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November 14, 2012 11:41 PM Tax Reform Grand Bargaining

By Don Taylor

So everyone is prattling away with their grand bargain ideas on tax reform, etc. so I will re-up the basic idea at the heart of the tax reform I proposed in my book Balancing the Budget is a Progressive Priority:

  • A tax reform that resulted in fewer rate brackets: 12, 22 and 28 were the marginal rates proposed by the Fiscal Commission that could be obtained with a capping of deductions and exemptions (you could substitute the Romney notion of a general cap, or we could pick winners and losers; this post has examples).
  • Ending the corporate income tax and
  • Raising the top personal income tax rate above the 28 percent noted above while making dividends and capital gains normal income. I am unsure of how much higher the top individual rate should be raised, and there would obviously have to a full reform of the individual tax code to keep individuals from becoming corporations and being very creative about avoiding tax (the general idea would work with whatever the top individual rate would otherwise be)

Of all the topics my book covered, what to do about the corporate income tax is the one that I most changed my mind about as I researched and wrote. I began by thinking that we needed to reduce exemptions and drop the marginal corporate rate (now 35%) to increase such receipts (standard broaden base, raise rates, increase receipts while incentivizing business). However, the truth is that very few corporations pay 35%, and so dropping the rate but ending deductions and exemptions would likely be a tax increase on many corporations, and certainly the most powerful who have essentially negotiated effective rates that are very low (or 0 in some cases). The more I have read the less convinced I am that corporations can effectively be taxed in practice.

Most of the wealth (but not all) flowing from corporations is going to flow to persons in the top marginal personal income tax bracket, and making dividends and capital gain normal income is a more efficient way to tax these flows. Some libertarians and conservatives have said as much before, and I think they are correct.

The thing that really changed my thinking was how small a proportion of the total federal tax receipts (between 10-13%,or ~ 2% of GDP) that the corporate tax has produced the past 30 years.

Ending the corporate tax, raising the top individual rate above what it otherwise would be, while making dividends and capital gains normal income seems to be a more efficient way to collect revenue than the strange dance that is the corporate income tax code we now have.

[Cross-posted at The Reality-based Community]

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Don Taylor is an associate professor of public policy at Duke University, where his teaching and research focuses on health policy.