America cannot afford to extend tax breaks for corporations or the wealthy that cripple our ability to invest in areas that expand economic growth, like infrastructure and education. Tax reform must be done in a way that raises significant revenue, protects working families and the vulnerable, and requires corporations and the wealthy to pay a fair share.
The primary goals of comprehensive tax reform should be to progressively raise sufficient revenue to (1) make investments that will grow the economy, and (2) set America on a path for long-term deficit reduction. Low-income and moderate-income Americans are already contributing to deficit reduction through the Budget Control Act spending caps and are likely to be asked to sacrifice more. Progressive tax reform is the only way that wealthy Americans can share significantly in that sacrifice.
Rather than use the 1986 tax reform as a model, politicians should be taking cues from America's last five balanced budgets (1969 and 1998-2001), which all required above average revenue. During these years of balance, federal revenue averaged 19.5% of GDP, substantially higher than the previous 40 year average (18% of GDP) and the pre-recession level (18.5% of GDP). However, with demographic shifts, the desperate need for job-creating investments, and the size of America's current deficits, our revenue will need to be higher than even these historical levels to achieve balance.
The writing is on the wall: a revenue-neutral approach to tax reform â€“ on either the corporate or individual side of the tax code â€“ is not an option. Further, so-called â€œdynamic scoring,â€ that imagines revenue out of thin air and is widely refuted by respected economists of all political affiliations, cannot be used to shirk the requirement for revenue in deficit reduction proposals. American Socialists believe that any comprehensive tax reform must take the following into account.
- The Socialist Party Position
- The Socialist Party Message
- Political Crossfire
- Some Facts
- Public Pulse
- Corporate Tax Reform Principles
- Individual Tax Reform Principles
Conservatives peddle the fiction that America has a â€œspending problemâ€ and there is no need for more tax revenue. The reality is the current tax code is still rigged for the 1 percent. Many billionaires are paying lower tax rates than their secretaries. Profitable multinationals are exploiting loopholes and oversea tax dodges to avoid taxes altogether. Instead of taxing what we donâ€™t need, like Wall Street gambling, we tax what we require, like good jobs.
The glaring flaws and gaps in the tax code are easy to spot, if the spotlight is actually put on them.
The Socialist Party Position (Top)
Americaâ€™s number one priority is to end the jobs crisis. We need massive public investment not only to fully recover the 8 million jobs lost to the Great Recession, but to fix an economic foundation that was already disintegrating before the 2008 crash: an infrastructure thatâ€™s crumbling, a social safety net in tatters, an unsustainable dependence on fossil fuels and a public education system starved of resources, from preschool to affordable college.
Yes, there is lots of waste, fraud and abuse in the federal budget. Powerful interests rake of billions in unneeded subsidies. Perverted priorities squander too much. But even with that, we still have a revenue problem.
Fortunately, we can solve our revenue problem without kicking the middle class when itâ€™s down or stifling the ability of businesses to create jobs. We can raise much of the revenues we need if we close wasteful loopholes, remove perverse job-killing tax incentives and fill the gaps that have allowed the richest Americans to escape contributing their fair share to Americaâ€™s future.
For example, Americans for Tax Fairness proposes:
- ★ Closing tax shelters for the wealthy, which would bring in as much as $167 billion a year. Ending the ability of U.S. corporations to delay paying taxes on foreign profits, which would save $61 billion a year.
- ★ Terminating destructive corporate tax breaks, including those regarding executive compensation, stock options and fossil fuel production; that would raise $16 billion a year.
- ★ Taxing Wall Street trading to discourage reckless speculation, which would produce $35 billion a year.
- ★ Placing a surtax on income above $1 million, which would collect $45 billion a year.
These proposals would begin to close the loopholes in the tax code that serve to benefit the wealthiest American households that do not need the help.
The Socialist Party Message (Top)
America need a fair tax code so Americans can rebuild America, put people back to work and make investments vital to Americaâ€™s future.
In the two years after the 2008 financial crash, the multimillionaires in the top 1 percent saw their average incomes rise 11 percent while the average income of everybody else shrank. Stunningly, American inequality is worse today than it was in 1774, even when you factor in slavery, according to new research from Harvard and the University of California.
