Background on Tax Reform

Tax Rates

‘Marginal Tax Rates’ means the amount you pay on each taxable dollar earned above the deductible base.
(Decreasing the marginal rates would decrease the amount everyone pays, but in general would favor those who pay more tax).

The current marginal tax rates are 15% on the first $42,350 of taxable income, 28% on the next $60,000, and 31%, 36%, & 39.6% above that.
(Those are the ‘Married Filing Jointly’ rates. The same marginal rates apply to singles, but at different breakpoints).

The ‘Marriage Penalty’ means that two people filing together pay more than if they filed as two singles separately.

The most common deduction is the mortgage interest deduction (applicable to everyone who owns a house; it makes buying a home more affordable by subsidizing 15% of the mortgage).

The charitable deduction is the basis for discussions of ‘Faith-based organizations’ replacing government agencies (see Welfare section)

The ‘Inheritance Tax’ or ‘Death Tax’ is the basis for discussions of Family Businesses (also see Economy section).
While polls indicate broad support for eliminating the estate tax, few Americans are directly affected by it. Already, 98 percent of descendants avoid taxes altogether because the first $675,000 of an estate is exempt from taxation, an exemption that is due to rise to $1 million by 2006 under current law. Only 47,500 estates paid any estate tax in 1998, the most recent year for which figures are available, and about half the money raised by the estate tax was paid by fewer than 3,000 estates worth more than $5 million each, according to the Internal Revenue Service.

The ‘Capital Gains Tax’ is a separate income tax (with a marginal rate of 20%) which applies when goods that have gone up in value are sold. Lowering the capital gains rate is considered a benefit to wealthier taxpayers.

Flat Tax & Sales Tax

A ‘Flat Tax’ would replace the current progressive marginal rates with a single ‘flat’ rate (plans vary from 10% to 17%), applied after a deductible base.

Flat Tax plans can achieve lower rates by removing the mortgage interest and charitable deductions.

A ‘National Sales Tax’ would replace the income tax with a consumption tax paid when purchasing anything. Many European countries implement a form of sales tax called ‘VAT’, or Value-Added Tax.

Tax Surplus

In August 2000, Congress passed a $792 billion tax cut package to be spread over 10 years. In the summer of 2001, a $1.3 trillion tax cut was passed at the urging of President Bush. Taxpayers received checks for $300 per person by autumn 2001, as the first installment of the tax cut.

From 2000 through 2009, the total budget surplus is now anticipated to be a cumulative $2.93 trillion.

The longest economic expansion in US history ended in October 2001; anti-tax-cut advocates say that the tax reductions should be delayed due to the recession.

Amendment XVI to the US Constitution

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration. (1913)

Related issues:

Budget.
Welfare.
Social Security.

Background documents:

IRS, main web page
Pro-Flat Tax , by Rep. Dick Armey
Pro-Sales Tax, 'USA Plan'
Pro-Tax Reform, Brookings Institute

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Click here for The Forum discussion on Tax Reform. Click here for policy papers on Tax Reform.
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