Flat Tax Work?

For many Americans, the flat tax means simply that everyone would be taxed at "just one rate." Even though the 17 percent tax rate is a key feature of the flat tax[1], it would be only one element of the comprehensive reform.[2]The flat tax eliminates inequalities in the current tax code by treating all taxpayers--and income--equally. With the exception of exemptions based on family size, all income would be taxed, but only one time. For fairness and simplicity, there would be no deductions, credits, preferences, or loopholes. To achieve even further simplicity, taxes on most business and capital income (such as dividends and interest payments) would be withheld and paid at the business level.

The leading legislative proposal to create a flat tax is sponsored by House Majority Leader Richard Armey and Senator Richard Shelby (R-AL). Under the flat tax, the current Internal Revenue Code's 480 forms would be replaced by two simple postcard-size forms. Individual taxpayers would receive a generous allowance based on family size (more than $33,000 for a family of four) but would be responsible for paying a tax of 17 percent on any wage, salary, and pension income above that amount. The tax on all other income, including interest, dividends, rents, royalties, and business profits, would be withheld and paid at the business level (much as an employer withholds and pays individual income tax for workers). Because the government would not be allowed to tax any income more than once, both the capital gains tax and the death (or estate) tax would be eliminated. The flat tax also would get rid of all itemized deductions like the write-off for home mortgage interest, charitable contributions, and state and local income and property taxes. On the business side,[3] the flat tax wipes out all features of the current code that undermine U.S. competitiveness, including the alternative minimum tax, rules on pensions and deferred compensation, depreciation (which would be replaced with first-year expensing), international tax provisions, and uniform capitalization rules. (See Chart 1.)

Instituting the flat tax would not affect payroll taxes for Social Security and Medicare. Even though these programs, funded by payroll taxes, certainly require fundamental reform, the debate surrounding these entitlements is not likely to be tied to discussions about reforming the income tax system.

How Would a National Sales Tax Work?

The national retail sales tax proposal would repeal the personal and corporate income tax code and replace it with a tax on all final sales of goods and services to consumers.[4] Although such a tax resembles the state sales taxes most Americans pay already, a national retail sales tax is much broader in scope and would require a tax rate roughly equal to the rate imposed by the flat tax. All economic output, including such activity as services that traditionally escape state sales taxes, would be subject to the tax. Like the flat tax, a national retail sales tax would treat all economic activity equally, but taxpayers would receive a universal credit--a measure that would have the effect of protecting all taxpayers from having to pay tax on purchases up to the poverty level.

The leading legislative proposal to create a national retail sales tax is sponsored by Representatives Dan Schaefer (R-CO) and Billy Tauzin (R-LA); the lead Senate proponent has been Senator Richard Lugar (R-IN). The sales tax bill introduced in the House would eliminate the individual and corporate income taxes, along with all related provisions such as the death tax and capital gains tax. To replace these levies, the government would impose a 17.65 percent tax on the value of all final sales to consumers.[5] To protect lower-income citizens from taxation, the legislation also would require the government to send all households periodic rebate checks, the net effect of which would be to offset the tax burden on purchases up to the poverty level. A family of four, for example, would receive a rebate from the government equal to the tax on about $18,500 of purchases. The rebate, which would be added in equal increments to workers' paychecks throughout the year, would total nearly $3,000. (Although it is not as generous, the rebate mechanism in the sales tax proposal would serve the same role as the family allowance in the flat tax; on the other hand, however, the smaller personal allowance would facilitate a lower tax rate.) To avoid creating a tax preference for government output, the national sales tax would impose an excise tax on the payrolls of federal, state, and local governments. Retailers would be compensated for their efforts to collect and then pay the taxes by receiving a rebate of 0.5 percent on any tax they collect or $200, whichever is greater. Finally, the sales tax legislation also provides a fee of 1 percent to any state that agrees to administer the tax.

Americans for Fair Taxation has proposed an alternative sales tax that would eliminate not only all personal and corporate income taxes but all payroll taxes as well. Proponents of this approach--which has not been introduced in Congress yet--argue that Social Security and Medicare payroll taxes must be repealed if all direct federal taxes on income are to be extinguished.[6]

What Do the Flat Tax and a National Sales Tax Have in Common?

Most taxpayers assume that the flat tax and a national sales tax are radically different ways to fund the federal government. Because one tax is collected from the paycheck and the other is collected at the cash register, this assumption is understandable. Perceptions of the two taxes also may be affected by the nature and scope of existing income and sales taxes. The current federal income tax imposes significant complexity on the economy and exposes certain types of income to more than one layer of tax; most state sales taxes are relatively invisible to taxpayers. These differences between the existing federal income tax and various state sales taxes, however, are almost irrelevant. By almost every standard, the flat tax and a national retail sales tax represent two sides of the same coin.
The common features of the flat tax and national sales tax are:

A single flat rate. Under both plans, income is taxed at one low rate.[7] This would ensure that the government treated taxpayers equally and would address the problem of high marginal tax rates. The single low rate also would promote faster economic growth by minimizing tax penalties on work, risk-taking, and entrepreneurship.

No bias against savings and investment. Implementing either the flat tax or a national sales tax would eliminate the current tax code's bias against capital formation by ensuring that no income is taxed more than one time. Because double taxation of capital income is a pervasive problem in the current law, going to the flat tax or a national sales tax would stimulate higher incomes and faster growth by minimizing the tax penalties on savings and investment.

Equality. Adoption of the flat tax or a national sales tax also would end the discriminatory treatment caused by a tax code that grants preferences or imposes penalties on certain behaviors and activities. Either reform would change the code so that all taxpayers--and all income--are treated the same under the law.

Simplicity. With 480 forms and 8 billion pieces of paper, the current IRS system has become a nightmare of complexity. Even though the flat tax and a national sales tax have different collection points, both would lower the cost of compliance and generate huge savings. Under the flat tax, individuals and businesses would fill out one simple postcard sized form. With a national sales tax, wage earners would be spared the need to interact with the tax system, and businesses simply would submit to the government a monthly form remitting the taxes they collected.

How Do the Flat Tax and a National Sales Tax Differ?

As similar as these two types of taxes are, there are differences, the most important of which center around how they would be collected.

A national retail sales tax would be added to the final selling price of all goods and services and collected at the point of sale. To avoid double taxation, the tax would not be levied on intermediate transactions or sales. For example, a lumber mill would not collect any tax on its sales to furniture manufacturers. Likewise, a furniture manufacturer would not be required to collect taxes on sales to furniture retailers.[8] Only the retailer making a sale to the consumer would impose and collect the taxes and then remit the money to the government.

The flat tax is regarded frequently as a simplified version of the current income tax. The existing loopholes, discriminatory rate structure, and different ways the government taxes the same income more than once would disappear, but collection of the tax would be similar to the manner in which taxes are collected today. Taxpayers would file returns by April 15 and either receive a refund or pay additional taxes, depending on whether their withholding was greater or less than the tax liability calculated on the postcard-sized form.

The Flat Tax as a Consumption Tax

To many Americans, consumption taxes are those collected at the cash register- such as the state sales tax--or value-added taxes like those they might encounter on a trip to Europe. Few Americans consider the flat tax a consumption tax because it would be levied on personal income. Economists and public finance experts, however, do consider the flat tax a consumption tax. The confusion revolves around the current tax code's policy of imposing greater penalties on income that is saved and invested than on income that is consumed. A tax code that does not discriminate against savings and investment is considered a consumption-based tax system, regardless of whether taxes are collected at the paycheck or at the cash register. In this respect, the flat tax is a version of a consumption tax.

Both the flat tax and a national sales tax also could be considered examples of an income tax, but one in which "income" is properly defined. The current tax system, by contrast, should not be referred to as an income tax; rather, it is an excessively complicated amalgamation of income and wealth taxation.

Charts 3 and 4 illustrate the ways in which the flat tax and sales tax are so similar and yet have so little in common with the current income tax structure.

What are the Benefits of a Single-Rate Tax System?

Regardless of which option is chosen, both the flat tax and sales tax would yield immense benefits for Americans. Specifically, these benefits would include:

Fairness. Most Americans believe the tax code is riddled with discrimination. They are right. The government either imposes tax penalties or grants tax preferences depending on the source, use, or level of income. All of these special provisions violate the principle that all citizens should be treated equally by the law. The flat tax and a sales tax would restore fairness in the system by ensuring that all taxpayers, all income, and all products are treated the same.[9]

Economic growth. Both the flat tax and a sales tax would minimize the tax rate imposed on productive behavior and eliminate the myriad forms of double taxation in the current code. Consequently, either one would boost the economy's potential growth rate and cause permanent increases in economic output. How much the economy would benefit is not easy to predict, but many economists project that, within 10 years, the economy would be 5 percent to 10 percent larger than it would be under the current tax structure. Faster growth and a bigger economy also translate into higher standards of living.[10]

Higher incomes. Tax reform increases income in two ways. Simply stated, when people get to keep more of what they earn, they want to earn more. A low tax rate increases the incentives to work and the desire to work longer hours. The second, and far more important, reason tax reform causes income to rise is that workers become more productive. Because the flat tax and a national sales tax would eliminate the bias against savings and investment, companies would be willing to invest in upgrading their production capabilities, giving their employees better machinery, tools, equipment, and technology with which to work more efficiently and hence become more productive.[11] As Chart 6 illustrates, this capital-driven increase in productivity is tied closely to higher wages. It is impossible to make exact predictions about how much workers' incomes will rise, but it is worth noting that even a 0.1 percent increase in the growth rate, sustained over 10 years, will mean an additional $5,000 in annual income for an average family of four.

