Government Watch

Congress Can Raise Your Income 10 Percent By Updating the Tax Code

TAX-CODEfrom – – by Curtis Dubay

Congress could raise your family’s income by 10 percent, or maybe even more. And it could do it with a policy reform that has the support of 71 percent of the American people.

Even better news is this is not some big-government spending program that would deliver a 10 percent raise. Instead, it’s tax reform.

The Tax Foundation, in a recent study, found that if Congress implemented a consumption tax, the economy would grow by 15 percent and wages by 10 percent.

We would see such pronounced positive effects because the current system bogs down the economy with high rates on working, saving, investing and taking risks. These are the basic elements of economic growth. When we have less of them, the economy and American families suffer from lower wages and less opportunity.

The tax code is a further weight on the economy because it has an archaic business tax system, cronyist policies in the code that pick winners and losers, is monstrously complex for families and businesses to comply with, and heavily taxes investment multiple times.

In a recently released primer for the 2016 presidential candidates, my colleague David Burton and I explain further in detail why each of these issues is such a problem for the economy. We also walk through what tax reform should accomplish and the various ways Congress could implement the right type of tax reform.

From a broad overview, tax reform needs to accomplish five key economic objectives:

  1. Lower individual and business tax rates. Tax reform must lower rates, in particular the top marginal rates, to strengthen the economy by improving incentives to work, save and invest.
  2. Establish the right tax base. Often overlooked in the tax reform debate is the fact that defining the tax base (what the tax code taxes) is as important as lowering the tax rate.
  3. Eliminate the bias against saving and investment. Tax reform must reduce, and ideally eliminate, the bias against saving and investing caused by double taxation.
  4. Eliminate tax preferences. More work is necessary to ensure that the base is neutral and does not pick winners and losers. That means that tax reform should eliminate any deductions, credits and exemptions that are not economically justified.
  5. Simplify the tax system and make it more transparent so that taxpayers understand how much they pay to fund the federal government.

There are long-standing debates among conservatives about which type of tax reform plan can best deliver the objectives laid out above. Those plans generally have more in common with each other than is usually understood. In fact, the best and most popular tax reform plans use the correct consumption tax base and have identical economic effects. They vary only in how taxpayers pay them. A useful way to understand their variations is to think of them as distinct software programs used to execute the same function. They all execute that function equally well, but they interact with their users (taxpayers) differently.

For many, a consumption tax means a retail sales tax such as the one that most states levy. However, a consumption tax is any tax on income that is spent on consumption, and excludes income that is saved or invested. Consumption taxes do not include the estate and gift tax, also known as the death tax. There are several plans that fit this mold, including:

  • the traditional flat tax (often referred to as the Hall–Rabushka flat tax);
  • the new flat tax (also known as an expenditure, or consumed-income, tax);
  • a business transfer tax (BTT); and
  • a national sales tax.

There are a host of other issues tax reform should address. But as long as Congress implements one of these systems in place of the current system, the economy would boom.

Unfortunately, a revenue collection agency will remain necessary to enforce any system Congress implements. Whether that is a reformed Internal Revenue Service, or a new agency created in its place, is up to Congress. Changes to the IRS are essential because of its recent misdeeds. But each of the tax reform plans described here would make for a smaller agency because the new tax code would be so much simpler than under the current system.

With nearly three quarters of Americans in favor of reform, and all the benefits it would bring, it is a wonder Congress hasn’t done tax reform already.

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5 years ago

There is no hope of “reform”, ever. Only a colossal depression will clear the air – either we get back to basics or just go communist. Since we are nearly there, that is probably our Karma. A vote for Hillary should put it over the top – Sen Joe McCarthy was right all along but we let him become marginalized by Hollywood, the universities and the media that HAD to be right just because they said so and we respected them. Here we are 50 years later worrying about printing money, one of the final tenets of “the master plan”.… Read more »

van hamlin
5 years ago

Consumption taxes end up being value added taxes. Each of these successive taxes are externalized to the consumer. In the long run, it causes inflation and reduces purchases. The 15% increase in GDP is not accurate either. It is more like 5%.

Jim Coleman
5 years ago

I believe the Fair Tax is the way to go. This system will entirely eliminate the IRS. Taxes are collected at the point of consumption or spending and would be operated by the states. The Fair Tax would eliminate all payroll taxes and so, allow Americans more spending money which will only boost the American economy. The Fair Tax would put the brakes on some of the corruption in government from granting tax favors. In my opinion, Social Security and Medicare will be supported by this consumption tax and become more financially secure. My suggestion would be for AMAC to… Read more »

5 years ago

AFFT (Americans For Fair Taxation) spent over $30 million doing research to make the FairTax the best. Yet it will not be passed because the power to tax the people gives Congress power and the FairTax would return that power to the people. If Congress were to raise the federal sales tax rate, consumers could change their buying habits and actually reduce the amount of revenue to the federal government. As a result the tax rate would have to be lowered. This concept was stated by one of our founding fathers, Alexander Hamilton. The current income tax is paid by… Read more »

5 years ago

as in years past, we move the furniture around on the titanic. the only way we will have a fair tax for all is by getting rid of the IRS, by passing the ( please out, it compares the flat tax/ present tax sys./and fair tax. the present tax sys. started out like a flat tax and evolved into what we have today. that can’t happen with the fair tax.

5 years ago

The Fair Tax is a well thought out tax plan eliminating the income tax with a consumption tax. The Fair Tax eliminates all taxes on saving and investment. AMAC would do well to sponsor this plan.

5 years ago

The only update to the tax code these politicians understand is to increase the national gasoline tax! …. Tax reform? … That’s only a pipe dream! … Whenever these politicians (of both parties) open their mouths to speak, ONLY LIES in the form of promises spew forth! … Garbage in, garbage out!

5 years ago

“With nearly three quarters of Americans in favor of reform, and all the benefits it would bring, it is a wonder Congress hasn’t done tax reform already.” Here’s the problem AMAC: When the subject of tax reform is brought up, everyone has a different idea of what it should entail. In very general terms, it breaks down along two main lines: On the left, the answer usually revolves around raising taxes on somebody else and making things “more fair” (the socialist definition of fair, NOT the Webster Dictionary definition). More money flowing to government to be re-distributed to “more worthy… Read more »

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