Tax Reform That Helps the Middle Class

5/12/2005

May 12, 2005

Speaking before the president's Advisory Panel on Federal Tax Reform yesterday, American Progress CEO John Podesta argued for a tax structure that treats all forms of income the same, whether it comes from wages or investments. Podesta explained that a cook at a high-school cafeteria making $25,000 a year effectively pays 30 percent of his or her income in federal taxes. A two-earner family making $85,000 a year effectively pays 40 percent in taxes. Meanwhile, a millionaire pays just 15 percent on his or her investment income. Reform that truly helps the middle class must ensure fairness, simplify the system, and expand growth and opportunity.

Fairness: Tax all income-whether from wages or investments-according to the same rate schedule. President Bush's tax cuts have effectively shifted more of the tax burden onto the backs of America's middle class. A fair tax system does not allow a millionaire to pay less in taxes than hard-working families struggling to get by. Money earned from dividends should be treated just the same as money earned from labor.
Simplification: Reduce the number of tax brackets and close corporate loopholes. President Bush's tax cuts and restructuring has added over 10,000 pages to the federal tax code. The system needs to be simpler. To start, the number of tax brackets should be reduced from six to just three - 15 percent (for income up to $25K), 25 percent (for income between $25K and $120K) and 39.6 percent (for income over 120K). Real tax reform must put an end to the costly corporate giveaways like the "Bermuda" loophole that allows U.S. firms to avoid paying taxes by moving their operations overseas. By closing individual loopholes, we would also eliminate the need for the Alternative Minimum Tax (AMT) - a special rate initially created to ensure that the very rich pay some taxes but now estimated to hit nearly 36 million Americans by 2010.
Growth and opportunity: Increase incentives for Americans to save and reduce the deficit. The current deduction system is upside-down - providing a greater incentive to save if you have a higher income (and pay a higher marginal tax rate). Smart reform would create a new across-the-board 25 percent refundable tax credit for retirement savings. This would provide the same incentives for every American - whether an investment banker or a secretary - to save, including the 33 million Americans who don't earn enough to have income tax liability. At the same time, we must reduce massive deficits that hinder economic growth by ensuring proper revenue to cover government expenses.