Why Double Taxation is Detrimental

To understand double taxation, consider a taxpayer who has $100 of disposable after-tax income. That taxpayer has a choice: either to spend the income immediately or to defer consumption by investing it. Consuming the money immediately yields $100 of benefit immediately, but investing it would yield a return that could allow the taxpayer to consume, say, $115 a year from now. The decision to invest obviously varies according to individual preferences about the value of consumption today compared with consumption in the future, but let us assume a taxpayer would be willing to give up $100 of consumption today in exchange for $110 of consumption one year later. In this example, of course, the taxpayer will choose to invest. In addition to making the taxpayer better off in the future, this decision also has a desirable impact on the economy by increasing capital.

Today's system of multiple taxation, however, undermines capital formation. If the government decides to tax the return earned on the $100 investment, the hypothetical taxpayer in the above example may wind up sacrificing $100 of consumption today to gain only $105 in after-tax consumption one year from now. Fewer individuals under this scenario would choose to invest, opting instead for immediate consumption and thereby depriving the economy of their capital. In addition, under today's system, taxpayers can look forward to paying two additional layers of tax on this $100 investment: capital gains and death taxes. (See Chart 5.) Double taxation, therefore, significantly undermines savings, investment, and future economic growth, and--because every economic theory, even Marxism, acknowledges that capital formation is the key to faster growth and higher wages--is particularly self-destructive.

Job creation. Tax reform also will make employees more valuable to business, thereby increasing wages for those already working and stimulating the creation of new jobs. The combination of lower taxes and faster growth will make it more profitable to hire certain workers, particularly those with low-skill levels who previously may have been considered unemployable. Another effect will be to draw new workers into the labor force. Many people, including older Americans, teenagers, and spouses, choose not to work because the direct costs of working exceed the benefits. Tax reform would alter that tradeoff by reducing the tax penalty on employment.
Increased wealth. Tax reform will boost the economy's future performance, but it also will have a more immediately positive impact by increasing the country's wealth. The value of income-producing assets (everything from stocks and bonds to office buildings and pet stores) is determined by market expectations of future income discounted by inflation, risk, and taxes. Once a lower tax rate is put in place, whether through the flat tax or a national sales tax, and double taxation is eliminated, income-producing assets will become more valuable (that is, there will be an increase in the present value of the future after-tax income stream generated by those assets). This increase in value means an immediate increase in wealth.[12]
Savings and investment. In addition to increasing the value of existing assets, changing to either the flat tax or the sales tax would boost the levels of new savings and investment substantially. The current tax code imposes two or three levels of tax on income that is saved, and as many as four levels on income from investment. Tax reform to eliminate these penalties on capital formation would increase the incentives to save and invest. Moreover, a flat tax or sales tax would make the United States a magnet for capital from around the world. For example, the tax rate reductions of the early 1980s dramatically increased the amount of worldwide capital that settled in the United States. The more dramatic changes involved in reforming the tax system today would have even more significant effects on savings and investment.
Lower interest rates. Tax reform will drive interest rates down by shifting the treatment of interest income. Instead of taxing the interest received by the lender, the flat tax would make interest payments by the borrower nondeductible. This approach--somewhat akin to the tax treatment currently granted to state and local municipal bonds--would remove the tax premium embedded in interest rates and result in a reduction between 25 percent and 35 percent.[13] Under a sales tax, eliminating direct taxes on income would have the same effect.
Lower compliance costs. Because both the flat tax and a national sales tax would eliminate the bewildering complexity of the current system, tax reform would slash the $157 billion annual costs of complying with personal and corporate income taxes. The current system is such a mess that even consulting expensive tax experts is no guarantee of accuracy. For example, in March 1997, Money reported that it had sent a hypothetical family's tax return to professional tax preparers. Of the 45 who responded, not one professional tax preparer came up with the proper solution, and fewer than 25 percent came within even $1,000 of the correct tax liability. The business side of the tax code makes processing personal income taxes seem simple by comparison.

Introduction

How Would the Flat Tax Work?

For many Americans, the flat tax means simply that everyone would be taxed at "just one rate." Even though the 17 percent tax rate is a key feature of the flat tax¹, it would be only one element of the comprehensive reform.²The flat tax eliminates inequalities in the current tax code by treating all taxpayers--and income--equally. With the exception of exemptions based on family size, all income would be taxed, but only one time. For fairness and simplicity, there would be no deductions, credits, preferences, or loopholes. To achieve even further simplicity, taxes on most business and capital income (such as dividends and interest payments) would be withheld and paid at the business level.

The leading legislative proposal to create a flat tax is sponsored by House Majority Leader Richard Armey and Senator Richard Shelby (R-AL). Under the flat tax, the current Internal Revenue Code's 480 forms would be replaced by two simple postcard-size forms. Individual taxpayers would receive a generous allowance based on family size (more than $33,000 for a family of four) but would be responsible for paying a tax of 17 percent on any wage, salary, and pension income above that amount. The tax on all other income, including interest, dividends, rents, royalties, and business profits, would be withheld and paid at the business level (much as an employer withholds and pays individual income tax for workers). Because the government would not be allowed to tax any income more than once, both the capital gains tax and the death (or estate) tax would be eliminated. The flat tax also would get rid of all itemized deductions like the write-off for home mortgage interest, charitable contributions, and state and local income and property taxes. On the business side,³ the flat tax wipes out all features of the current code that undermine U.S. competitiveness, including the alternative minimum tax, rules on pensions and deferred compensation, depreciation (which would be replaced with first-year expensing), international tax provisions, and uniform capitalization rules. (See Chart 1.)

How Would a National Sales Tax Work?

The national retail sales tax proposal would repeal the personal and corporate income tax code and replace it with a tax on all final sales of goods and services to consumers.⁴ Although such a tax resembles the state sales taxes most Americans pay already, a national retail sales tax is much broader in scope and would require a tax rate roughly equal to the rate imposed by the flat tax. All economic output, including such activity as services that traditionally escape state sales taxes, would be subject to the tax. Like the flat tax, a national retail sales tax would treat all economic activity equally, but taxpayers would receive a universal credit--a measure that would have the effect of protecting all taxpayers from having to pay tax on purchases up to the poverty level.

The leading legislative proposal to create a national retail sales tax is sponsored by Representatives Dan Schaefer (R-CO) and Billy Tauzin (R-LA); the lead Senate proponent has been Senator Richard Lugar (R-IN). The sales tax bill introduced in the House would eliminate the individual and corporate income taxes, along with all related provisions such as the death tax and capital gains tax. To replace these levies, the government would impose a 17.65 percent tax on the value of all final sales to consumers.⁵ To protect lower-income citizens from taxation, the legislation also would require the government to send all households periodic rebate checks, the net effect of which would be to offset the tax burden on purchases up to the poverty level. A family of four, for example, would receive a rebate from the government equal to the tax on about $18,500 of purchases. The rebate, which would be added in equal increments to workers' paychecks throughout the year, would total nearly $3,000. (Although it is not as generous, the rebate mechanism in the sales tax proposal would serve the same role as the family allowance in the flat tax; on the other hand, however, the smaller personal allowance would facilitate a lower tax rate.) To avoid creating a tax preference for government output, the national sales tax would impose an excise tax on the payrolls of federal, state, and local governments. Retailers would be compensated for their efforts to collect and then pay the taxes by receiving a rebate of 0.5 percent on any tax they collect or $200, whichever is greater. Finally, the sales tax legislation also provides a fee of 1 percent to any state that agrees to administer the tax.

What Do the Flat Tax and a National Sales Tax Have in Common?

A single flat rate. Under both plans, income is taxed at one low rate.⁷ This would ensure that the government treated taxpayers equally and would address the problem of high marginal tax rates. The single low rate also would promote faster economic growth by minimizing tax penalties on work, risk-taking, and entrepreneurship.

No bias against savings and investment. Implementing either the flat tax or a national sales tax would eliminate the current tax code's bias against capital formation by ensuring that no income is taxed more than one time. Because double taxation of capital income is a pervasive problem in the current law, going to the flat tax or a national sales tax would stimulate higher incomes and faster growth by minimizing the tax penalties on savings and investment.

Equality. Adoption of the flat tax or a national sales tax also would end the discriminatory treatment caused by a tax code that grants preferences or imposes penalties on certain behaviors and activities. Either reform would change the code so that all taxpayers--and all income--are treated the same under the law.

Simplicity. With 480 forms and 8 billion pieces of paper, the current IRS system has become a nightmare of complexity. Even though the flat tax and a national sales tax have different collection points, both would lower the cost of compliance and generate huge savings. Under the flat tax, individuals and businesses would fill out one simple postcard sized form. With a national sales tax, wage earners would be spared the need to interact with the tax system, and businesses simply would submit to the government a monthly form remitting the taxes they collected.

How Do the Flat Tax and a National Sales Tax Differ?

As similar as these two types of taxes are, there are differences, the most important of which center around how they would be collected.

