April 29, 2005
Executive Summary
Americans are ready to support fundamental tax reform, judging from their responses to a recent Tax Foundation/Harris Interactive poll. A majority of American adults believe federal taxes are too high, the tax code is too complex, and the income tax system is unfair. A majority even support simplification even if it means giving up some deductions and exemptions.
The first step toward a solution is to understand how our progressive income tax rate system interacts with recent demographic changes. If we look at who comprises the wealthiest 20 percent of taxpayers, we find they share many traits with our traditional notions of “middle class”:
The current tax system penalizes these groups. These families are taxed at the highest income tax rates because our progressive tax rate system is not fully adjusted for such things as cost of living, age, education, or the number of incomes in a household. Tax reform should attempt to make the tax code more neutral to these demographic traits.
The only way to mitigate the punishing effects of our current progressive rate structure on dual-income couples, older workers, the college educated, business owners, and families living in high-cost communities, is to enact a single-rate tax levied on consumption or on incomes.
Such a tax should be set a low rate, applied to a broad base, and have as few deductions as is politically possible. Single-rate tax systems have proven successful in Central and Eastern European countries in recent years, and would likely enjoy similar success in the United States.