We donâ€™t need a tax code that fosters staggering inequality and shifts more of the burden of paying for government services onto the shoulders of working families. Instead, the corporations and individuals who have profited the most from all that government provides should be paying their fair share. In other words, pay the employees a fair share of the profits that their efforts produced, or pay the government that amount to care for the underpaid employees.
These tax reforms would also help generate jobs here at home. A financial speculation tax would help reduce the Wall Street gambling that helped blow up the economy. Ending incentives for outsourcing would help deter companies from moving jobs abroad.
Political Crossfire (Top)
Capitalist Politicians say: We already raised taxes on the rich. Now it is time to address the real problem: spending.
American Socialists say: Since 2011, the president and Congress have locked in more than $2 trillion in deficit reduction, with more than two-thirds of that from spending cuts. America has cut deeply enough â€“ in fact, too deep â€“ and more austerity would kill jobs. The fact is we have a revenue problem. Many billionaires are paying lower tax rates than their secretaries. Profitable multinationals are exploiting loopholes and oversea tax dodges to avoid taxes altogether. Capitalist politicians arenâ€™t raising enough revenue to invest in what America needs to grow: jobs, infrastructure, education and homegrown clean energy.
Capitalist Politicians say: We canâ€™t punish success. It will destroy the incentives for job creators to invest in Americaâ€™s growth.
American Socialists say: America applied that conservative logic during the Bush presidency, slashing taxes on the wealthy. America patiently waited for the jobs to come. They never did. The Wall Street Journal found the Bush record on jobs was the â€œworst on record.â€ American workers didnâ€™t get jobs. American workers got growing inequality, are being pushed down out of the middle class, and are still suffering from the biggest economic downturn since the Great Depression. Itâ€™s time to go back to what works: a fair tax code that funds the investments America needs to rebuild America and put American workers back to work.
Capitalist Politicians say: 47 percent of Americans donâ€™t pay any federal income tax. We donâ€™t need to further burden the successful. We need everyone to contribute.
American Socialists say: Now we know the truth. 47 percent of Americans are so underpaid, they can't afford to contribute additional taxes to America's future. The truth of the matter is: Conservatives donâ€™t want to cut taxes for everybody. Conservatives only want to cut taxes for the rich and raise them for the poor. In fact, every working American pays taxes â€“ payroll taxes, sales taxes, state and local taxes. Middle-class Americans are paying taxes at a higher rate than billionaires. Small businesses pay at a higher rate than multinationals that hide profits abroad. Itâ€™s not the poor who have gamed the tax code; itâ€™s the rich and the powerful. Tax reform starts at the top.
Some Facts (Top)
★ For every dollar in new revenue raised through tax increases since 2011, capitalist politicians have cut $2.50 out of federal government programs: $1.5 trillion in spending cuts versus $600 billion in tax increases. (Center for Budget and Policy Priorities)
★ The top 1 percent of households saw their average federal tax rate fall 17 percent between 1979 and 2009. (Congressional Budget Office)
★ Corporations are paying a fourth of what they paid 60 years ago as a share of federal revenues. That means the American workers are having to pay more. (Americans for Tax Fairness )
★ Federal taxes as a share of the total economy havenâ€™t been this low since 1950. The last time we had a balanced budget (1998-2001), revenues were 20 percent of gross domestic product; now revenues are just 15.4 percent of GDP. (Ezra Klen, The Washington Post, via Americans for Tax Fairness)
Public Pulse (Top)
Even after the fiscal cliff deal, 66 percent of voters say the richest 2 percent should pay higher taxes. Only 9 percent say they should pay less. (Hart Research Associates for Americans for Tax Fairness)
More than three out of four respondents agree that federal budget deficits should be addressed through a combination of tax increases and budget cuts. Only 19 percent agree with the Republican leadership position that the deficit should be reduced by budget cuts alone. (Pew Research Center)
64 percent of voters say that large corporations should pay more in taxes. (Hart Research Associates for Americans for Tax Fairness)
66 percent of voters say revenue from closing loopholes should go toward public investments and deficit reduction. Only 23 percent say revenue from closing loopholes to go toward paying for lower tax rates. (Hart Research Associates for Americans for Tax Fairness)
Corporate Tax Reform Principles (Top)
1. Revenue Positive
As the debate over our fiscal challenges proceeds, more and more constituencies have been asked to contribute to taming our deficit under the pretense of â€œshared sacrifice.â€ Yet time and time again, the corporate tax code has been given a pass. This asks nothing of corporations that continue to set near-record level profits and have largely recovered from our post-2008 economic slide, and requires the sacrifice of working families and the poor to be more severe. Plain and simple, the corporate contribution to our deficit reduction must increase from the status quo. As a share of GDP, corporate taxes have fallen from 4.7% in the 1950s to a scant 1.9% from 2000-2009. In 2007, the U.S. Treasury found that when evaluated on average corporate tax rates, the United States was second lowest among its competitors in the G8 and three percentage points below the Organization for Economic Cooperation and Development (OECD) nationsâ€™ average. Just this year, CBO data show that the effective corporate tax rate dropped to 12.1%, the lowest recorded level during the past 40 years. As a share of our total revenues, corporate taxes averaged 27.6% in the 1950s and have dropped precipitously since to 10.4% from 2000-2009. This is not a fair distribution of our tax burden.
