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article imageOp-Ed: Comprehensive U.S. tax reform can benefit the 90 percent

By Michael Krebs     Jan 20, 2014 in Politics
With the 2014 midterm election narrative likely to center on income inequality, congressional legislators and candidates should look to meaningful comprehensive tax reform.
According to the Center on Budget and Policy Priorities, the bottom 90 percent of Americans are facing income stagnation. One reason for this stagnation may be persistent debt interest, as Zero Hedge's Tyler Durden notes.
However, with interest rates poised to increase in the early days of the economic claw-out from the Great Recession, the status quo economic solutions offered by both Democrats and Republicans ahead of the income inequality conversation that will shape the narrative of the 2014 midterm elections are certain to keep that stagnation firmly in place — particularly when factoring in the increases in taxes and premiums associated with Obamacare.
Without meaningful and fair reform, the income gap is certain to widen. High-income earners and corporations adapt to the directions given by their financial advisors; low-income earners — and the poorest and sickest among them — have little choice but to utilize netting offered by social services; and middle-income earners — the 90 percent referenced above — pay the disparate federal, state, and local tax tabs, living a losing lifestyle on a paycheck-to-paycheck treadmill.
For the 90 percent, financial illiteracy is partly to blame, and as Time magazine recently reported, Americans are still debating the need for financial education throughout the nation's public schools. Poor financial decisions and blind hunger for debt offer cruel economic entrapment for the middle class. In a recent ABC News poll, Americans were asked what they would do if they were to receive additional money — and only 13 percent said they would pay down their existing debt obligations.
Given these behaviors, it is not reasonable to expect that income inequality will be corrected through the financial discipline employed by the average American household. The burden is on the government to act, as the broad population's financial illiteracy leaves legislators no meaningful choice.
There are many levers available to the federal government, but chief among them is comprehensive tax reform.
Some congressional legislators are pushing for the "FairTax," a system that would shift the entire tax burden away from income taxes, payroll taxes, capital gains taxes, and death taxes — insisting instead that all taxes are collected at the point of purchase for a product or service in a consumption-based sales tax.
"The FairTax repeals all taxes on income: no more income taxes, payroll taxes, capital gains or death taxes," John Linder wrote in Town Hall last week. "If you make $52,000 a year your weekly check will be $1,000. Since the average income tax today is 15% and the employee’s portion of the payroll tax is 7.65%, the average take-home pay will increase by 29%."
Under FairTax legislation, used items would not be taxed — as previously taxed items cannot be taxed again. Since lower-income Americans buy primarily used goods, the FairTax would not impact their consumption behaviors would provide them with an income boost, as low-income households would not be penalized by the payroll tax.
Additionally, there are no loopholes in consumption taxation. The FairTax targets wealth and ignores wages, while providing considerably higher revenues to the federal government, as a comprehensive analysis by Dr. David Tuerck, Chairman of the Economics Department and Executive Director of the Beacon Hill Institute at Suffolk University in Boston, concluded.
According to the Tuerck report, federal FairTax revenue would have exceeded the current cumbersome tax environment by $171 billion in 2009 and $267 billion in 2010. In fact, the current tax code is so convoluted that its 73,000 pages of regulations costs American taxpayers $500 billion to $1 trillion a year in compliance, according to George Mason University.
Proponents of alternatives to the FairTax often cite a flat tax model, affixing a simple percentage to the gross income of all income brackets. However, the implementation of a flat tax needs to also address the subjectivity of deductions for individuals and corporations. This is the fairest means by which income inequality can be addressed.
North Carolina just introduced a flat tax. However, as WRAL reported, its implementation came with the removal of many deductions.
In order to execute a fair flat tax, all deductions and loopholes — for everything, including the popular mortgage deduction — should be eliminated. The only allowable deduction in a proper flat tax model would be for charitable donations. The benefits in universal deduction removal include:
1. Urban renewal and revitalization: eliminating the mortgage deduction would encourage pricing competition found in rental units that populate urban centers.
2. Green initiatives: eliminating the mortgage deduction would discourage suburban sprawl, preserving green initiative goals.
3. Corporate loopholes: removing all corporate loopholes — including inbound overseas tax income realized at the more attractive flat rate — would drive considerable tax receipts.
4. High-income real estate deductions: erasing the mortgage deduction would yield considerable tax revenue from high-income Americans, many of whom own multiple properties.
There are hosts of benefits that come from the equation of a flat tax and a zero-deduction policy. However, legislators remain challenged in conveying the benefits of any comprehensive tax reform — FairTax or flat tax — to a collective audience that remains vastly inattentive on personal finance matters.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of
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