The Need for Tax Reform, Part 1: Raising Individual Tax Rates Will Squelch Growth

Apr 9, 2012

Tax Day is almost upon us. It’s that time of the year when Americans get a harsh reminder about what a mess our tax system is and the need for comprehensive reform. Leading up to next week’s filing deadline on April 17, I’ll be digging into what makes it so complicated, inefficient, and counterproductive to economic growth and job creation.

Let’s start off with individual tax rates. This week, the President and his allies will again make the case for the “Buffett Rule” that would raise rates on high-income earners.  Today, Vice President Joe Biden tweeted that it “just makes sense.”

No Joe, it doesn’t.

As Caroline Harris pointed out a few weeks ago, those people targeted by the Buffett Rule (those making over $1 million) already pay a higher proportion of all income taxes and do so at a higher effective tax rate than other income groups. Also, the $47 billion estimated to be collected wouldn’t make a dent in replacing the Alternative Minimum Tax.

While the Buffett Rule makes headlines, on the horizon is the expiration of the 2001/2003 tax cuts. If Congress fails to act, on January 1, 2013, marginal rates for individuals in every tax bracket will rise. The top marginal rate will go up to 39.6%, and with the reduction in personal and itemized deductions it could rise to 41.6%.

For many businesses, these higher individual tax rates would have an enormous negative effect. National Journal reported in February that many companies file under the individual tax code as “pass-through” entities like “S corporations,” limited liability companies (or LLCs), partnerships, and sole proprietorships. These companies “employ more than 50 percent of the workforce in the United States.” Raising taxes on these job creators will only hinder an economy already having trouble creating jobs.

Besides it being bad economic policy, there’s little public appetite to raise taxes on high-income earners. In February, The Hill reported on the results of a poll:

Three-quarters of likely voters believe the nation’s top earners should pay lower, not higher, tax rates, according to a new poll for The Hill.

The big majority opted for a lower tax bill when asked to choose specific rates; precisely 75 percent said the right level for top earners was 30 percent or below.

Even Ezra Klein, a blogger friendly to the administration, admits the Buffett Rule is a “sideshow.”

Our economy can’t afford tax increases.  Instead of election-driven tax talk, we need comprehensive tax reform that lowers both individual and corporate tax rates to increase global competitiveness, capital investment, and job creation.

In the interim, as we work towards comprehensive tax reform, Washington must stop the class warfare rhetoric and work to extend expiring and expired tax provisions and the 2001/2003 tax rates for all taxpayers. Failure to extend those tax provisions will thwart economy recovery and hinder the investment and job creation we need on the road to reform.

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