A national retail sales tax would be added to the final selling price of all goods and services and collected at the point of sale. To avoid double taxation, the tax would not be levied on intermediate transactions or sales. For example, a lumber mill would not collect any tax on its sales to furniture manufacturers. Likewise, a furniture manufacturer would not be required to collect taxes on sales to furniture retailers.⁸ Only the retailer making a sale to the consumer would impose and collect the taxes and then remit the money to the government.

The Flat Tax as a Consumption Tax

Charts 3 and 4 illustrate the ways in which the flat tax and sales tax are so similar and yet have so little in common with the current income tax structure.

What are the Benefits of a Single-Rate Tax System?

Regardless of which option is chosen, both the flat tax and sales tax would yield immense benefits for Americans. Specifically, these benefits would include:

Fairness. Most Americans believe the tax code is riddled with discrimination. They are right. The government either imposes tax penalties or grants tax preferences depending on the source, use, or level of income. All of these special provisions violate the principle that all citizens should be treated equally by the law. The flat tax and a sales tax would restore fairness in the system by ensuring that all taxpayers, all income, and all products are treated the same.⁹

Economic growth. Both the flat tax and a sales tax would minimize the tax rate imposed on productive behavior and eliminate the myriad forms of double taxation in the current code. Consequently, either one would boost the economy's potential growth rate and cause permanent increases in economic output. How much the economy would benefit is not easy to predict, but many economists project that, within 10 years, the economy would be 5 percent to 10 percent larger than it would be under the current tax structure. Faster growth and a bigger economy also translate into higher standards of living.¹⁰

Higher incomes. Tax reform increases income in two ways. Simply stated, when people get to keep more of what they earn, they want to earn more. A low tax rate increases the incentives to work and the desire to work longer hours. The second, and far more important, reason tax reform causes income to rise is that workers become more productive. Because the flat tax and a national sales tax would eliminate the bias against savings and investment, companies would be willing to invest in upgrading their production capabilities, giving their employees better machinery, tools, equipment, and technology with which to work more efficiently and hence become more productive.¹¹ As Chart 6 illustrates, this capital-driven increase in productivity is tied closely to higher wages. It is impossible to make exact predictions about how much workers' incomes will rise, but it is worth noting that even a 0.1 percent increase in the growth rate, sustained over 10 years, will mean an additional $5,000 in annual income for an average family of four.

Why Double Taxation is Detrimental

Job creation. Tax reform also will make employees more valuable to business, thereby increasing wages for those already working and stimulating the creation of new jobs. The combination of lower taxes and faster growth will make it more profitable to hire certain workers, particularly those with low-skill levels who previously may have been considered unemployable. Another effect will be to draw new workers into the labor force. Many people, including older Americans, teenagers, and spouses, choose not to work because the direct costs of working exceed the benefits. Tax reform would alter that tradeoff by reducing the tax penalty on employment.
Increased wealth. Tax reform will boost the economy's future performance, but it also will have a more immediately positive impact by increasing the country's wealth. The value of income-producing assets (everything from stocks and bonds to office buildings and pet stores) is determined by market expectations of future income discounted by inflation, risk, and taxes. Once a lower tax rate is put in place, whether through the flat tax or a national sales tax, and double taxation is eliminated, income-producing assets will become more valuable (that is, there will be an increase in the present value of the future after-tax income stream generated by those assets). This increase in value means an immediate increase in wealth.¹²
Savings and investment. In addition to increasing the value of existing assets, changing to either the flat tax or the sales tax would boost the levels of new savings and investment substantially. The current tax code imposes two or three levels of tax on income that is saved, and as many as four levels on income from investment. Tax reform to eliminate these penalties on capital formation would increase the incentives to save and invest. Moreover, a flat tax or sales tax would make the United States a magnet for capital from around the world. For example, the tax rate reductions of the early 1980s dramatically increased the amount of worldwide capital that settled in the United States. The more dramatic changes involved in reforming the tax system today would have even more significant effects on savings and investment.
Lower interest rates. Tax reform will drive interest rates down by shifting the treatment of interest income. Instead of taxing the interest received by the lender, the flat tax would make interest payments by the borrower nondeductible. This approach--somewhat akin to the tax treatment currently granted to state and local municipal bonds--would remove the tax premium embedded in interest rates and result in a reduction between 25 percent and 35 percent.¹³ Under a sales tax, eliminating direct taxes on income would have the same effect.
Lower compliance costs. Because both the flat tax and a national sales tax would eliminate the bewildering complexity of the current system, tax reform would slash the $157 billion annual costs of complying with personal and corporate income taxes. The current system is such a mess that even consulting expensive tax experts is no guarantee of accuracy. For example, in March 1997, Money reported that it had sent a hypothetical family's tax return to professional tax preparers. Of the 45 who responded, not one professional tax preparer came up with the proper solution, and fewer than 25 percent came within even $1,000 of the correct tax liability. The business side of the tax code makes processing personal income taxes seem simple by comparison.

Smaller IRS, more civil liberties. The current tax code gives the IRS sweeping, virtually unlimited power to monitor people's lives, track their assets, and review their expenditures. Moreover, the law gives the agency far-reaching authority to seize property, garnish wages, and freeze assets. Perhaps worst of all, taxpayers who have been accused by the IRS of committing fraud or tax evasion are presumed guilty and required to prove their innocence--a complete reversal of the rights guaranteed by the Constitution. Although neither the flat tax nor a national sales tax[14] can be expected to rid the United States of the IRS or eliminate every possible conflict with the government, the dramatic simplification that either reform would bring about would significantly reduce the size, scope, and power of the IRS bureaucracy.[15]
Less political corruption. The tax code today is the result of 84 years of special deals, loopholes, and preferences. Each one of these loopholes benefits a special interest that has used campaign contributions and lobbying to enlist the help of politicians who voted to create the tax shelter. Although individuals, whether acting alone or through organized groups, have a constitutional right to petition their government, this does not mean their elected lawmakers should acquiesce to improper demands. The flat tax or a national sales tax would remove from the tax system the corrupting process of exchanging loopholes for political support.

No social engineering. One of the most attractive features of both the flat tax and a national sales tax is that politicians no longer would be able to use the tax code for purposes of social engineering. The flat tax would eliminate all the biases and preferences in the income tax, and a sales tax is designed so that all products and services would be taxed at exactly the same rate.
No marriage penalty. Despite all the rhetoric in Washington about family values, one of the most bizarre examples of social engineering in the current tax code is the marriage penalty. Today, many married couples could reduce their tax bill by hundreds or even thousands of dollars simply by divorcing and living together. Although this quirk of the tax code presumably is not causing families to break up, it violates the principle of equal treatment under the law and should be repealed. The flat tax would achieve this goal of equal treatment for married couples because it is impossible under a single-rate tax system to be bumped into a higher bracket. A national sales tax, meanwhile, would make the concept irrelevant because income no longer would be subject to direct taxation.

Responding to the Critics of Tax Reform

Notwithstanding these many benefits, some people continue to oppose tax reform. Their assertions, however, are not supported by the evidence. For example:

Criticism: Both the flat tax and a national sales tax are unfair because the rich and poor would pay the same rate.

Response: The only reasonable definition of fairness is that everyone should play by the same rules--the very principle that underlies both flat tax and sales tax reform plans. Under the flat tax, a person who has ten times the taxable income of another would pay ten times as much in taxes. Likewise, under a sales tax, the rich person who consumes ten times as much as a poor person would pay ten times as much in sales tax.[16]

Criticism: Tax reform would give the rich an undeserved tax cut.

Response: The tax system should be designed to collect the money needed to run the government in the fairest and least destructive manner possible. For those who currently face confiscatory tax rates to receive a tax cut is eminently fair. It is worth noting that there is a big difference between tax rates and amount of taxes paid. In all likelihood, upper-income taxpayers would pay even more in taxes after tax reform because the incentives to hide, shelter, and underreport income would be reduced significantly. As Chart 9 illustrates, this is precisely what happened in the 1980s. The wealthy, whose tax rates were reduced from 70 percent to 28 percent, reported so much more income on their tax returns than before that they wound up paying a significantly higher share of the total income tax burden.[17]

Criticism: The poor would pay more.

Response: Because of the generous personal allowances in the Armey flat tax proposal, a family of four would pay no income tax on its first $33,800 of income. By contrast, the personal exemptions and standard deductions in the current tax code protect only about $17,000 of income from income tax. The sales tax proposal includes a universal rebate that would send all taxpayers a check to offset their purchases up to the poverty level.[18]

Criticism:Loss of the home mortgage interest deduction would reduce home values and harm the housing industry.

Response: In reality, fewer than 30 percent of taxpayers use itemized deductions. This group is comprised disproportionately of higher income taxpayers who presumably would be glad to give up deductions in exchange for a simple, low-rate tax system. Numerous studies by such nonpartisan organizations as the Congressional Research Service,[19] Tax Foundation,[20] National Center for Policy Analysis,[21] and Institute for Research on the Economics of Taxation[22] have demonstrated conclusively that tax reform will not have an adverse impact on home values. Above all, home values and home sales are tied to the overall health of the economy. As the first part of Chart 10 illustrates, home values are closely correlated to the growth of income. Because tax reform will boost income, the impact on the housing market would be beneficial, not detrimental.[23]

Part two of Chart 10 shows specifically what happened to the housing market during the 1980s. When President Ronald Reagan reduced tax rates from a high of 70 percent to 28 percent, he also slashed the value of the mortgage interest deduction dramatically. Yet, as the chart clearly illustrates, this had no adverse impact on home values.

