A Simplified Progressive Tax Plan

Summary - American Prospect Online

The Center for American Progress has put forward a new proposal to make the tax code fair, simple, and supportive of new economic opportunity. We would tax all forms of income according to the same rate schedule. This change would end preferential treatment for income from capital (wealth) over income from work by setting capital gains and dividend taxes equal to the tax rates on ordinary income.

We also would provide relief for the most regressive part of the system, the payroll tax. The Social Security payroll tax is currently 12.4 percent and split evenly between workers and their employers. The center’s plan would reduce the tax rates on work by eliminating the employee side of the Social Security payroll tax. This would mean an immediate 6.2-percentage-point reduction in the tax rates on the first $90,000 of income from salaries and wages. At the same time, we would make the employer side of the payroll tax less regressive by requiring employers to pay taxes on payroll incomes above $90,000.

We would revamp the income-tax rate structure by reducing it to three tax brackets with tax rates set at 15 percent, 25 percent, and 39.6 percent -- which we would also set as the tax rate on capital gains and dividends. The brackets would be set at taxable income levels of $0, $25,000, and $120,000, with a $10,000 standard deduction for married couples.

Because most taxpayers pay more in payroll taxes than in income taxes, the tax savings for middle-income households would be significant.

This simple restructuring of the tax code would also include an elimination of the AMT, rescuing 30 million taxpayers from the snare of complicated and expensive tax filings over the next several years. We would also reduce the income level needed to qualify for the full child tax credit, enabling more low-wage workers to receive it. By raising additional revenue, this simpler, fairer tax plan would also reduce the deficit and create a stronger foundation for economic growth.

Unlike the trifecta of right-wing tax-policy reforms -- a flat tax, a value-added tax (VAT), or a national sales tax -- our plan would maintain 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.

Finally, the center’s plan would replace the upside-down retirement savings deduction with a refundable credit. Currently, those in a higher tax bracket receive a greater tax benefit from retirement savings. For example, someone in the 15-percent bracket receives a 15-cent reduction in their tax share for each $1 saved in a tax-preferred retirement account, while those with higher incomes in the 35-percent bracket receive a 35-cent reduction. Under our plan, everyone would receive a 25-percent refundable credit for retirement savings.

Tragically, the argument against the Bush tax agenda was never heard. Instead of offering a progressive counter-narrative, Democrats too often allowed the right to set the terms of the debate. As a result, even those rare victories, such as the middle-class tax relief Democrats gained in the 2001 tax bill, were dwarfed by the system’s growing regressivity.