How does America improve? America should advance the tax codeâ€™s efficiency, eliminate wasteful loopholes, broaden the base, and reduce bias towards overseas investments. However, the presumption that America should turn around and shovel this revenue out the door through lower marginal rates â€“ particularly when America has huge needs for investment in areas such as infrastructure and education â€“ is simply one American workers can no longer afford.
2. Promote Responsible Corporate Behavior
In addition to being a means through which the private sector contributes to public goods and societal needs, the corporate tax code is meant to serve as a tool to fuel smart investments, and an economic instrument to incent clear, positive objectives. Comprehensive corporate tax reform should retain those expenditures that have proven to be an efficient and worthwhile investment in our nationâ€™s future. This includes, but is not limited to, incentives to hire disadvantaged workers, invest in distressed communities such as the Low Income Housing Tax Credit, bring jobs home from overseas, help small businesses and promote clean energy and energy efficiency.
Further, America must eliminate tax loopholes that encourage reckless and undesirable behavior such as the overuse of debt financing and tax sheltering, and explore commonsense revenue streams like putting a price on carbon pollution or enacting a small financial transactions tax to reduce market volatility. Politicians should also repeal the more than $95 billion in special tax breaks they are scheduled to give away to the established, highly profitable fossil fuel industry over the next ten years.
3. A Global System that Works for the American People
In addressing America's serious revenue gap, politicians should reduce â€“ not increase â€“ the tax codeâ€™s bias towards overseas investment. Rather than fixate on top marginal rates, corporate tax reform should focus on whatâ€™s actually broken: America's partial-worldwide system relying on deferral has not kept pace with the globalized business community. The status quo allows multinational corporations to achieve extremely low worldwide and domestic effective tax rates, encourages shifting of profits and investment overseas, and costs billions each year in US tax revenues. To harmonize 21st century commerce with America's revenue needs, elected officials should modernize the American tax code by either ending deferral (and the excessive tax avoidance this encourages) or adopting a global minimum tax (rendering deferral largely irrelevant).
Yet some large corporate interests have marched to Capitol Hill advocating for a tax system that would worsen the tax codeâ€™s bias towards foreign profits and investment, and increase the deficit. They claim that the only way for the United States to remain globally competitive is to transition to a territorial tax system, which would levy taxes only on earnings in the country in which they are reported and exempt corporationsâ€™ offshore profits from US taxes. Their solution is wrong and ignores some very hard facts.
Such a system would increase the incentives and opportunities for multinationals to shift profits and investment offshore. While that might be good for corporate shareholders, it would not be good for America's workers. The non-partisan Congressional Research Service told Congress that a territorial system â€œwould make foreign investment more attractive,â€ causing investment to flow abroad and reducing wages for US workers even more.
Regardless of rumor or political agenda, the United States remains the preeminent location for businesses in the global economy. According to the World Bank, the United States ranks first among large countries in the ease of doing business, which included more comprehensive measures of business-friendliness including regulation burden, property rights, access to credit, and contract enforcement, to name a few. There is no need to cater to the demands or large corporations, particularly when it would devastatingly undercut the investments we need to make in our infrastructure and human capital.
Individual Tax Reform Principles (Top)
1. Restore and Improve Progressivity
It is a bedrock principle of fairness that those with higher incomes should pay progressively higher tax rates. Any tax reform must ensure that each fifth of the income distribution (as well as the top 1% and top 0.1%) should have a higher average effective tax rate than the income group below. Across the board tax rate cuts are regressive because a 20% tax cut for a millionaire â€“ even as a share of income â€“ amounts to a far greater benefit than a 20% cut for a hardworking low income American.
