Testimony for the President’s Tax Reform Panel

Also see: A Progressive Approach to Tax Reform

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*** BEGIN SLIDE: Testimony to the President’s Tax Reform Panel ***

Thank you.

My name is John Podesta and I am president of the Center for American Progress.

American Progress is a nonpartisan research and educational institute dedicated to promoting a strong, just and free America that ensures opportunity for all.

We believe that, as Americans, we are bound together by a common commitment to these values – even more, we believe that our national policies must reflect them.

*** NEXT SLIDE: “Overview” ***

That is why I appear before the Commission today.

Because it is not enough for our nation to have a tax system that guarantees the financial integrity of the United States government; it must also honor the moral integrity of the American people:

*** NEXT SLIDE – “Principles” ***

Our belief in fairness.

Our belief in opportunity.

Our belief that, in a democracy, there is no excuse for a tax system that can only be fully understood by professional accountants and a handful of lawyers.

These values are the underpinning of the American Progress plan – a progressive approach to comprehensive reform of our Federal tax code.

Why comprehensive reform?

Because a 21st century economy requires a modern tax system.

Our economy is increasingly driven by jobs requiring advanced skills. “Human capital” is just as important as physical capital, if not more so. A tax system that rewards income from wealth at the expense of work and skill flies in the face of this fundamental economic change. Yet this is exactly the tax system our nation has today.

As a result of the tax code changes championed by President Bush during his first term, middle-income workers today can easily find themselves paying a tax rate on their wages that is double the 15 percent rate that millionaires pay on their investment income.

*** NEXT SLIDE – Bar Graphs***

Consider a cook at a high-school cafeteria, preparing school lunches for our kids, and making $25,000 a year. That taxpayer is currently paying a marginal federal income tax rate of 15 percent. Now add to that the payroll tax of 6.2 percent for Social Security and 1.45 percent for Medicare. That worker will face a cumulative 22.65 percent on their wages. Add to that the 6.2 percent their employer pays on their behalf for Social Security, and the 1.45 percent for Medicare. They are then paying about 30 percent in total.

Also consider a two-earner family, where the married couple is working as a nurse and firefighter. Together they are making $85,000 a year from their work. They would be paying a tax rate of about 40 percent. This, of course, is a significantly higher marginal tax rate than the rate paid on the capital income of millionaires, which is now just 15 percent.

We believe America can do better than that.

With comprehensive reform we can reward work instead of wealth and, in the process, strengthen the middle class.

With our plan for progressive tax reform, approximately 70 percent of U.S. taxpayers will receive a tax reduction. For those earning under $200,000 it will average about $600.

Yet, at a time when the federal government is floating on a sea of red ink, our plan will also generate about $500 billion more when compared to the president’s policy.

Our revenue and distributional estimates come from the Urban/Brookings Tax Policy Center and were generated with their state of the art micro-simulation model. We have tried to be conservative in the revenue implications. At a time of massive federal deficits, it is important to be cautious about how much revenue any comprehensive reform would raise.

I will provide today an outline of the main components of the plan. For additional details, please see the American Progress response to your second request for comments, or the full description of the plan that is available at our website:

Here’s how the American Progress plan works.

*** NEXT SLIDE – Fairness ***

We put fairness first:

  • Each Source of Income Will be Taxed the Same—in other words, we will tax wealth according to the same rate schedule as ordinary income.
  • We Will Reduce the Dependence on Regressive Payroll Taxes—the plan will remove the employee side of the Social Security Payroll Tax, and remove the cap on the employer side.
  • We Will Enhance the Take-Home Pay of Lower-Income Taxpayers by reducing the marriage disincentive of the EITC while expanding eligibility for the child tax credit.
  • We Will Reform the Estate Tax. Though its opponents have misrepresented the impact of the estate tax, in fact it remains the most progressive of federal taxes. It is only paid by multi-millionaires, affects less than 2 percent of the population, and provides an essential backstop to the federal tax system. Our plan increases the exemption to $2.5 million per individual to ensure that virtually all small business owners, farmers and ranchers could pass on their assets without being subject to the estate tax.

