Clean Slate Time

By Libbey, Keith; Thomas, Evan | Newsweek, September 6, 2010 | Go to article overview
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Clean Slate Time


Libbey, Keith, Thomas, Evan, Newsweek


Byline: Keith Libbey and Evan Thomas

How about this for a tax plan: cut most people's taxes by half, eliminate the need to file returns, and provide the Treasury with a better way to reduce the deficit. Sound impossible? It's not. Here's how to get it done.

Most Americans spend dozens, if not hundreds, of hours attempting, not always successfully, to do their tax returns. We spend almost $30 billion paying accountants to fill out the complicated forms, and by some estimates we devote $110 billion of our own labor just keeping track of all the necessary records and paperwork. Americans pay about 85 percent of the taxes they owe, better than in most countries, but the shortfall is still a drain on the Treasury (and the rich seem to find a way to avoid taxes legally). Is this costly, demoralizing struggle between the IRS and the rest of us really necessary?

The short answer is no. There is a way to relieve almost all Americans of the annual April 15 nightmare. What's more, it's a necessary first step toward a plan to cut the looming federal deficit. The time is right for thoroughgoing tax reform--a true clean slate--that will bring in more revenue while giving the public a greater sense of fairness. The reforms we propose will even allow most people to take home more pay than they do now.

The place to start is to cut almost everyone's payroll and income taxes by half. Yes, you read that right. Cut most tax rates, which now run from 10 to 39 percent, by half. All individual taxes would be collected through company withholding taxes on compensation (salary, bonus, deferred payments, etc.) and investment income (dividends, interest, capital gains, rents) to individuals. The very rich--those making more than $2 million a year--would still pay a top tax rate of 30 percent on earned income. The rate on investment income would be 15 percent. The result: individuals would not have to file tax returns, most Americans would take home more pay than they do now, the tax base would be broadened, and the AMT--the alternative minimum tax, which sweeps up more taxpayers every year--would be eliminated.

Too good to be true? There's no free lunch. The revenue lost to the government--roughly half of all personal federal taxes--has to come from someplace else. The best fix is to eliminate all deductions and exemptions for individual taxpayers--all those tax breaks that were intended to promote economic activity or serve worthy social goals but have ended up creating myriad unfair outcomes. It's true that the wealthiest 1 percent currently pays about 18 percent of all taxes. Still, thanks to clever tax dodges, the top 400 income earners pay an average tax rate of 16.6 percent; megabillionaire Warren Buffett notes that his secretary pays a higher tax rate than he does.

Deductions are costly to the federal Treasury--siphoning off between a fifth and a quarter of all revenue. Wipe them out and we will have restored a significant percentage of the money lost by cutting income-tax rates. Where does the rest come from? A 12 percent tax on consumer goods, collected in increments as they are produced and sold, would raise $600 billion, more than closing the gap.

Some will argue that a consumption tax would raise prices, maybe even unleash inflation, and hurt the economy. Many economists, however, believe that a modest value-added tax (VAT) can actually boost the economy in the long run. It encourages saving and investing over consumption and debt--the twin habits that helped push the country into the Great Recession of 2008. Though savings rates are going up, we are still "unwinding" our personal debts and have a way to go.

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Clean Slate Time
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