Criticism: Implementing a national sales tax would create the risk that the United States might end up like Europe, with both income and consumption taxes.

Response: Advocates of a national sales tax properly vow that complete and irreversible elimination of the income tax must occur before the plan can be enacted. The only certain way to prevent future politicians from pulling a bait-and-switch on a trusting public, however, would be to amend the Constitution by repealing the 16th Amendment, which gives Congress the power to impose an income tax, and expressly forbidding direct taxes on income. This presumably would mean the abolition of Social Security and Medicare payroll taxes as well.

Criticism: The flat tax allows people living off dividends and interest to escape all taxes.

Response: Under the flat tax, businesses withhold and pay taxes on dividends and interest before sending the money to individuals. Thus, income from interest payments and dividends would be treated the same as the income in a worker's paycheck--as an after-tax payment. Taxing dividends and interest a second time at the individual level is as unfair as requiring workers to file tax returns based on their net pay.

Criticism: Neither the flat tax nor the sales tax will capture the entire underground economy.

Response: This is true but meaningless. A drug dealer is not going to report his income under the flat tax and certainly will not collect taxes on the "products" he sells under a national sales tax system. But the current system does not capture this money either, so this argument hardly serves as a reason to reject tax reform. At the very least, the flat tax and a national sales tax would reduce the level of tax evasion by people who are trying to protect their income from unfair and excessive taxation today.

Criticism: Tax reform would do nothing to relieve the burden of payroll taxes.

Response: By and large, this criticism is true. As Chart 12 illustrates, payroll taxes have climbed dramatically in the past two decades. Combined with the fact that both Social Security and Medicare--the programs funded by these taxes--face severe financial problems, there can be little doubt that reform is needed.[27] For better or worse, income and payroll taxes are different revenues funding different programs and, therefore, probably will be addressed separately. Americans for Fair Taxation has proposed a sales tax to replace payroll taxes as well as income taxes. This proposal has not yet been introduced in Congress.

Smaller IRS, more civil liberties. The current tax code gives the IRS sweeping, virtually unlimited power to monitor people's lives, track their assets, and review their expenditures. Moreover, the law gives the agency far-reaching authority to seize property, garnish wages, and freeze assets. Perhaps worst of all, taxpayers who have been accused by the IRS of committing fraud or tax evasion are presumed guilty and required to prove their innocence--a complete reversal of the rights guaranteed by the Constitution. Although neither the flat tax nor a national sales tax¹⁴ can be expected to rid the United States of the IRS or eliminate every possible conflict with the government, the dramatic simplification that either reform would bring about would significantly reduce the size, scope, and power of the IRS bureaucracy.¹⁵

Less political corruption. The tax code today is the result of 84 years of special deals, loopholes, and preferences. Each one of these loopholes benefits a special interest that has used campaign contributions and lobbying to enlist the help of politicians who voted to create the tax shelter. Although individuals, whether acting alone or through organized groups, have a constitutional right to petition their government, this does not mean their elected lawmakers should acquiesce to improper demands. The flat tax or a national sales tax would remove from the tax system the corrupting process of exchanging loopholes for political support.

No social engineering. One of the most attractive features of both the flat tax and a national sales tax is that politicians no longer would be able to use the tax code for purposes of social engineering. The flat tax would eliminate all the biases and preferences in the income tax, and a sales tax is designed so that all products and services would be taxed at exactly the same rate.

No marriage penalty. Despite all the rhetoric in Washington about family values, one of the most bizarre examples of social engineering in the current tax code is the marriage penalty. Today, many married couples could reduce their tax bill by hundreds or even thousands of dollars simply by divorcing and living together. Although this quirk of the tax code presumably is not causing families to break up, it violates the principle of equal treatment under the law and should be repealed. The flat tax would achieve this goal of equal treatment for married couples because it is impossible under a single-rate tax system to be bumped into a higher bracket. A national sales tax, meanwhile, would make the concept irrelevant because income no longer would be subject to direct taxation.

Responding to the Critics of Tax Reform

Notwithstanding these many benefits, some people continue to oppose tax reform. Their assertions, however, are not supported by the evidence. For example:

Criticism: Both the flat tax and a national sales tax are unfair because the rich and poor would pay the same rate.

Criticism: Tax reform would give the rich an undeserved tax cut.

Criticism: The poor would pay more.

Criticism:Loss of the home mortgage interest deduction would reduce home values and harm the housing industry.

Response: In reality, fewer than 30 percent of taxpayers use itemized deductions. This group is comprised disproportionately of higher income taxpayers who presumably would be glad to give up deductions in exchange for a simple, low-rate tax system. Numerous studies by such nonpartisan organizations as the Congressional Research Service,¹⁹ Tax Foundation,²⁰ National Center for Policy Analysis,²¹ and Institute for Research on the Economics of Taxation²² have demonstrated conclusively that tax reform will not have an adverse impact on home values. Above all, home values and home sales are tied to the overall health of the economy. As the first part of Chart 10 illustrates, home values are closely correlated to the growth of income. Because tax reform will boost income, the impact on the housing market would be beneficial, not detrimental.²³

Criticism: Implementing a national sales tax would create the risk that the United States might end up like Europe, with both income and consumption taxes.

Criticism: The flat tax allows people living off dividends and interest to escape all taxes.

Criticism: Neither the flat tax nor the sales tax will capture the entire underground economy.

Criticism: Tax reform would do nothing to relieve the burden of payroll taxes.

Response: By and large, this criticism is true. As Chart 12 illustrates, payroll taxes have climbed dramatically in the past two decades. Combined with the fact that both Social Security and Medicare--the programs funded by these taxes--face severe financial problems, there can be little doubt that reform is needed.²⁷ For better or worse, income and payroll taxes are different revenues funding different programs and, therefore, probably will be addressed separately. Americans for Fair Taxation has proposed a sales tax to replace payroll taxes as well as income taxes. This proposal has not yet been introduced in Congress.

Criticism: Regardless of the type of tax, taxpayers will not be safe so long as lawmakers can raise taxes in the future.

Response: Any tax reform should be accompanied by legislation, even constitutional reform, that requires a supermajority to approve any future increase in tax rates.²⁸

Criticism: Tax reform would reduce government revenues.

Response: The current tax burden is much too high. Moreover, it is economically desirable and, by most estimates, politically necessary for tax reform to lower the overall burden of taxation on Americans.²⁹ Even though faster growth, lower unemployment, and higher income probably would offset most or all of the foregone revenue as time passed,³⁰ it is conceivable that there could be some short-term decline in government revenue collections. If this decline became an obstacle to passage of a flat tax or national sales tax plan, lawmakers should use it as an opportunity to eliminate or scale back as many federal programs as possible.

Conclusion

The current U.S. tax system is an unmitigated failure. On both economic and moral grounds, the tax code should be repealed and replaced with a system that treats all taxpayers--and all income--fairly and equally. Both the flat tax and a national sales tax satisfy this standard, and both would improve the economy's performance substantially.

Many advocates of tax reform prefer the flat tax because it would not require an amendment to the Constitution prohibiting income taxes. Such an amendment would require a two-thirds vote in Congress and approval by 75 percent of the state legislatures. Nonetheless, if support for a national sales tax and such an amendment grows, flat tax partisans would do well to join the effort.

Because plans for the flat tax and a national retail sales tax are so similar, lawmakers have no reason to champion one at the expense of the other. Advocates of tax reform should seek instead to highlight the benefits and similarities of the two plans and, when the opportunity arises, rally behind the one that has garnered more political and popular support.³¹ Both the flat tax and the sales tax would simplify the current tax code, boost income, stimulate the economy, and end the bias against savings and investment.

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Testimony of Scott Hodge before the U.S. Senate Budget Committee, Hearing on Distribution and Efficiency of Spending in the Tax Code
by Scott A. Hodge
Prepared Statement of
Scott Hodge
President
Tax Foundation
Hearing on
Distribution and Efficiency of Spending in the Tax Code
Before the U.S. Senate Budget Committee
March 9, 2011

