The Republican response to President Obama's State of the Union speech this week by Iowa Senator Joni Ernst included a very important proposal: reform and simplify the tax code by eliminating loopholes and reducing tax rates.
This is a key component of my tax proposal
Taxation has become extremely regressive, negatively impacting those least able to afford it the most. It also impedes economic growth substantially, since it promotes income and wealth disparities. This reduces consumption relative to income and lowers direct investment in employment-creating businesses. (Financial arbitrage and speculation typically transfer wealth.)
Loopholes enable Warren Buffett to claim that his average federal tax rate is lower than that of his secretary. In one instance, Buffett saved as much as $1 billion in federal taxes for Berkshire Hathaway when he recently exchanged approximately $4.7 billion in Procter & Gamble stock for P&G's Duracell battery business along with a $1.7 billion cash infusion.
This type of financial mechanism is referred to as a cash-rich split-off transaction, which permits an avoidance of capital gains taxes on the appreciated P&G stock.
In addition, Social Security taxes are also highly regressive, since they only apply to the first $118,500 of earned income in 2015. Any earned income above this level income is excluded from taxation.
State and local taxes are similarly regressive. According to the Institute on Taxation and Economic Policy, a non-partisan research organization, average state and local taxes as a percentage of income in 2015 are 10.9 percent for the poorest fifth of Americans, 9.4 percent for the middle fifth and 5.4 percent for the wealthiest 1 percent.
In the most regressive state, state and local taxes as a share of income for the poorest quintile are nearly seven times more than that for the top 1 percent.
The regressive nature of taxation is the result of a heavy reliance on sales, excise and real estate taxes that burden the lower- and middle-class to a much greater degree than they do the upper class. The Institute anticipates this trend will continue to worsen.
Standard & Poor's suggests this regressive tax policy tends to increase income and wealth inequality, which hinders long-term economic growth.
My tax proposal would reduce the regressivity in our tax code and empower economic growth with the following measures: 1) streamline the tax code, 2) expand the tax base, 3) eliminate and replace all federal taxes with lower tax rates on savings and consumption, 4) balance the budget at current spending levels, 5) increase employment by lowering the cost of hiring and use of capital, 6) maintain low levels of inflation, 7) stimulate net capital inflows from abroad and 8) provide a strong safety net to the least advantaged by refunding the consumption tax for income at or below the federal poverty level.
This plan could be applied to the state and local levels as well.
Tax reform is a key fiscal driver toward our economic revival, and, in turn, our political democracy, as power becomes less concentrated.
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