To maintain or strengthen progressivity, America should end one of the leading contributors to after-tax income inequality in this country, the special tax breaks for investment income. Workers who get their salaries from wages often pay a higher effective tax rate than wealthy individuals like Mitt Romney and Warren Buffett who make most of their income from selling stocks and bonds or from dividends. This undermines the basic tenant that average tax rates should rise with income. In fact, the richest 1% of taxpayers receives 71% of all capital gains, while the bottom 80% of taxpayers receives only 10% of capital gains. America should treat all capital gains and qualified dividends as ordinary income, an approach President Reagan once signed into law.
America must also strengthen the estate tax, which is the single most progressive tax. The weakening of estate tax requirements over time has contributed to expanding income inequality for the top 1%. The current estate tax rules should expire and, at a minimum, America should return to 2009 levels as President Obama has proposed, which would impact only the wealthiest three out of every 1,000 estates.
2. Fair Rates for the Wealthiest Taxpayers
America must ensure that the wealthiest Americans are paying their fair share of taxes. While Americans do applaud success, the successful should not exploit that praise. When the wealthy get tax breaks they donâ€™t need and the country canâ€™t afford, the middle class and working families make up the difference in cuts to needed programs like education and Medicare. Whatâ€™s more, the income gains of the last three decades have not been distributed fairly. The wealthiest Americansâ€™ have seen an outsized growth in income (155% income gains for the top one percent of earners compared to 41% income gains for the bottom 80 percent) and tax reform should not exacerbate these trends of gross income inequality. As studies continue to bear out, high levels of income inequality weaken the economic environment for all Americans.
As a first and minimum step, instead of giving an average tax break of $160,000 to millionaires, the Bush-era tax rates on the richest 2% should, at minimum, return to the rates America had when Bill Clinton was president and the economy was booming. As a recent Congressional Research Service report found, reductions in the top tax rates have little association with economic growth, although it found these reductions were associated with increasing income disparities.
There is a meaningful difference between a multimillionaire and a family earning $250,000 a year that the American tax code fails to recognize. The simplest and most direct way to address America's revenue needs while avoiding undue burdens on some upper-middle class Americans is to add additional tax brackets for the extremely wealthy as proposed by Rep. Schakowsky (H.R. 1124). Because the root of America's tax codeâ€™s complexity stems from the web of deductions and tax expenditures, not tax rates, these new brackets could help raise additional revenue and improve equity without unduly hampering economic efficiency.
3. Reexamine Expenditures that Benefit the Wealthy; Protect those that Help Working Families, the Poor, and Seniors
Tax policy is economic policy, and tax expenditures are a form of spending. America must prioritize our spending through the tax code to remove expenditures that disproportionately benefit the wealthy, while protecting those that create ladders of opportunity, reward work, and protect the poor.
Subsidies that disproportionately benefit the wealthy should be made fairer and more efficient by targeting them better, such as by transitioning to tax credits. At the very least, we should cap the benefit of itemized deductions for families with incomes over $250,000 at 28%, as outlined in the Presidentâ€™s budget. Only one-third of taxpayers itemize their deductions because the majority of Americans claim the standard deduction. Further, the value of a deduction corresponds to an individualâ€™s marginal tax rate, making itemization highly regressive.
The Socialist Party supports tax expenditures that increase access to health care, homeownership, and a secure retirement. Tax credits that benefit seniors, the poor, or working families â€“ such as the child tax credit â€“ should also be protected with their refundability maintained. American Socialists support maintaining the improvements made under the American Recovery and Reinvestment Act to tax credits targeting working families, including the Earned Income Tax Credit, the Child and Dependent Care Credit, and the American Opportunity Tax Credit. In addition, as America's economy continues to recover, American Socialists support tax credits to create consumer demand and assist low-income and middle-income families such as the successful Making Work Pay tax credit.
America also must not fall for the trap of agreeing to a tax reform framework that sets a goal of locking in regressive and costly rate reductions while leaving for later which tax expenditures would be targeted. This would either result in lower overall revenue or would put at risk tax expenditures that benefit the poor and the middle class, and neither is acceptable.