To celebrate April 15, TPC director Len Burman argued yesterday on TaxVox that today’s income tax “is not all bad” and that “we could do a lot worse.” Well, it may not be all bad, but it is pretty awful. And while we could do worse, we could also do a lot better.   more »

Like most Americans, I hate preparing my income tax return. And, as a tax policy expert, I know that our current tax system is deeply flawed. But it's not all bad. It raises a lot of revenue ($1.1 trillion in 2007) and, like it or not, we have to pay for government. Income taxes are also progressive, raising the lion's share from those most able to pay, and little or nothing from those at the bottom. Sure, we could and should make it simpler and fairer, but we could also do a lot worse.

The financial burden of the income tax on most people is pretty bearable. Most taxpayers pay more in payroll (FICA) taxes than in income taxes. For example, the median income of married couples in 2007 was about $74,000. (That is, half of couples earned more and half less.) Their average income tax bill was $3,400, or less than five percent of income. The median-income single taxpayer earned $22,500) and paid about $610, or three percent.

The income tax also helps millions of working families at the bottom. The earned income tax credit (EITC) augments the meager wages of low earners and encourages them to work. Indeed, the EITC lifts millions of children out of poverty.

People with high incomes paid a lot more. The top 40 percent pay most of the income tax. The top 10 percent pays 72 percent. That seems like a lot, but they earn nearly half of all income. Their income tax amounts to about 16 percent of income.

They should pay even more—their incomes have exploded while middle-income households have struggled to get ahead, and they have gotten huge tax cuts since 2001. But, even after the tax cuts, the income tax is highly progressive.

That said, there are huge flaws in the income tax.  Some high-income people pay peanuts in tax because of gaping loopholes. Meanwhile, middle- and even low-income people are so daunted by the unnecessary complexity that most pay professional preparers to fill out their tax returns.

The income tax needs fixing and proposals for doing just that are abundant. But there are also proposals—well funded by millionaires who think they're over-taxed—that would jettison the income tax in favor of a supposedly simpler system.

The so-called “Fair Tax,” famously embraced by Governor Huckabee in his run for the White House, would replace the income tax with a national sales tax. Its proponents argue that just about everyone would pay lower taxes under this system, apparently assuming that most Americans are not bright enough to figure out that this means that the tax would not raise anywhere near enough money to finance the government. In fact, at rates high enough to pay for the government—at least 34 percent, according to President Bush's tax reform panel—it would represent a huge tax increase on the middle class and (surprise) a huge tax cut for millionaires (who spend only a fraction of their incomes).

The flat tax, Steve Forbes's crusade, would similarly bestow massive tax cuts on the wealthy. Fred Thompson proposed allowing people the option of paying tax under a simpler alternative tax system. People would only make that choice if it meant lower taxes, and the people who'd get the biggest tax cuts would be the millionaires. This bit of fiscal magic would add $6 trillion to our burgeoning national debt over the next 10 years.

Senator McCain's proposal, which his campaign admits is a first step toward a consumption tax, would do nearly as much damage to fiscal finances as Senator Thompson's tax giveaway.

Ironically, the Democratic candidates would unwittingly provide ammunition for the income tax bashers by adding a raft of new credits and deductions. Those breaks may make great sound bites on the campaign trail, but they'd make the income tax more complicated and contribute to the perception that it is unfair.

The solution is not to ditch the income tax, but to fix it. Rein in the propensity of politicians of both parties to use it to grant favors to particular constituencies. And make sure it raises enough revenue to pay our bills so we don't bequeath bigger tax headaches to our children.

While the Presidential candidates are campaigning on grandiose and often radical reforms to the current tax system, they are missing out on a simple commonsense reform that would make tax filing easier for millions of Americans.    more »

A News Years Eve, 1965, Time magazine article quoted iconic free-market economist Milton Friedman as saying, "We are all Keynesians now." Friedman later explained that the quote was taken out of context. He meant that even though the language of John Maynard Keynes—famous for recommending fiscal policy as a tool to manage the economy—had pervaded popular consciousness, most people had no idea what this meant.   more »

Mike Huckabee wants to replace the entire federal tax system with a national retail sales tax of 23 percent. Trouble is, he can't do it and maintain anything like the government that Americans have come to expect.   more »

The Wall Street Journal editorializes ($) admiringly on Fred Thompson's "voluntary flat tax" (or alternative maximum tax to use the tax code's current lingo). Putting aside questions of the desired size of government, cost, feasibility, equity and so forth, I'd like to zero in on the claim that "there would only be five lines on the tax form."   more »

An awful lot of Democrats suddenly seem to think that senior citizens are overtaxed. Presidential hopeful Barack Obama wants to exempt seniors making less than $50,000 from paying any federal income tax. House Ways & Means Committee Chairman Charlie Rangel (D-N.Y.) has tucked a new $700 above-the-line deduction for real estate taxes into his proposal to extend Alternative Minimum Tax relief for another year. While Rangel doesn’t say so, seniors who have paid off their mortgages and no longer itemize would be big beneficiaries of the new tax break.    more »

In the October 30th Democratic presidential debate, Hillary Clinton was asked what she thought of the tax reform plan offered by House Ways and Means Committee Chairman Charlie Rangel (D-N.Y.). She responded by expressing her deep admiration for the gentleman from New York and explaining that, "I don’t know all the details of what Charlie is recommending." This, of course, is Washington-speak for "I ain't getting anywhere near this soaking puppy."    more »

One of the main charges against the Rangel tax plan is that it would increase taxes by $1 trillion. Which is a bit odd because the President's budget proposed the exact same revenue increase, although in his case it is collected through the Alternative Minimum Tax (AMT) instead of a rate surcharge on high income families.    more »

My colleagues and I had some heartburn when various news outlets referred to a surtax proposal made by Greg Leiserson and me as "the Tax Policy Center plan" to fix the AMT. The TPC has no tax plan or institutional positions of any kind. Highlighting that point, TPC's chief blogger, Howard Gleckman, showed that we don't speak with one voice when he complained that "I don't like ... the way AMT relief [in Chairman Rangel's tax reform plan] is funded" in his most recent post. That is, Howard's not keen on Greg's and my modest proposal, which Mr. Rangel adopted with small modifications.   more »

Let’s start with the obvious: The tax plan rolled out today by House Ways & Means Committee Chairman Charlie Rangel (D-N.Y.) is not the “mother of all tax reforms,” the congressman’s claim notwithstanding.    more »