Today, President Bush’s Tax Reform Panel begins two days of hearings on specific options for fundamental taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reform (See the Tax Foundation’s submitted comments to the Panel here). While some of the brightest minds in tax policy will present their ideas to the Panel, each plan faces the same problem—America has become divided between a growing class of people who pay no income taxes and a shrinking class of people who are bearing the lion’s share of the burden.
Despite the charges of critics, the Bush tax cuts dramatically reduced the tax burden of low- and middle-income taxpayers and shifted the tax burden onto wealthier taxpayers. In 2004, one out of every three Americans who filed a tax return (44 million) had no tax liability after they took advantage of their credits and deductions, while millions more paid next to nothing. As a result, the wealthiest 20 percent of taxpayers—those earning more than roughly $68,000 in 2004—now pay over 80 percent of all the income taxes. (See our Putting a Face on America’s Tax Returns Section here).
The widening gulf between the “payers” and the “non-payers” poses a dilemma for this panel. Generally speaking, the goal of tax reform is to broaden the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. while lowering tax rates. But how do you craft a tax reform plan that (1) doesn’t raise taxes on the 44 million Americans who pay nothing and (2) doesn’t “cut taxes for the rich” who now pay everything? There is no easy answer.Share