Income tax forms for 2011 are due Tuesday. Professor Dorothy Brown argues that it is time for meaningful reform.
Highlights of history
Dorothy Brown: We live with the myth that we have a progressive tax system
In fact, she says, people like Mitt Romney, Barack Obama pay less than secretaries
She says low flat rate on dividends and capital gains protects the rich
Brown: The elimination of progressive tax brackets is a step towards a fairer system
Editor’s Note: Dorothy Brown is Professor of Law at Emory University. She has published extensively on the racial and social implications of federal tax policy.
Last week we learned that Barack and Michelle Obama’s effective tax rate for 2011 was 20.5%. They had an adjusted gross income of $ 789,674. We also learned that their tax rate was slightly lower than that of President Obama’s secretary, who had about $ 95,000 in income.
Ours is supposed to be a graduated rate system, which means that the more income increases, the more tax rates rise. In a true progressive rate system, Obama would never pay a lower tax rate than his secretary.
We also know that Mitt and Ann Romney have a projected effective tax rate of 15% for 2011. They have requested an extension so that we do not have their actual returns. Their household income was just under $ 21 million. In a truly progressive tax system, Romneys would never pay a lower tax rate than Obamas.
We do not have a progressive tax system. The notion of progressive tax is the lie that has been perpetuated for far too long.
First, not all income is taxed the same. While our income tax has always had progressive rates, for most of the 20th century a lower rate applied to some non-wage income. This rate differential widened considerably following Bush’s tax cuts.
Most of Romney’s income comes from stock ownership. Stock dividends and capital gains are generally not subject to our graduated rate system. Income from shares is taxed at a flat rate of 15%.
Fewer than one in 5 Americans owns stocks in a way that qualifies for the flat rate. Of this minority, very few benefit as the Romney do.
An analysis of IRS statistics shows that for households up to $ 200,000, no more than about 5% of their income is eligible for the 15% fixed rate. These households combined represent well over 90% of US households.
The Simpson-Bowles commission included a proposal that all income should be taxed the same. While some would say this is a drastic step, this is precisely what we did in 1986.
Second, not all deductions are treated the same. Two-thirds of all taxpayers do not itemize their deductions but take the standard deduction. So, as a result, most Americans don’t even benefit from the myriad of special interest group deductions found in our tax code.
Also, in a progressive tax system, the value of a deduction depends on the tax rate on your bottom dollar. This is called your marginal tax rate.
The more income you have, the higher your marginal tax rate and the higher the value of the deduction.
For example, if your marginal tax rate is 35%, then for every dollar you spend, you save 35 cents. If your marginal tax rate is 15%, then for every dollar you spend, you only save 15 cents. This explains why people in the higher income brackets look for tax deductions as a way to save money on their taxes.
Third, this is all meant to be a secret.
The only reason we have the information is that taxpayers have voluntarily disclosed it – either because they are presidential candidates or because they are concerned citizens like investor Warren Buffett. The IRS statistics do a great job of masking this information because the real problem lies with the richest 1% of taxpayers, and the data is not presented in a way that isolates this group.
Congress decides to enact a tax law and the president signs the bill. While presidents voluntarily publish their tax returns, members of Congress do not. The first step towards real tax reform would be for every member of Congress to publish their tax return. We can see which tax provisions benefit them and we can compare their effective tax rates with ours.
Achieving meaningful tax reform will require very few steps.
First, tax all forms of income at the same rate. Second, repeal the progressive tax system and adopt a flat tax. If a flat tax is good enough for Mitt and Ann Romney, it should be good enough for the rest of us.
Most flat tax proponents, however, want a flat tax, but they want to exempt stock income completely. That would mean that Mitt and Ann Romney’s already low effective tax rate of 15% would be further reduced. It would be a misguided tax reform.
Finally, most deductions should be eliminated. Most taxpayers don’t detail, so this change would only affect about a third of taxpayers – and their accountants and tax lawyers.
Every time Congress enacts a deduction, it creates winners and losers. It must stop. To be sure, every special interest group will even object to the allusion of this suggestion. But we outnumber them.
I don’t think it’s fair that the richest Americans pay taxes less than most taxpayers and neither do you.
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