The following HTML text is provided to enhance online
readability. Many aspects of typography translate only awkwardly to HTML.
Please use the page image
as the authoritative form to ensure accuracy.
Choosing the Nation’s Fiscal Future
nates itemized deductions, which currently benefit some middle-level tax filers who would, under simplified taxation, claim the standard deduction. Although the amount of the standard deduction in the simplified structure rises through time with the price level, incomes tend to increase faster, so its projected tax benefit diminishes over time, which is another cause of the distributional difference between the current and simplified tax structures.
Among high-income taxpayers, the effects of the tax treatment of income from capital gains remain significant.36 The distribution of this income source is extremely skewed: in recent years the top 0.1 percent of taxpayers has received roughly half of all capital gains. Table 8-2 shows that under both the current and simplified tax structures—but especially for the latter—the top 5 percent generally fares much better than the top 20 percent. For the implementation of both tax structures, the capital gains rate is adjusted proportionately to the rates on ordinary income, but the resulting reduction in progressivity is greater with the simplified tax structure.37
Although the simplified tax structure moves the federal tax system somewhat away from its current progressivity, it would remain highly progressive. In 2050, for instance, the first quintile would pay 1.2-1.3 and 1.5-1.7 percent of combined taxes under the current and simplified structures, respectively, for the different scenarios; for the middle quintile, taxes would be 10.4-10.8 and 11.2-12.2 percent, respectively; and for the top 5 percent the share of all taxes would vary between 38.1 and 39.4 percent for the current tax structure and between 33.7 and 36.5 percent under the simplified tax structure.38 If these distributional results were judged to differ more than is desired from the current progressivity of the tax burden, the tax liabilities could be adjusted by using somewhat more elaborate procedures than the committee used to fine-tune the tax parameters, such as the exemptions, standard deductions, numbers of tax rate brackets and their tax rates.
The committee chose a simple tax structure that started by approximately replicating the current distribution of the tax burden. This choice does not reflect the committee’s position on any particular distribution of the burden. Rather, our goal was to show ways to raise the revenues required by the spending scenarios. If policy makers and others prefer a somewhat more or less progressive system, it can be achieved with relatively minor changes in the parameters of the committee’s version of a simplified system.
Whatever the tax structure or the population group, all the committee’s scenarios except the low one reduce the after-tax incomes of taxpayers. To one degree or another, all taxpayer groups would shoulder the increased tax burden in the three scenarios that include substantial increases in federal spending.