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Holtz-Eakin on Prospects for Fundamental Tax Reform

1 min readBy: Joseph Bishop-Henchman

Former CBO Director and current 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. Foundation board member Douglas Holtz-Eakin writes in the Daily Caller about the prospects for fundamental tax reform:

With the posturing out of the way, the commission could turn the clock to 2000 and make progress on a 21st century tax code that is pro-growth and supports the upward mobility of American families. Certainly such a code would include familiar elements. It would keep marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. s low and feature deductible IRAs and other vehicles that support saving, investment, and capital accumulation. The combined sunsets would put nearly $300 billion on the table for these purposes and bi-partisan blessing could locked them into place and provide a stronger signal to the private sector.

But it would avoid other features that have become too common, noticeably the extensive use of refundable tax creditA refundable tax credit can be used to generate a federal tax refund larger than the amount of tax paid throughout the year. In other words, a refundable tax credit creates the possibility of a negative federal tax liability. An example of a refundable tax credit is the Earned Income Tax Credit (EITC). s. As noted earlier, these are really spending programs implemented via the tax code.[…]

Finally, the commission would have to take on some of the base broadeningBase broadening is the expansion of the amount of economic activity subject to tax, usually by eliminating exemptions, exclusions, deductions, credits, and other preferences. Narrow tax bases are non-neutral, favoring one product or industry over another, and can undermine revenue stability. absent in previous efforts. There is no compelling case for an open-ended tax subsidy to leverage in mortgage finance or employer-sponsored health insurance. These are two of the largest, most pernicious, and durable examples of anti-growth subsidies to consumption over saving embedded in the tax code.

The road to tax reform includes the recognition of the importance of low marginal tax rates, the need to support the upward mobility of Americans, and the danger of inefficient tax-subsidies to favored forms of consumption. But it also includes ending some of the myths regarding the fairness and effectiveness of past efforts. The commission will be uniquely positioned to accomplish this mission.

Full article here.

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