Mr. Chairman and members of the Committee:
I am Scott Hodge, president of the Tax Foundation. Thank you for the opportunity to speak to you today regarding the distributional and economic issues surrounding tax expenditures in the federal budget.
Founded in 1937, the Tax Foundation is the nation's oldest organization dedicated to promoting economically sound tax policy at the federal, state, and local levels of government. We are a non-partisan 501(c)(3) organization.
For nearly 75 years, the Tax Foundation's research has been guided by the immutable principles of economically sound tax policy that were first outlined by Adam Smith: Taxes should be neutral to economic decision making; they should be simple, transparent, and stable; and they should promote economic growth.
In other words, the ideal tax system should do only one thing: raise a sufficient amount of revenues to fund government activities with the least amount of harm to the economy. As Jean Baptiste Colbert famously wrote, "The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least amount of hissing."
By all accounts, the U.S. is far from that ideal. According to the National Taxpayer Advocate, tax complexity is the number one issue facing taxpayers and the IRS today. The main cause of that complexity has been the proliferation of credits, deductions, and preferences built into the tax code.
Introduction
Over the past two decades, lawmakers have increasingly asked the tax code to direct all manner of social and economic objectives, such as encouraging people to: buy hybrid vehicles, turn corn into gasoline, save more for retirement, purchase health insurance, buy a home, replace the home's windows, adopt children, put them in daycare, take care of Grandma, buy bonds, spend more on research, purchase school supplies, go to college, invest in historic buildings, and the list goes on.
In too many respects, the IRS has become an extension of, or rather a substitute for, every other cabinet agency, from Energy and Education to HHS and HUD. But perhaps the most troubling development in recent years is that the efforts of lawmakers to use the tax code to help low- and middle-income taxpayers have knocked millions of taxpayers off the tax rolls and turned the IRS into an extension of the welfare state.
Today, a record number of Americans—52 million, or 36 percent of all filers—have no direct connection with the basic cost of government because they pay no income taxes. If we add this group to the people who have some income but don't file a tax return, the ranks of American households outside the income tax system rise to 48 percent.[1]
Indeed, many of these 52 million tax filers now look to the IRS as a source of income thanks to the more than $100 billion in refundable tax credits paid to people who have no income tax liability.
As a result of removing millions of people from the bottom of the tax rolls, we have dramatically reduced the number of people with "skin in the game." Indeed, the top 1 percent of taxpayers now pays a greater share of the income tax burden than the bottom 90 percent combined.
Sadly, individuals are not the only taxpayers looking to the IRS as a source of income. The proliferation of tax credits aimed at promoting technologies such as renewable energy and fuel-efficient products has addicted many companies and industries to IRS handouts. In a recent case, one-third of the profits of a major appliance company were attributable to energy production credits.
Ironically, but perhaps not surprisingly, the sectors suffering the biggest financial crises today—health care, housing, and state and local governments—all receive the most subsidies through the tax code. The cure for what ails these industries is to be weaned off the tax code, not given more subsidies through such things as the First Time Homebuyer's Credit, Premium Assistance credits, or more tax-free bonds.
Washington can actually do more for the American people by doing less. The solution lies in fundamental tax reform. Indeed, as the plan authored by Erskine Bowles and Alan Simpson (co-chairmen of President Obama's National Commission on Fiscal Responsibility and Reform), demonstrated, Americans could enjoy much lower tax rates, and the government could raise the same amount of revenue if most—if not all—tax expenditures were eliminated.
That said, the primary goal of fundamental tax reform should not be raising more money for government. The primary goal should be improving the nation's long-term economic growth and lifting living standards.
Economists at the OECD have determined that high corporate and personal income tax rates are the most harmful taxes for long-term economic growth. Unfortunately, the U.S. has one of the highest corporate income taxes among industrialized nations and one of the most progressive personal income tax systems.
Cutting these rates while broadening the tax base would greatly improve the nation's prospects for long-term GDP growth. The benefits of higher economic growth will accrue to taxpayers and Uncle Sam alike.
What Are Tax Expenditures?
According to the Joint Committee on Taxation, "tax expenditures include any reductions in income tax liabilities that result from special tax provisions or regulations that provide tax benefits to particular taxpayers."[2] These special preferences are called tax expenditures because some people consider them the equivalent of direct spending through the tax code.
However, aside from the refundable cash outlay portion of some credits, tax expenditures are really not the same as direct spending. Instead, they are an attempt to achieve certain public policy goals by inducing or incenting taxpayers with the prospect of a lower tax bill. Essentially, lawmakers are trying to get taxpayers to achieve these policy objectives by using their own money, not "the government's."
To be sure, many people improperly view the forgone revenue from tax expenditures as "the government's money." By this view, what the tax code allows taxpayers to keep through tax preferences has thus been "spent" in the same manner as a government program.
But there is a very real moral and functional difference between the government taking $1,000 from a taxpayer and giving it to the Department of Energy for switch grass research, and a tax preference which allows that taxpayer to keep $1,000 of his own money because he purchased new windows for his home. The tax credit may be poor tax policy, but the transaction is clearly one that the taxpayer chose of his own accord. The government did not actively take his money and give it to Home Depot for the new windows.
How Many Tax Expenditures Are There?
While estimates of tax expenditures vary, there is no doubt that their numbers have grown in recent years. Table 1 in the Appendix to this report illustrates the growth in the number of tax expenditures according to a recent analysis by economists at the OECD. In 2002, the OECD identified 135 separate tax preferences in the U.S. tax code. By 2010, the number had increased to 164, a jump of 21 percent.
The biggest growth in tax expenditures was in the area of industry-specific provisions, where the number jumped from 35 to 54 between 2004 and 2008. The majority of these new industry-specific provisions were targeted to businesses involved in renewable energy and energy efficiency.
Which Are the Largest Categories of Tax Expenditures?
According to the President's FY 2011 budget documents, corporate and individual tax expenditures will total more than $1 trillion this year. The vast majority of these tax preferences, roughly $900 billion, operate through the individual side of the tax code.
Both the Joint Committee on Taxation and the Treasury caution against viewing the estimated cost of tax expenditures as the amount that could be raised if the preferences were eliminated. Eliminating a preference causes numerous behavioral and substitution effects that are not captured in these budgetary estimates. Thus, eliminating a provision could raise substantially less new revenue than the budgetary cost associated with it.
With that cautionary note in mind, Figure 1 shows the composition of the largest categories of tax expenditures in FY 2011. By far the largest of these, at $174 billion, is the tax exclusion for employer-provided health insurance. The next largest category, at $135 billion, is for the collection of tax exclusions for pensions, 401(k)s, Individual Retirement Accounts, and Keogh plans.
For the sake of comparability, we've included the actual outlay cost of the refundable portion of tax credits even though they are not included in the overall cost of traditional tax expenditures. However, as we will discuss later, they are among the fastest-growing tax preferences and now comprise the third-largest category of preferences in the tax code with an actual cost of $108 billion in 2011.
The amount of corporate "loopholes" is actually much less than what is commonly thought. Overall, the roughly 80 separate corporate tax preferences have a combined budgetary cost of roughly $102 billion in FY 2011, only slightly larger than the cost of the mortgage interest deduction alone.
As Figure 1 shows, the mortgage interest deduction confers roughly $89 billion in benefits to homeowners and the housing industry each year. State and local governments receive about $87 billion in benefits through the combined effects of the deduction for state and local taxes and through tax-exempt bonds. Lastly, charities benefit from about $46 billion in budgetary resources each year.
Tax Expenditures and Distributional Issues
One of the dominant issues in any discussion of tax expenditures is who benefits from them. Because the value of a tax deduction depends upon the taxpayer's marginal tax rate, many of the largest and best known tax preferences, such as the mortgage interest deduction, do tend to benefit upper-income taxpayers. However, over the past 20 years or so, lawmakers have increasingly turned to using tax credits to benefit low- and middle-income taxpayers. This has had the unintended consequence of removing millions of taxpayers from the tax rolls altogether.
Setting aside for the moment the question of the true economic incidence of tax expenditures (i.e. who ultimately benefits from them), the major individual tax expenditures are largely claimed on the returns of upper-income taxpayers. For example, according to the Joint Committee on Taxation, 64 percent of the benefits of the mortgage interest deduction flow to taxpayers earning over $100,000, while 81 percent of the benefits of the deduction for state and local taxes (income, property, and sales) went to the same group.[3] Many rightfully argue that these provisions effectively subsidize high-tax communities at the expense of low-tax communities or subsidize homeowners at the expense of renters.
Similarly, JCT found that 80 percent of the benefits of the charitable deduction went to taxpayers earning over $100,000. To be sure, Americans earning under $100,000 give billions each year to charity, but because they are not among the roughly one-third of taxpayers who itemize on their tax returns, the tax code does not reward them for their generosity.
The Growth of the Nonpaying Population
While the tax code's benefits to high-income taxpayers are well documented, less attention has been given to the growth in tax benefits targeted to low- and middle-income taxpayers. Since the early 1990s, lawmakers have increasingly used the tax code instead of government spending programs to help low-income and middle-class taxpayers. In terms of tax revenue, the most significant of these socially targeted credits was the $500 per-child tax credit enacted in 1997. The 2001 and 2003 tax bills doubled the value of the credit to $1,000 and added a refundable component.
Most tax credits can only reduce the amount a taxpayer owes to zero, but the EITC and the child tax credit are also refundable, meaning that taxpayers are eligible to receive a check even if they have paid no income tax during the year. Those tax returns have become, in effect, a claim form for a subsidy delivered through the tax system in much the same way that a traditional government program sends out a welfare check or a farm support check.
In 2008, according to the most recent IRS data available, 25 million tax filers received $51.6 billion in EITC benefits. Of this amount, $50.5 billion was refundable in excess of their income tax liability. Also in 2008, some 25.3 million filers received $30.7 billion in child tax credit benefits, with more than 18 million of these filers getting $20.5 billion in refundable checks. Many families are eligible for both the EITC and the child credit. These are not refunds of overpaid tax; they are payments to people who have already gotten back everything that was withheld from their paychecks during the year.
Figure 2 shows the fluctuation in the number and percentage of nonpayers since 1950 and how that has soared over the past decade.[4] The percentage of tax returns with no liability was fairly low in the 1960s and again in the early 1980s. The recent growth in the number of nonpayers was accelerated by two major tax changes enacted during the 1990s, followed by the Bush tax cuts in 2001 and 2003, and then the Economic Stimulus Act of 2008, which included a tax rebate of $300 per person, $600 per couple.
In 2008, these tax rebates boosted the number of nonpayers to nearly 52 million, or roughly 36 percent of all tax filers. Moreover, the rebates boosted the maximum income for nonpayers to more than $56,700. In the absence of the rebates, the threshold would have been roughly $44,500.
When the final IRS data is tallied for tax years 2009 and 2010, it is likely that the number of nonpayers could approach 40 percent due to President Obama's making-work-pay credit, first-time homebuyer credit, and American Opportunity tax credit. As a rule of thumb, we can now expect that the typical family of four earning up to $50,000 will owe no income taxes.[5]
Refundable Credits Soar
Table 1: Outlay Components of Tax Credits in 2011 and 2016
Tax Provision
Outlay Component 2011 ($Billions)
Outlay Component 2016 ($Billions)
Earned Income Tax Credit
$54.96
$44.91
Child Tax Credit
24.17
24.17
Making Work Pay
20.49
0
Health Coverage Tax Credit
0.15
0.15
Adoption Credit
0.41
0
Build America Bonds
2.59
2.45
Premium Assistance Tax Credit
0
43.84
Small Business Credit
0.18
0.32
Energy Production Grants
4.2
0.62
Credit for holding clean renewable energy bonds
0.02
0.03
Qualified energy conservation bonds
0.05
0.06
Recovery Zone Bonds
0.12
0.13
Credit for holders of zone academy bonds
0.02
0.03
Qualified school construction bonds
0.85
1.02
    Total =
$108.21
$117.73

