My motivation in writing this article was that the Congressional Budget Office released last week estimates of the proposed tax Bill that House Republicans are gathering around the extension of the Trump era tax cuts. It is going to cost over $4 trillion. It isn’t and feasible amount of money for a tax cut. And what I argue is that this would be the fifth tax cut in 25 years, after which the US tax system is still in desperate need to reform. Tax cuts are not the same thing as tax curious. And so my hope is that this massive dollar amount will shake Congress awake to the fact that cutting taxes is not the same thing as fixing the tax system, and it has deep entrenched problems that they need to address, starting with one, it’s unfair.
So Gallup polling every year, ask Americans, do you think the amount that you pay in taxes is fair? Do you think you’re paying your fair share in the share of Americans who answer kind of in the positive has been declining basically throughout this 25 year period of success of tax cuts. So been falling since the early 2 and we have had multi trillion dollar tax cuts in 2001,2003,2,012 and 2,017. But even as Congress is dramatically cutting taxes, more and more Americans say that the amount they pay isn’t fair. What’s going on? Well, as tax reform commissions have noted in the past, fairness in the tax system isn’t necessarily about what you pay, but whether or not you think someone else is pain like you do. And in this case, Americans are dead on.
The complexity of the tax system allows people with sophistication and means to reduce their tax Bill in the way that regular people can’t. You just have labor income, you don’t own a house. You’ll never be able to reduce your taxes the way that a multi millionaire will be able to do. They can take advantage of the tax codes complexity and you can’t, and they have done an incredibly good job at it. So the example I give is the pass through deduction. In 2017, when Congress passed the Trump era tax cuts, they were primarily tasked with lowering the core corporate tax rate. Well, not all businesses are corporations. A lot of businesses in the US are small businesses, meaning that their souls sole proprietors. And you basically, you have a business, you bring in money for that business, you have expenses for that business and you pay whatever is income net of expenses as a regular household income tax filer. So Congress wanted to create a tax reduction for sole proprietors as well called the pass through deduction. It was a way to lower their tax rate similar to how they lowered the corporate tax. Well, the top point one % of households, this is the hundred and fifty thousand richest filers in the United States who have to clear just under $4 million a year in income, half of them claimed this deduction. So this small business deduction flowing crazily up to the top. And in fact, a quarter of all of the deductions, spending goes to the top point one %. 150,000 households who are able to bend a small business sole proprietor deduction to their, you know, to their benefit. Not because they’re all small businesses, but because they all employ really good accountants and lawyers to get them to lower their tax Bill. The tax system isn’t there, complexity doesn’t benefit all of us.
And this is a perfect example that Americans are wise to. Second problem with the tax system is that it’s unbalanced. This is a really tough problem that Congress just has no ability to talk about. We have a progressive federal income tax system. The more you make, the more you have to pay seems fair. But the income distribution upon which our progressive tax system cysts is getting more and more polarized and unequal. So according to IRS statistics, the top point one %, those top hundred and fifty thousand filers in the US took home 8% of all taxable income in 2001. So point one % of Americans take home 8% of income in 2001. By 2,021, this had doubled to just about 16%,15,8. That means that point one % of Americans take home 16% of all taxable income. That is enormously unequal. I mean, that’s insane how polarized that income inequality is and getting worse. But of course, in the progressive tax system, that means that instead of paying 14% of federal income taxes, they are now paying close to 25. 5% of federal income taxes, where this very rich group of people is now paying a quarter of federal income taxes.
Now here would be a great time to pause and say that is just federal income taxes. The federal government also collects its payroll taxes through your paycheck for Social Security and Medicare. And if you can imagine that, like all federal income taxes raised $1 million, payroll taxes through your Social Security contributions would be like $650,000. So it’s a really large amount of money, about two thirds the size of what is collected through income taxes are collected through payroll taxes. And in that case, the top one point set, they pay almost nothing because it’s a regressive tax. It’s a per cap tax and it is also has a tax cap. So they’re not paying for a quarter of the government, they’re paying for a quarter of federal income tax contributions, but that’s still a problem of how to design a their and sustainable system when the incomes of the very richest are just pulling away from everybody else. I don’t know how to solve this problem in a way that make Americans feel fair, but I know that we’re never going to do it if we don’t talk about it as we talk about tax reform.
And then this is the third problem. The US tax system is grossly underperforming. It is simply not bringing enough revenue to meet promised expenses. Now, sure, you might say we’ll just cut spending. The three largest ticket items in the federal government are Social Security, Medicare and National defense. Three ticket items that have proven completely immune to spending cuts, often for very good reason. Now, I mean, there is some like, well, let’s cut all these programs to go to lazy, poor people. Like why do we have food stamps? Why do we have all this? If you were to add up the amount of money the federal government spends on food stamps, school lunches, Pell Grants, the federal portion of Medicaid and chip, the Supplemental Security Income. Hannah, if you were to add up all of these programs, they’re less than Medicare in a year. They’re simply not large enough to make a difference. So, you know. Yeah, in the last debt ceiling deal, Republicans added work requirements for 50 to 54 year olds who are on snap. Like that’s, they ain’t gonna cut it. That is not meaningful reform. We simply need to bring in more revenue. And the current tax system is not doing that.
But how do you solve this problem, right? If the tax system is unfair and we need to raise more revenue, how do we get Americans on board with that? I mean, they want these programs, but they don’t want to have it go through such an unfair tax system whose opinion is deteriorating.
Well, there is an answer. And I think it’s frankly unclear to me if anyone would ever be, you know, bold or courageous enough in Congress to actually go for it. But you simply have to make the tax system transparent. The only way that you can have fairness in the tax system is through simplicity, which means that you’ve just got to take all those deductions and all of those credits and all those things that people can take advantage of at the top, get rid of them.
The 2005 Tax Reform Commission found that if you did this, you could raise, you know, just as much money with much lower tax X rates because the system would be really accessible. You would also save, you know, millions of dollars in how much Americans pay to help someone prepare their taxes because they’re basically being, you know, no question of how much you owe. It’s just a function of how much you earn. There wouldn’t really be anything else left to calculate or claim or prove or show. It would fly in the face of a lot of legislation that uses the tax code in order to achieve social policy goals or climate policy goals. But I think kind of the message that Americans have been giving is that they don’t like this, right, Debbie? We would prefer a simple, fair tax system and then just have social policy go through social policy.
I mean, if you simplify the tax system, you could solve a lot of these problems and you would have predictable income. Predictable taxes, and you wouldn’t have the, you know, kind of deep and growing sense of unfairness. I don’t know if that’ll ever happen. I don’t know what would happen. And if it did happen, like there would be lots of consequences to having such a radical reform of the tax system. But I can tell you now with four pieces of legislation behind us and four massive tax cuts, cutting taxes will not get us to either of these solutions. We cannot make the system more fair. We can’t make it more balanced. We can’t make it, you know, better performing if we simply just every, you know, five to seven years take two to four trillion dollars, throw it back into the tax system and don’t do anything out.