The Public Policy

Rudy Thinks FAST

He's pitching an alternative maximum tax. Tax lobbyists are not amused.

By 1.24.08

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The economy needs fiscal stimulus to prevent a recession. Hence, the chairman of the Federal Reserve has recently urged Congress to enact a plan to put more money into the economy now! Rudy Giuliani has proposed such a plan, and history shows that it would give our economy the needed incentive to increase employment. It would also make our lives simpler.

The debate over whether to increase or decrease marginal tax rates -- the question whether to make the tax rates flatter -- is typically portrayed as a dispute between those who want to help the "rich" get richer by lowering tax rates and those who want to help the poor. The real question is whether changing the tax rates will help or hurt the economy. Increasing the marginal tax rates is bad if doing so will hurt the economy, increase unemployment, and reduce federal tax revenue. History shows that Rudy is right: lowering taxes will help the economy.

In 2005, after the Bush tax cuts, the IRS collected in tax revenue 7 percent more than it collected in 2000, before the tax reductions. Congress cut taxes, and then the economy grew, tax revenue increased, and unemployment decreased.

Not only that, but taxes became more progressive. For example, in 2000 -- the last year of the Clinton Presidency -- the bottom 50 percent of taxpayers earned 13 percent of adjudged gross income and paid 3.9 percent of income taxes. In 2000, the top 50 percent of taxpayers paid 96.1 percent of taxes and earned 87 percent of adjusted gross income. In 2003, the bottom 50 percent of taxpayers earned 14 percent of adjudged gross income and paid 3.5 percent of the income tax. In 2003, the top 50 percent earned 86 percent of adjusted gross income and paid 96.5 percent of income taxes.

Reducing taxes raised more money for the federal government not less -- just as Wal-Mart makes more money than Tiffany, although Tiffany charges higher prices.

PRESIDENT JOHN F. KENNEDY understood this, and made the tax structure substantially flatter. He reduced the lowest bracket by 6 percentage points, from 20 percent to 14 percent, and reduced the highest bracket 21 percentage points, from 91 percent to 70 percent. The richest people saw their marginal rate reduced substantially more than the poorest.

Yet in 1965, the first year for which the new rates applied, high-income taxpayers paid more taxes than they would have paid under the old law. Those earning more than $500,000 annually, for example, paid $701 million in federal taxes before the JFK tax cuts, and $1.02 billion after the tax cuts. This trend was true at every level.

Between 1981 and 1986, President Ronald Reagan reduced marginal tax rates across the board. The full reduction in the 1981 act did not take place until 1984. The tax reforms of the 1986 act further reduced the top rate from 50 percent to 28 percent. As Congress lowered the marginal rates, the percentage of taxes collected from the poor dropped, while the percentage collected from the rich rose substantially.

IRS data show that the share of total individual income taxes paid by the top 1 percent of adjusted gross income was only 17.9 percent in 1981 (before Reagan reduced marginal tax rates), but rose to 21.8 percent in 1984 and to 25.6 percent in 1990 (after all of the reductions in the marginal rate). Again, these statistics are similar for every income level. And the bottom 50 percent reduced its payment from 7.4 percent in 1981 to 5.7 percent in 1990.

As taxes got flatter during the 1980s, the rich paid more and the poor paid less.

Rudy's tax cuts fit within this tradition. Sadly, there are now those who want to use tax policy to punish hard work instead of rewarding it. They do not understand the simple economics: If you tax something, you get less of it. If you tax work, you get less of that too. Rudy's plan would reduce taxes and make America competitive again.

Right now, our corporate tax rate of 35 percent is the second highest in the industrialized world. Even countries with socialist traditions now tax corporations less because they want their people employed. Rudy's plan would cut the corporate tax rate to 25 percent, so we can compete better abroad. American workers are among the most productive in the world. Rudy's tax plan is about unleashing this work ethic.

BY NOW, MOST of us have heard of the Alternative Minimum Tax (AMT). It was supposed to tax only the richest Americans (we've heard that one before) but, because Congress did not index this tax for inflation, it is now hitting millions of middle class Americans. Rudy's plan would immediately and permanently index the AMT for inflation and then repeal it as soon as possible.

Instead of the Alternative Minimum Tax, Rudy proposes what is, really, the Alternative Maximum Tax. Rudy's "Fair and Simple Tax Form," or FAST form, has only three rates, 10 percent, 15 percent and 30 percent, cutting the current six tax brackets in half.

FAST offers all of us the opportunity for a tax cut while preserving the major deductions that people have come to rely on -- mortgage interest, charity, state and local taxes, the child tax credit, the personal exemption, and the health care tax exclusion. The family-centered tax will help us to achieve economic security.

FAST would allow people to opt between it and the regular federal tax code every year. If you like complexity, then choose the present system. But if you want a simpler tax code, you can choose FAST. You tax form will be one page -- shorter than this article.

Tax lobbyists who like complexity may use their corporate jets to strafe Capitol Hill if FAST becomes the law. The rest of us will not shed a tear for them. We will benefit, first, because the IRS will be returning to us some of our own money. Second, it will be giving us the gift of time.

Americans spend nearly 6.5 billion hours annually filling out tax forms, keeping records, and learning tax rules. Complying with federal income taxes costs our economy $200 billion each year. Rudy would end that waste.

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About the Author

Ronald D. Rotunda is professor of law at the Chapman University School of Law.