Since it was enacted in 1913, the income tax code has contained provisions—such as the standard deduction, personal exemption, and dependent exemption—that exempted low-income workers from tax or greatly reduced their income tax burden. But starting with the earned income tax credit (EITC), and then the child tax credit, the IRS was required to send a "refund" check to taxpayers even though they had no income tax liability.
As Figure 3 shows, the amount of refundable checks sent by the IRS to nonpayers has doubled in real terms between 1996 and 2008, growing from $36 billion to over $72 billion. These credits are so generous, that the Joint Committee on taxation estimates that in 2009, they exceeded the employee share of payroll taxes for 23 million tax filers and exceeded the employer's share of payroll taxes for 15.5 million filers.[6]
In recent years, more and more tax provisions are resulting in a cash outlay from the IRS. As Table 1 shows, in 2011 there are 13 tax provisions that will result in $108 billion in outlays. In five years, after the Premium Assistance Credit takes effect in 2014, tax outlays will top $117 billion.
Tax Expenditures and Progressivity
There is a common belief that because so many tax expenditures benefit upper-income taxpayers, the "rich" are not paying their fair share of taxes. Nothing could be further from the truth.
Indeed, because of the expansion of tax benefits aimed at low- and middle-income households, the OECD finds that the U.S. has the most progressive income tax system of any industrialized country. What that means is that the top 10 percent of U.S. taxpayers pay a larger share of the income tax burden than do the wealthiest decile in any other industrialized country, including traditionally "high-tax" countries such as France, Italy, and Sweden.[7]
Meanwhile, because of the generosity of such preferences as the EITC and child credit, low-income Americans have the lowest income tax burden of any OECD nation. Indeed, the study reports that while most countries rely more on cash transfers than taxes to redistribute income, the U.S. stands out as "achieving greater redistribution through the tax system than through cash transfers."[8]
The share of the income tax burden borne by America's wealthiest taxpayers has been growing steadily for more than two decades. Figure 4 compares the share of income taxes paid by the top 1 percent of taxpayers to the share paid by the bottom 90 percent of taxpayers.
The chart shows that, as of 2008, the top 1 percent of taxpayers paid 38 percent of all income taxes, while the bottom 90 percent of taxpayers paid just 30 percent of the income tax burden. By any measure, this is the sign of a very progressive tax system.
Measuring the Distribution of Both Taxes and Spending
While the topic of this hearing is the distribution and efficiency of tax expenditures, it is a mistake to focus solely on the distributional effects of tax policy without considering the distributional effects of spending. After all, federal spending is intended to achieve various policy objectives and benefit different groups of Americans in different ways. Thus, it is important to look at the progressivity of the entire fiscal system, not just the tax side.
In an important 2009 study, in order to gain a better understanding of the overall amount of redistribution that occurs through both tax and spending policies, Tax Foundation economists measured how much families at various income levels paid in taxes versus how much they received in spending benefits. The results of this analysis show that federal tax and spending policies are very heavily tilted to the poor and middle-class, even before considering the Obama administration's major policy initiatives such as health care reform. For 2010, the Tax Foundation report found that the bottom 60 percent of American families received more in government spending than they paid in taxes.
Not surprisingly, as Figure 5 shows, government spent $10.44 on the lowest-income families for every dollar they paid in taxes. Remarkably, families in the middle-income group received $1.15 for every dollar they paid in taxes.
By contrast, the top 40 percent of families paid more in taxes as a group than they received in government spending benefits. The highest-income families received 43 cents in government spending for every dollar they pay in taxes, even though they are assumed in this study to disproportionately benefit from public goods such as national defense.
Overall, federal tax and spending policies combined to redistribute more than $824 billion from the top 40 percent of families to the bottom 60 percent of families in 2010. In other words, the entire federal fiscal system is very progressive and redistributive.
Tax Expenditures Are the Cause of Today's Financial Crises
Today, the biggest financial crises facing working families and the economy are health care, housing, and state and local government finances. Ironically, these are the areas in which government is already the most involved.
For example, the tax preference for employer-provided health insurance creates a classic third-party payer problem in which patient-consumers are disconnected from the cost of service. The cost of health care is soaring because we have an unlimited demand for health care since someone else is paying the bills. The market forces that deliver quality goods at low prices for everything from toasters to automobiles have been disrupted in the health care system because it is tax preferred. The recent health care reform legislation will make this problem worse, not better.
Housing suffers a similar problem because of the plethora of tax and spending subsidies intended to promote home ownership. Professor Dennis J. Ventry, Jr. of the UC Davis School of Law, calls the mortgage interest deduction (MID) the "accidental deduction," because the authors of the original tax code never intended the deduction for personal interest expenses to subsidize home ownership.[9]
Economists find that the MID gets capitalized into the price of homes and may amplify price volatility,[10] which offsets whatever effect it has on promoting home ownership. The actual economic benefits of those capitalized costs tend to flow to the home builders and realtors, who have naturally been the most vocal opponents of eliminating the MID. One study determined that the MID is "an ineffective policy to promote homeownership and improve social welfare."[11]
While the lion's share of the blame for the current housing crisis properly rests with government-sponsored enterprises Fannie Mae and Freddie Mac, the MID certainly played a role in encouraging some families to purchase homes that they really could not have afforded otherwise. Canada does not have a mortgage interest deduction, yet its rate of homeownership is equal to that in the U.S. Even the Washington Post has editorialized that it is time to "[t]rim the excessive tax subsidy for real estate."[12]
The deduction for state and local taxes and the tax subsidies for municipal bonds allow local governments to raise taxes and pass as much as one-third of those costs to Uncle Sam. This is especially true for high-cost, high-tax suburban communities. Ironically, the state and local tax deduction is the primary reason more and more taxpayers in these high-tax urban areas—largely in so-called Blue States—are being ensnared in the Alternative Minimum Tax. The AMT is not an issue for taxpayers in lower-tax states and communities.
One study found that the state and local tax deduction leads to higher local tax revenues "by increasing the rate of local property taxation." Specifically, the authors found "that if deductibility were eliminated, the mean property tax rate in our sample of 82 communities would fall by 0.00715 ($7.15 per thousand dollars of assessed property), or 21.1 percent of the mean tax rate."[13]
In the same way that the MID encourages some families to purchase larger, more expensive homes than they otherwise could afford, federal tax subsidies for state and local activities may encourage some governments to buy more government than their taxpayers could otherwise afford. In recent years, state and local debt has grown significantly as a share of GDP according to Steven Malanga, a fellow with the Manhattan Institute. He estimates that:
Over the last decade, through good times and bad, total state and local debt has soared from $1.5 trillion in 2000 to $2.4 trillion (in current dollars). When that debt is added to other growing obligations that governments are racking up, using techniques like not paying their bills on time, state and local liabilities have increased from 15 percent of GDP in 2000 to an estimated 22 percent this year. In 1980, they were 12 percent.[14]
It is very likely that these governments would not have borrowed as much as they did were it not for the fact that tax-free municipal bonds allow them to pass some of that cost off to the federal government.
Dependent Corporate Interests
History shows that lawmakers need to be very cautious about trying to use targeted tax preferences to promote specific industries or technologies because these preferences can create a dependent class of industries in the same way that refundable tax programs such as the EITC and child credit can create a dependent class of families.
The recent tax policies aimed at promoting renewable energy sources and more efficient appliances provide two good examples. Many recent news reports have documented the fragility of the wind and solar power industry without federal tax subsidies. During last December's debate over the extension of the energy investment credit, the CEO of the American Wind Energy Association warned that without the tax credit the prospects for the industry would be "flatline or down."[15]
