reform the federal tax system

ISSUE

Federal taxes account for more than 18 percent of GDP, and federal tax rules span 75,000 pages. The federal government will extract $3.5 trillion in taxes from families and businesses in 2017. Individuals will be left with less income to buy food, clothing, and other needed items, while businesses will be left with less income to hire workers and build factories. The tax code’s complexity creates a large paperwork burden and makes financial planning more difficult. High tax rates reduce productive activities, such as working and investing, and the unequal tax treatment of different industries and activities steers resources into low-value uses. Congress should cut spending to reduce the overall burden of taxes, and it should reform the tax code with three goals in mind: simplification, transparency, and increased economic growth. Fundamentally, taxes should be lower, flatter, and simpler, and reforms should move in that direction.

 

SOLUTION

Congress should

  • replace current individual income tax rates with rates of 15 and 25 percent;

  • eliminate the corporate income tax, and treat dividends/capital gains as ordinary income on individual income taxes;

  • repeal all deductions and credits to restore the income tax to raising revenue, not for social and economic engineering [exception: make charitable contributions a dollar-for-dollar tax credit];

  • create universal savings accounts so that all families can build wealth without double taxation;

  • repeal the alternative minimum tax and the estate tax.

 

Note: These proposals are based in part on policy analyses developed by the Cato Institute.