*** NEXT SLIDE – Simplicity ***

In making the tax system fairer, we will also make it simpler and more user-friendly. We do this by:

  • Reducing the Number of Income Tax Brackets to three with rates of 15 percent, 25 percent, and 39.6 percent. Those three rates would apply to brackets of taxable income of $0 to $25,000; $25,001 to $120,000; and $120,001 and above. These brackets would be indexed for inflation.
  • Our Plan Eliminates Tax Loopholes that now allow corporations and wealthy individuals to avoid paying their fair share of taxes.
  • And We Eliminate the Alternative Minimum Tax. The AMT threatens to impact a third of taxpayers by 2010 – our plan eliminates the AMT and relies on the federal income tax as the core revenue engine of the tax code.

Unlike many of the right-wing reforms—such as some versions of the flat tax, the value added tax (VAT), or a national sales tax—our plan maintains the current deductibility of charitable giving, home mortgage interest, state tax deductibility, and other deductions in their current form. We believe that there is room enough to raise revenue without eliminating valuable deductions that serve important social interests.

*** NEXT SLIDE – Increasing Economic Opportunity ***

In addition, with progressive tax reform, we will be able to offer tens of millions of Americans new opportunities to save and create wealth for retirement.

  • We will do that by replacing the deduction-based retirement savings tax incentive with an across-the-board 25 percent refundable tax credit for retirement savings.
  • And to encourage long-term savings. For those earning less than $1 million annually, they would be able to exempt a portion of their capital gains on assets held at least one year, and for assets held for more than five years they would receive a 50 percent exemption.

*** NEXT SLIDE – Distributional Implications ***

As I mentioned, most taxpayers will receive a tax reduction. For those earning under $200,000 it will average about $600. Those with very high incomes will likely see a tax increase under our plan.

*** NEXT SLIDE – Enhancing Retirement Security ***

Since I have raised the question of retirement security, I would also like to point out that to maintain our full commitment to financing Social Security, our plan will dedicate a portion of general revenues to the Social Security trust fund. By raising more revenue overall than the current system, and by dedicating 2.25 percent of gross domestic product per year to the Social Security trust fund, we will solidify the financial status of the Social Security system. Further, our plan protects this revenue by including a number of safeguards to prevent future Congresses from reducing this dedicated stream, including a requirement that any reduction can only be made after a three-fifths majority vote in the Congress, to ensure that this funding is not cut.

At the Center for American Progress we are convinced that we can have a tax system that is fair, that is simple, that fosters economic growth and that reduces the fiscal deficit.

But creating that tax system will take honesty, and courage.

Though this panel is charged with only reporting revenue neutral options to the Treasury Department, any responsible tax reform proposal must offer a far more effective response to the federal budget deficit than that provided in the president’s budget.

As I noted, the American Progress plan will generate an additional $500 billion over ten years relative to the president’s proposals. Under separate cover we have also presented you with two revenue-neutral alternatives. However, what I’ve outlined today is our preferred option.

Not far from here, inscribed on the Internal Revenue Service building, are the words of the great jurist Oliver Wendell Holmes.

“Taxes,” he said, “are the price we pay for a civilized society.”

I think he was only partly right.

What makes us a civilized society isn’t taxes, but our commitment to taxation that is fair and responsible.

Taxation that rewards work. That eases the burden on the middle class rather than giving more to those who already have much.

As I said, we can have a tax system that honors those values. I believe Americans need it – and we don’t have a moment to spare.

John Podesta is the President and Chief Executive Officer of the Center for American Progress.

The positions of American Progress, and our policy experts, are independent, and the findings and conclusions presented are those of American Progress alone. A full list of supporters is available here. American Progress would like to acknowledge the many generous supporters who make our work possible.