The Washington Post reports that the wind industry "has had its production tax credits lapse three times—in 1999, 2001 and 2003. According to the American Wind Energy Association, new installed wind capacity declined 93, 73 and 77 percent, respectively."[16] In other words, without the tax subsidy, there is no investment.
According to a recent Bloomberg story, the tax incentives for the production of energy-efficient appliances have also resulted in very unintended consequences:
Whirlpool Corp. will claim $300 million this year in U.S. tax credits for making energy-efficient appliances, collecting almost four times the government's estimate for what all companies would receive from the tax incentive.
The credit will generate about one-third of Whirlpool's earnings this year, according to the company's projections.
Company filings show that as of Dec. 31, 2010, Whirlpool had $555 million in stockpiled business credits and $2 billion in tax losses. Both can typically be used to offset up to 20 years of future income and taxes.[17]
When Congress created the tax credit in 2005 to encourage the production of energy-efficient appliances, it seems unlikely that lawmakers envisioned that it could someday comprise one-third of a company's profits. For Whirlpool, the energy credit is an income subsidy in the same manner as the EITC subsidizes the income of a poor family.
Ironically, the stockpiling of tax credits can turn some companies into opponents of corporate tax reform. That is because these credits are booked as "assets" on the company's balance sheet and have a value linked to the corporate tax rate of 35 percent. Should the corporate tax rate be lowered, to say 25 percent, then the value of those assets will fall by about one-third, which directly impacts the book value of the company. Since no CEO wants that, they have an incentive to lobby on behalf of higher corporate tax rates.
Tax Reform Is the Solution
In its 2010 Annual Report to Congress, the National Taxpayer Advocate identified tax complexity as the most serious problem facing taxpayers and the IRS, and urged lawmakers to simplify the system.[18]
Simply complying with the tax code costs taxpayers an estimated $163 billion each year. About 62 percent of all taxpayers use tax return preparers, but the percentage climbs to about 73 percent for those claiming the EITC.[19] Moreover, the complexity of EITC eligibility is a contributing factor to the estimated $10 billion to $12 billion in erroneous overpayments out of nearly $44 billion of total EITC claims in 2006.[20]
According to a recent Tax Foundation study, the "deadweight" costs, or excess burden, of the current individual income tax is not inconsequential, amounting to roughly 11 to 15 percent of total income tax revenues. This means that in the course of raising roughly $1 trillion in revenue through the individual income tax, an additional burden of $110 to $150 billion is imposed on taxpayers and the economy.[21]
New revenues should not be the primary goal of reform. To be sure, with the deficit now topping $1.5 trillion, many lawmakers may look at eliminating tax "loopholes" and simplifying the tax code as an opportunity to raise more revenues. This should not be the primary goal of tax reform. The primary goal should be to promote long-term economic growth and better living standards for the American people. If the byproduct of increased economic growth is more tax revenues, then that is a win-win.
Clearly, eliminating "loopholes" and other distortionary tax provisions can wring some of the deadweight losses out of the economy. But the key to promoting long-term growth is cutting top tax rates. A recent study by economists at the OECD found that corporate income taxes are the most harmful tax for long-term economic growth and that high personal income taxes were found to be the second-most harmful for long-term growth.
Not only does the U.S. have the most progressive income tax system among OECD nations, it also has the second-highest corporate income tax rate in the OECD. These high taxes on corporate and personal income are jeopardizing the country's long-term prospects for growth. Cutting both personal and corporate income tax rates while eliminating tax expenditures would result in both improved GDP growth and a more efficient tax system.
According to OECD economists, cutting the top personal tax rate can "raise productivity in industries with potentially high rates of enterprise creation."[22] In other words, lower marginal rates can increase entrepreneurship and risk taking. Moreover, they find that "lowering statutory corporate tax rates can lead to particularly large productivity gains in firms that are dynamic and profitable, i.e. those that can make the largest contribution to GDP growth."
There are any number of plans that would greatly simplify the tax code, including the flat tax, Rep. Paul Ryan's "Roadmap," the FairTax, and the Bradford X-tax. A good illustration of how far tax rates can be lowered by eliminating some or all of the tax expenditures in the code is the "Zero Plan" drafted by the chairmen of President Obama's National Commission on Fiscal Responsibility and Reform, Erskine Bowles and Alan Simpson.[23]
As the table from the Bowles/Simpson report shows, below, eliminating all tax expenditures could lower the top corporate tax rate from 35 percent to 26 percent and the top individual rate from 35 percent to 23 percent. This would also allow the lowest tax rate to be reduced from 10 percent to 8 percent. [24]
With these optimal rates in mind, the plan shows lawmakers and taxpayers the cost of putting various credits and deductions back into the tax base. The more tax preferences you put back into the code, the higher the rates have to be to raise the same amount of revenues.
For example, keeping the child tax credit and the EITC would boost the bottom individual rate from 8 percent to 9 percent and the top rate from 23 to 24 percent. Every rate would have to go up another 3 percentage points should lawmakers want to keep the child credit and EITC while slightly scaling back the MID, health exclusion, and retirement benefits. The rates would have to go up another percentage point if all of these major provisions were kept unchanged in the current tax code.
While these are difficult trade-offs to be sure, the goal of the process is to wring as much inefficiency out of the tax system as possible while rewarding taxpayers with lower rates and a simpler, less complicated tax code.
Cautions and Caveats
Not every tax expenditure listed by either the JCT or the Treasury should be put on the chopping block. Some measures listed as tax expenditures under the current tax code would be the norm under an ideal tax system.
For example, bonus depreciation and other accelerated depreciation measures are currently listed as tax preferences. Most economists would argue that the ideal tax system would allow for full expensing of business investment, so bonus depreciation should be seen as closer to the ideal than as a tax preference.
Similarly, the preferential rates for capital gains and dividend income are currently seen as tax expenditures. But an ideal tax system would not double-tax corporate income as is currently the case with capital gains and dividends. The flat tax, for example, would not tax capital gains or dividend income since that income is already taxed once at the corporate level.
The current system also treats the deferral of tax on profits earned abroad as a tax expenditure. These profits have already been taxed by the host country where they were earned and should not be taxed a second time when they are brought home to the U.S. Ideally, America should be moving toward a territorial system of taxation of foreign profits, as have the majority of our major trading partners. The United Kingdom and Japan are the two most recent competitors to move toward such a system.
The Research and Development tax credit is a trickier issue. On the one hand, a neutral tax system would not preference specific business activities such as research and development over other investments. However, many economists believe that in the absence of such a preference, the free market would under-invest in R&D and the economy would suffer. Moreover, most of our major economic competitors have generous incentives for R&D, so to eliminate this incentive from our system may be likened to unilateral disarmament.
Conclusion
The U.S. tax system is in desperate need of simplification and reform. The relentless growth of credits and deductions over the past 20 years has made the IRS a super-agency, engaged in policies as unrelated as delivering welfare benefits to subsidizing the manufacture of energy efficient refrigerators. I would argue that were we starting from scratch, these would not be the functions we would want a tax collection agency to perform.
While tax cuts will always curry more favor with voters than new spending programs, Washington needs to call a truce to using the tax code for social or economic goals. The consequence of trying to micromanage the economy as well as individual citizens' behavior through the tax code is a narrow tax base and unnecessarily high tax rates. These high rates are endangering America's global competitiveness and undermining the nation's long-term economic growth.
Fundamental tax reform can restore the nation's competitiveness and put us on a growth path for the future. Not only will this improve living standards in America, but it will improve the nation's fiscal health. That is a win-win for everyone.
Thank you very much. I would welcome any questions you may have.

