Tax Proposals

As part of its mission, the Tax Foundation provides tax policy research and
analysis on the 2020 Democratic Presidential Campaign Tax Proposals (Links to
an external site.). For this discussion board, please select DONALD TRUMP
presidential candidate's campaign tax proposal and evaluate the proposal in
terms of its likely fairness or equity. In your evaluation, be sure to specifically
address the questions posed above, as well as the following concepts: benefits
received vs. ability to pay, horizontal and vertical equity, and tax burden vs. tax
incidence.
 Your responses should directly reference and cite relevant content from the
assigned readings for this module in addition to referencing and citing outside
resources obtained on your own.
 Answer all questions posed and offer additional relevant comments for
discussion:
Discussion Board Instructions
The following excerpt was taken from, "How to Judge a Tax Plan," by
William McBride. Tax Foundation Report No. 286, December 15, 2011.
Available for download here: https://taxfoundation.org/how-judge-tax-
plan/ (Links to an external site.).
Tax reform has become the central issue in the presidential primaries and will likely
remain an important issue in the general election. While the plans and proposals will
vary considerably in their scope and intent, it is important that they all be judged against
a standard set of guideposts or principles that define a sound tax system.
The ideal tax system should do only one thing: raise a sufficient amount of revenue to
fund government activities with the least amount of harm to the economy. By all
accounts, the U.S. tax system is far from that ideal.
Since 1937, Tax Foundation economists have judged every tax measure against the
immutable principles of economically sound tax policy, which say that: Taxes should be
neutral to economic decision-making; they should be simple, transparent, and stable;
and they should promote economic growth. See, for example, Adam Smith’s formulation
in The Wealth of Nations, that taxes should a) be in proportion to income, b) remain
stable, and c) minimize compliance costs and distortions of economic behavior.
The largest group of questions used to evaluate any tax plan deals with fairness and
neutrality, since this aspect of our current tax code is widely perceived, perhaps
correctly, as the code’s most egregious failing. More specifically, it is important to ask:
 Does the proposal tax everyone's income at the same rate?
How to think about this: A single rate tax system is the fairest system of all. It treats all
Americans equally, no matter their age, occupation, income, or station in life.
By contrast, the current personal income tax code is highly progressive, which means
individuals with different incomes are taxed at different rates; those with higher incomes

face higher rates than those with lower incomes. While progressive rates are frequently
justified to ensure that wealthier taxpayers “pay their fair share,” these rates – and the
incomes they apply to – are arbitrary and set by political fiat, not by any economic
rationale.
For example, in 1977, there were 26 separate tax brackets for married couples, ranging
from a zero rate for those earning up to $11,848 (in today’s dollars) to a top marginal
rate of 70 percent for those earning over $752,375 (in today’s dollars). That system
collected 8 percent of GDP in income taxes. The 1986 Tax Reform Act reduced the
complex rate structure to two rates, 15 percent and 28 percent, and still raised percent
of GDP in income taxes. Now, there are six tax brackets ranging from 10 percent to 35
percent. Today, individual income taxes are 6 percent of GDP.
There is a mistaken perception that a single-rate system cannot protect the poor. This
can be addressed with a generous individual or family allowance that shields a certain
amount of a taxpayer’s income from tax, then applies the single rate to every dollar
earned above the allowance.
 Does the proposal tax business income equally, regardless of
organizational form?
How to think about this: Businesses should be taxed equally, no matter what size they
are and no matter whether they are owned by an individual or by a large group of
shareholders. But the current tax code not only taxes business income differently
depending on how the business is organized; it also applies different rules to small and
large businesses.
For example, the income of traditional “C-corporations” is taxed first at the business
level and then a second time as dividends at the shareholder level. “Pass-through”
businesses (including S-corporations, partnerships, sole-proprietorships, and farms) pay
their business taxes just once at the individual owner level. Moreover, lawmakers have
also created different sets of tax rules for small businesses as opposed to large
businesses. For example, small businesses are often able to expense the purchase of
equipment whereas corporations must depreciate those purchases. Also, pass-through
businesses pay the individual capital gains rate of 15 percent, whereas corporations pay
a capital gains rate of 35 percent – the same as the top corporate rate.
Remarkably, these inequities have pushed the majority of business income into the
personal income tax code rather than the corporate code. A fair tax system should tax
business entities in the same manner no matter how they are organized while reducing
the incentives to arbitrage the tax system.
 Does the proposal promote economic growth rather than redistribution?
How to think about this: Many politicians are calling for higher tax rates on upper-
income taxpayers. But the economic evidence suggests that this would be very
detrimental to the country’s long-term economic growth. Indeed, OECD economists
determined that high personal income taxes are second only to corporate income taxes
in their harmful effects on long-term economic growth. And it will surprise many

Americans to learn that the U.S. already has the most progressive income tax burden
among the leading industrialized nations.
What that means is that the top 10 percent of U.S. taxpayers pay a larger share of the
income tax burden than do their counterparts in any other industrialized country,
including traditionally “high-tax” countries such as France, Italy, and
Sweden.8 Meanwhile, because of the generosity of such preferences as the EITC and
child credit, low-income Americans have the lowest income tax burden of any OECD
nation – less than zero for almost half of tax filers (due to refundable credits).
Standard economic theory and a great body of evidence9 indicate there is a tradeoff
between economic growth and the redistribution of income. This means that the more
we try to make an income tax system progressive, the more we undermine the factors
that contribute most to economic growth: investment, risk-taking, entrepreneurship, and
productivity. This is because high-income earners tend to do much of the saving,
investing, risk-taking, and high-productivity labor. In simple terms, the more you tax
something, the less you get of it, so taxing high-income earners reduces all the key
factors in job creation and economic growth.
A sound tax reform plan will put long-term growth ahead of short-term redistribution.
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