10 Questions to Evaluate Tax Plans and Tax Proposals
Taxing is a simple concept:raise the money required to fund government activities without harming economic activity.
Taxes should be:
- Promote economic growth
The economists at the Tax Foundation have developed 10 basic questions,broken into four basic areas we can all use to decide whether a plan or proposal is a sound tax system:
How Does the Plan Affect Fairness and Neutrality?
1) Does it make taxes less of a reason in decision-making and cut social engineering?
- Taxes should play as small a role in the decision to buy a home,replace the windows on that home,build a factory,or hire new workers.
- Our tax code incentivize taxpayers into all types of activities,from buying hybrid vehicles to investing in historic buildings.
2) Does it cut special interest provisions or “loopholes,”and lower special interest’s ability to seek favors?
- The estimated cost of tax “loopholes”is over $1 trillion per year,or ~7% of GDP.
- Loopholes narrow the tax base,which drives tax rates up to raise the same revenue as a simpler system
3) Does it tax everyone’s income at the same rate?
- A single rate tax system is treats all Americans equally,no matter their age,occupation,income,or station in life.
- The current personal income tax code taxes different incomes at different rates;higher incomes face higher rates than those with lower incomes.
- Progressive rates are typically justified to make sure that wealthier taxpayers “pay their fair share,”but rates are set by political process not economic rationale
4) Does it end the double and triple taxation of saving and investment?
- Income should be taxed only once,and as close to the source as possible.
- The current system taxes income multiple times,often at very high rates. For example:
- Personal income is taxed once by the income tax,and a second time on the returns of any saved or invested post-tax income
- Corporate profits are taxed first at the firm level,then a second time when they are distributed as dividends,or when they are realized as capital gains
- The Estate tax is a second or third tax on a lifetime of the accumulated savings by business owners,farmers,and citizens
5) Does it tax business income equally,regardless of organizational form?
- Taxes should affect businesses should be taxed equally,regardless of size,how they are organized,or whether they are owned by an individual or a group of shareholders
- A fair tax system would cut the incentives to arbitrage the tax system.
How Does the Plan Affect Compliance Costs and Complexity?
6) Does it cut complexity and make the tax code easier to understand?
- Complying with the federal income tax code costs taxpayers about $400 billion each year.
- About 62 percent of all taxpayers use tax return preparers,but the percentage jumps ~73 percent for people claiming the earned income tax credit (EITC).
- According to the Tax Foundation the complexity in the current personal income tax system costs $110 to $150 billion
7) Does it improve certainty in the tax code?
- People and businesses need a stable and economically sound tax system to make long-term plans and investments
- Short-term tax provisions,such as tax holidays and stimulus measures,only make planning more unpredictable and investment riskier
How Does the Plan Affect Competitiveness and Growth?
8) Does it make the U.S. more competitive and attractive for investment?
- Most of the U.S. business partners have moved to a business tax model focused on lower tax rates and exemptions for foreign earnings that give resident multi-national firms a competitive edge
- The U.S. is the only OECD country with a worldwide tax system and a corporate rate above 30%;our 39% rate is second only to Japan
- As globalization continues capital will flow to places where costs,including tax costs,are low relative to market demand;a sound tax reform plan will position the U.S.to compete globally and attract investment
9) Does it promote economic growth over redistribution?
- The U.S has the most progressive income tax burden among leading industrialized nations:
- The top 10% of U.S. taxpayers pay a larger share of total income tax than in any other country,including “high-tax”countries such as France,Italy,and Sweden.
- Almost half of America’s tax filers pay less than 0% due to refundable credits for low-incomes,such as the EITC and the child credit
- Progressive income taxes are harmful to long-term economic growth,because they preferentially undermine high-income earners,who drive economic growth by doing most of the saving,investing,risk-taking,and high-productivity labor
How Does the Plan Affect Tax Revenue?
10) Does it improve revenue stability?
- Whatever the size of government,the ideal tax system should raise a sufficient amount of revenue to fund government activities with the least amount of harm to the economy
- A fiscally sound tax system should have a broad base that is not restricted to volatile sources of income.
The Tax Foundation developed these 10 questions to help taxpayers evaluate tax plans. The questions focus on simplicity,transparency,neutrality,and stability,all issues that naturally increase prosperity:
- Unnecessary complexity and a lack of transparency means most taxpayers do not understand how their taxes are related to the services they receive from government,a critical element of democracy
- The lack of neutrality and stability is preventing long-term investment and economic growth.