Appendix 1: How Do U.S. Tax Expenditures Compare to Other Nations?
Compared to other industrialized nations, the U.S. is well above average in terms of the percentage of budgetary resources going toward tax expenditures. As Figure 2 below shows, tax expenditures in the U.S. equal roughly 34 percent of total government tax and non-tax receipts. By contrast, tax expenditures in Germany, Korea, the Netherlands, and Spain, total less than 15 percent of government receipts. On the other end of the spectrum, Canadian tax expenditures equal 44 percent of government receipts, while in the U.K., tax expenditures equal 35 percent of receipts.

Appendix Table 1: Tax Expenditures in OEDC Countries
Tax Expenditures in OECD Countries - OECD © 2009 - ISBN 9789264076891
Source: http://dx.doi.org/10.1787/747140815638
Version 1 - Last updated: 10-Nov-2009
Number of tax expenditures in the United States % of GDP
With reclassifications by author

2002 † 2003 2004 2005 2006 2007 2008 2009‡ 2010‡
Purpose of Tax Expenditure, Income Tax*
General Tax Relief 0 0 0 0 0 0 0 0 0
Low-Income Non-Work Related 11 11 11 11 11 11 11 11 11
Retirement 11 11 11 10 10 10 10 10 10
Work Related 10 9 9 9 9 9 10 10 10
Education 14 15 15 16 16 16 16 16 16
Health 8 8 8 8 8 9 9 9 9
Housing 8 8 9 9 9 9 11 11 11
General Business Incentives 16 16 16 17 18 18 18 18 18
R&D 2 2 2 2 2 2 2 2 2
Specific Industry Relief 34 35 35 43 50 52 54 54 54
Intergovernmental Relations 3 3 3 3 3 3 3 3 3
Charity 4 4 4 4 4 4 5 5 5
Other 3 3 3 3 4 4 4 4 4
Total 124 125 126 135 144 147 153 153 153
CAPITAL INCOME TAXATION
Accelerated Depreciation 2 2 2 2 2 2 2 2 2
Interest 1 1 1 1 1 1 1 1 1
Dividends 1 1 1 1 1 1 1 1 1
Capital Gains 3 3 3 3 3 3 3 3 3
Subtotal 7 7 7 7 7 7 7 7 7
Total 131 132 133 142 151 154 160 160 160
Make Work Pay Provisions 4 4 4 4 4 4 4 4 4
Total 135 136 137 146 155 158 164 164 164
Non-Income Tax Related 0 0 0 0 0 0 0 0 0
Grand Total 135 136 137 146 155 158 164 164 164
Structural Items 1 1 1 1 1 1 1 1 1
Income Tax Expenditures by Type*
Credits 28 28 28 31 35 36 38 38 38
Deductions, Exemptions, and Exclusions 80 81 82 88 91 92 96 96 96
Deferrals 22 22 22 22 24 25 25 25 25
Reduced Rates 5 5 5 5 5 5 5 5 5

† In fiscal years: fiscal year 2006 is from October 1st 2005 to September 30th 2006.
‡ Projection
* Classification of tax expenditures by purpose and by type is to some degree arbitrary.
Sources: Budget of the U.S. Government, Fiscal Years 2009 and 2010, Analytical Perspectives, Chapter 19, Table 19-1

Appendix Table 2: Nonpayers by State in 2008
State
Total Filers
Filers with a Tax Liability
Filers with No Tax Liability
Percentage of Filers with No Liability
Rank (Most to Least)
US Total
143,490,468
95,520,933
51,045,911
36%

Mississippi
1,254,942
719,916
567,195
45%
1
Georgia
4,255,054
2,598,415
1,753,675
41%
2
Arkansas
1,223,637
755,772
498,682
41%
3
New Mexico
923,431
573,865
372,148
40%
4
Alabama
2,076,195
1,288,134
833,877
40%
5
South Carolina
2,047,201
1,273,969
818,631
40%
6
Louisiana
1,983,957
1,250,519
780,097
39%
7
Texas
10,792,258
6,822,725
4,226,513
39%
8
Florida
8,875,483
5,645,900
3,468,156
39%
9
Idaho
666,723
423,714
258,528
39%
10
Tennessee
2,842,898
1,814,965
1,100,304
39%
11
North Carolina
4,180,091
2,664,444
1,607,594
38%
12
Utah
1,145,303
730,938
432,744
38%
13
Arizona
2,714,182
1,756,481
1,010,982
37%
14
Kentucky
1,869,439
1,218,223
694,890
37%
15
California
16,478,215
10,809,941
6,083,777
37%
16
Oklahoma
1,605,411
1,051,298
591,878
37%
17
Montana
477,153
314,174
174,568
37%
18
Indiana
3,019,320
1,992,138
1,083,040
36%
19
Michigan
4,626,365
3,059,154
1,659,010
36%
20
Missouri
2,739,220
1,832,981
963,611
35%
21
West Virginia
785,966
527,282
275,876
35%
22
New York
9,203,531
6,233,030
3,223,814
35%
23
Oregon
1,753,860
1,182,640
608,311
35%
24
Nevada
1,272,433
854,584
441,251
35%
25
Illinois
6,112,426
4,128,709
2,100,258
34%
26
South Dakota
389,575
266,064
131,608
34%
27
Kansas
1,328,944
905,922
446,675
34%
28
Nebraska
857,622
591,594
282,150
33%
29
Maine
633,674
443,576
206,378
33%
30
Vermont
320,162
224,748
103,669
32%
31
Hawaii
656,452
459,268
211,696
32%
32
Pennsylvania
6,130,055
4,264,743
1,975,694
32%
33
Ohio
5,562,764
3,876,376
1,789,893
32%
34
Wisconsin
2,767,859
1,940,996
873,884
32%
35
Colorado
2,340,854
1,654,661
731,210
31%
36
Iowa
1,415,088
1,000,188
441,887
31%
37
Rhode Island
510,709
361,016
159,378
31%
38
Delaware
425,490
303,666
129,186
30%
39
New Jersey
4,304,848
3,077,401
1,301,727
30%
40
Virginia
3,727,792
2,674,714
1,120,668
30%
41
Minnesota
2,569,679
1,850,504
764,698
30%
42
Washington
3,185,705
2,302,518
939,240
29%
43
Maryland
2,776,026
2,012,029
811,278
29%
44
North Dakota
322,761
235,533
92,955
29%
45
Wyoming
274,041
201,684
77,085
28%
46
New Hampshire
668,971
497,127
184,299
28%
47
Connecticut
1,742,470
1,296,183
474,410
27%
48
Massachusetts
3,197,925
2,387,861
866,220
27%
49
Alaska
359,709
290,564
74,876
21%
50
District of Columbia
302,531
223,339
84,641
28%

* Source: Tax Foundation calculations based on IRS data.
Adjustments were made to account for EITC recipients in the nonpayer estimate.

[1] Roberton Williams, "Why Nearly Half of Americans Pay No Federal Income Tax," Tax Notes, June 7, 2010, p. 1149.
[2] "Background Information on Tax Expenditure Analysis and Historical Survey of Tax Expenditure Estimates," Joint Committee on Taxation, February 28, 2011, p. 2.
[3] "Estimates of Federal Tax Expenditures for Fiscal Years 2010-2014," Joint Committee on Taxation, U.S. Government Printing Office, December 15, 2010, p. 55-56.
[4] Individual Income Tax Returns, Tax Year 2008 Preliminary Data: Selected Income and Tax Items, by Size of Adjusted Gross Income. Internal Revenue Service. http://www.irs.gov/pub/irs-soi/08in01pl.xls. These preliminary data represent estimates of income and tax items based on a sample of individual income tax returns filed between January and late September of a given processing year. These returns are then weighted to represent a full year of taxpayer reporting. In general, some of the returns processed during the remainder of the year may have somewhat different characteristics compared to these earlier ones. Therefore, these preliminary data are best utilized by comparisons made to the preliminary estimates from the prior year. When available, the estimates from the Complete Year Data should be used in place of the preliminary data.
[5] Scott A. Hodge, "Record Numbers of People Paying No Income Tax; Over 50 million "Nonpayers" Include Families Making over $50,000," Tax Foundation Fiscal Fact No. 214, p. 4.
[6] Joint Committee on Taxation, Letter to Representative Dave Camp and Senator Kent Conrad, May 28, 2010.
[7] "Growing Unequal? Income Distribution and Poverty in OECD Countries," Organization for Economic Cooperation and Development, 2008. p. 112.
http://dx.doi.org/10.1787/422013187855. Here income taxes refer to both personal and social insurance taxes.
[8] Ibid.
[9] Dennis J. Ventry, Jr., "The Accidental Deduction: A History and Critique of the Tax Subsidy for Mortgage Interest," UC Davis Legal Studies Research Paper Series, Research Paper No. 196, November 2009.
[10] Dan Andrews, "Real House Prices in OECD Countries: The Role of Demand Shocks and Structural and Policy Factors," OECD Economics Department Working Papers, No. 831, OECD Publishing, 2010.
[11] Christian A. L. Hilber and Tracy M. Turner, "The mortgage interest deduction and its impact on homeownerhip decisions," August 2010.
[12] "Trim the excessive tax subsidy for real estate," Washington Post, January 1, 2011.
[13] Douglas Holtz-Eakin and Harvey S. Rosen, "Federal Deductibility and Local Property Tax Rates," NBER Working Paper Series, Vol. w2427, December 1990.
[14] Steven Malanga, "The Muni-Bond Debt Bomb. . . and how to dismantle it," City Journal, Summer 2010, Vol. 20, No. 3. http://www.city-journal.org/2010/20_3_muni-bonds.html
[15] "The Wind Subsidy Bubble," Wall Street Journal, December 20, 2010.
[16] Anita Huslin, "Energy Boost: Solar and Wind Businesses Powered by Tax Breaks," Washington Post, April 14, 2008.
[17] Richard Rubin, "Whirlpool Stockpiles Energy Credits, Reducing Future Tax Bills," Bloomberg, February 22, 2011.
[18] National Taxpayer Advocate's 2010 Annual Report to Congress.
http://www.irs.gov/advocate/article/0,,id=233846,00.html
[19] National Taxpayer Advocate, Report to Congress: Fiscal 2010 Objectives, June 30, 2009, p. xxii.
http://www.irs.gov/pub/irs-utl/fy2010_objectivesreport.pdf
[20] Ibid. p. xix.
[21] Robert C. Carroll, "The Excess Burden of Taxes and the Economic Cost of High Tax Rates," Tax Foundation Special Report No. 170, August 14, 2009.
[22] "Tax Policy Reform and Economic Growth," OECD Tax Policy Studies. No. 20., OECD Publishing, 2010, p. 24.
[23] This example is for illustrative purposes only. The Zero Plan did set aside $80 billion per year for deficit reduction and treat capital gains and dividends as ordinary income. The Tax Foundation does not support these aspects of the plan.
[24] National Commission on Fiscal Responsibility and Reform. "Co-Chair's Report," November 11, 2010.
http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/CoChair_Draft.pdf
Attached Files
Testimony of Scott Hodge before the U.S. Senate Budget Committee, Hearing on Distribution and Efficiency of Spending in the Tax Code, PDF, 302.2 KB
by Scott A. Hodge