Center for American Progress

RELEASE: New CAP Report Debunks 7 Common and Persistent Myths Around Tax Reform
Press Release

RELEASE: New CAP Report Debunks 7 Common and Persistent Myths Around Tax Reform

Washington, D.C. — It seems that nearly every day, a presidential candidate or a Capitol Hill policymaker puts forth a new tax plan or proposal, which can make it difficult for the American public to sort fact from fiction—but a new issue brief released today by the Center for American Progress seeks to debunk seven commonly heard and persistent myths around tax reform.

“Nearly 30 years have elapsed since Congress last undertook a major tax overhaul. While most policymakers agree that our tax code is badly in need of repair, it’s important that the American public and members of media be able to discern how a given proposal would impact everyday Americans,” said Alexandra Thornton, Senior Director, Tax Policy at CAP and co-author of the issue brief. “Too often, tax reform proponents have perpetuated myths about changes to our tax code, contributing to the lack of progress on tax reform.”

“Even those unfamiliar with tax policy can easily understand that a fair tax system should be based on one’s ability to pay,” said Harry Stein, Director, Fiscal Policy at CAP and co-author of the issue brief. “If the winners in a new tax proposal are those who have the ability to pay more—or if the losers are those who have less ability to pay—policymakers and citizens should be skeptical.”

Since enactment of the last major tax reform—the Tax Reform Act of 1986—Congress has inserted a wide range of tax expenditures into the tax code, the total value of which in 2015 is approximately $1.5 trillion. While some of these tax expenditures efficiently support important policy goals, others are less effective and reduce federal tax revenues, which must be offset by increasing taxes elsewhere, cutting spending, running higher deficits, or some combination of these methods. As a result, any tax reform plan must be considered within the broader context of the federal budget and the funding determinations it will make for programs such as Social Security; Medicare and Medicaid; national security; infrastructure; education; scientific and medical research; job training; and other social safety net programs that strengthen the middle class. Where and how these tax revenues are raised should take into account who has the ability to pay in order to ensure that everyone pays their fair share.

Politicians frequently use the claims examined in CAP’s new issue brief to dodge the fundamental questions of who wins and who loses—who would pay more, and who would pay less—under their respective tax agendas. CAP’s new report shines a light on the most common myths and sets the record straight on a fair tax system:

  • We do not have to wait on comprehensive tax reform to close tax loopholes. The vision of achieving comprehensive tax reform at a hypothetically ideal moment in the future leads some policymakers to argue that even egregious loopholes should not be reformed or eliminated until Congress is prepared to take on comprehensive tax reform. Unfortunately, this rationale allows undeserving recipients of widely recognized tax loopholes to continue paying far less than their fair share of taxes for years on end. Preserving such wasteful tax breaks is misguided.
  • Economic growth does not depend on tax cuts for the wealthy as job creators. A 2011 study by economists Thomas Piketty, Emmanuel Saez, and Stefanie Stantcheva found no observable correlation between reductions in top tax rates and economic growth. In addition, a study by Danny Yagan of one of the largest reductions to a capital tax rate—the 2003 dividend tax cut—showed zero change in corporate investment and no effect on employee compensation.
  • Taxes are not crushing American corporations, and therefore they do not need more tax breaks. Conservatives often decry the 35 percent statutory income tax rate placed on corporations, yet corporate tax breaks on many groups of companies allow them to pay a much lower effective tax rate—closer to 23 percent. While reforms are needed to update the corporate tax code and enhance its efficiency, U.S. corporations are far from crushed by the U.S. tax system.
  • Repealing America’s current tax system would not allow us to abolish the IRS. As long as the United States has any kind of tax system, the government will need an agency to administer it. No matter how small tax-cut proponents may think government should be, some revenues will be needed in order to maintain the system of courts and law enforcement officers; air traffic control; and other military and homeland security infrastructure.
  • A flat tax would not be simpler or fairer. A teacher with $20,000 of taxable income pays roughly $2,550 under the current tax code compared to $3,000 under a 15 percent flat tax. Meanwhile, a lawyer with a taxable income of $500,000 pays $155,046 under the current system but would only pay $75,000 under the same flat tax. A flat tax would result in massive financial windfalls for high-income taxpayers, could threaten Social Security retirement, and would violate the fundamental principle that tax systems should be based on ability to pay.
  • Replacing our progressive income tax with a consumption tax would not yield massive economic growth. Proposals to replace the income tax with either a national sales tax or a value-added tax would hit low- and middle-income people hard. While high-income earners only use a small portion of what they make for purchases, lower-income earners spend nearly all of their earnings to support themselves. A consumption tax would reduce the ability of lower-income earners to make ends meet and require them to carry a much larger tax burden.
  • Tax reform should raise revenue. Approximately half of the members of Congress have signed the Taxpayer Protection Pledge, pledging their opposition to any tax increase. In the context of the long-term fiscal pressures created by an aging population, not raising tax revenues would require making significant cuts to Medicare and Medicaid and could force a massive disinvestment from infrastructure, education, research, child care, job training, and many safety net programs that help struggling families.

Click here to read “Who Wins and Who Loses?” by Alex Thornton and Harry Stein.

For more information or to speak with an expert, contact Allison Preiss at [email protected] or 202.478.6331.