In a practical context, the distinctions that have to be made are between making “fair” choices to collect the same amount of revenue as is collected now and making “fair” choices to distribute additional taxes (e.g., to close the budget gap described in this report). In raising an unchanged level of revenue, some people want a tax system that is more progressive, that is, that places greater burdens on those at higher incomes. Other people want less progressivity. One argument for changing the tax system but not changing its current level of progressivity is that this approach would minimize the number of “winners” and “losers” from the tax change. Also, taxpayers have made long-term commitments—borrowing money to buy homes or invest in their own businesses, for example—and increasing their taxes in the short run is unfair or, at least, painful.
When the goal is to increase the overall amount of revenue, however, fairness issues are more contentious. Furthermore, there is no clear and simple benchmark—such as maintaining the current distribution of burdens—that can be used as a starting point for public debate.
In this chapter generally, the committee models either the current tax law or a simplified alternative with tax rates chosen to replicate the level and distribution of revenues of the current law and then increases revenues by simply increasing all tax rates proportionately. Such an approach holds no particular claim to superiority and in an actual legislative process surely would be challenged from all sides. However, we find it a straightforward starting place for the kind of discussion that this report seeks to begin and support.
There are practical choices that may conflict with some conceptions of fairness. One issue, noted above, is the international competition for investment on the basis of after-tax income from investments. If international competition—whether arguably efficient or a shortsighted “race to the bottom”—forces lower taxes on incomes from capital, that would tend strongly toward the perhaps-unintended consequence of reducing the progressivity of the tax system.
Another issue is the current negative income tax burden on comparatively low-wage workers. (That is, because of “refundable” credits—discussed below—many low earners receive checks rather than paying taxes through withholding or otherwise.) In the 1960s and early 1970s, some argued for increasing the personal exemption and standard deductions to cut the tax burden for families with poverty level incomes, and, at the same time, to reduce the administrative and compliance burden on those families and the IRS by eliminating the obligation to file a return. In the mid-1970s, however, this approach was expanded with the introduction of “negative income taxes,” in the form of the Earned Income Tax Credit (EITC). The EITC eliminated the burden of the Social Security payroll tax for poor families, and provided a kind of wage supplement that did not