Congress can fix tax code, repeal state and local deductions
Congress is preparing to pass a massive tax hike to partially pay off its $ 3.5 trillion budget proposal. These tax hikes will target the rich and big business, justified by the fact that these parties “pay their fair share”.
Like beauty, tax fairness is in the eye of the beholder. But new facts suggest there is little evidence that the rich and big business dodge taxes.
In recent decades, Congress has given so much tax relief to low- and middle-income households that the vast majority of taxpayers who pay income taxes are now high-income families and individuals. A recent Tax Policy Center report (TPC) found that nearly 61% of Americans paid no income tax in 2020, largely thanks to the substantial tax cuts passed in various COVID-19 relief bills and the decline personal income during the pandemic.
This is the highest number of non-payers since income tax was extended to all workers during World War II.
While 2020 was certainly an anomaly, TPC estimates that the number of non-payers is likely to exceed 57% this year and continue to hover around 45%, so many of the temporarily extended tax credits, such as the tax credit for children, became permanent. TPC detailed estimates for 2022 show that about 94% of these non-payers will earn less than $ 98,200.
Who pays the most?
In contrast, the latest data from the Congressional Budget Office shows that in 2018, the year after the Tax Cuts and Jobs Act (TCJA) reduced taxes for each income group, the share of income taxes paid by 1% of the richest taxpayers hit a record close to 41.7%. The same group paid nearly 26% of all federal taxes, double the share paid by the poorest 60% of Americans combined.
So if those at the top pay the bulk of federal income taxes, surely corporations are tax evaders, right? Here too, those pushing for these tax hikes are neglecting the data.
The White House has perpetuated the narrative that big corporations avoid U.S. tax by shifting their profits overseas. But one recent analysis by Tax Notes economist Martin A. Sullivan found that big tech companies shifted $ 40 billion in global profits to the United States in 2020, believing the rhetoric that they shift their profits overseas. Sullivan found that publicly traded multinationals as a whole have steadily increased the national share of their global profits from 48% in 2017 to 56% in 2020.
Tax fairness is defined differently by almost all economists and tax writers, but if the goal is to ensure that the tax code does not play the role of a frontrunner among the richest 1% of businesses, Congress could take easy steps.
First, lawmakers could start by repealing a policy that favors the rich: state and local tax deduction. Even at its $ 10,000 cap, the SALT deduction primarily benefits affluent suburbs, and its elimination could bring in more than $ 1.5 trillion over 10 years.
Another way would be to broaden the corporate tax base by repealing most tax deductions for businesses (while retaining economically advantageous deductions for capital investments). While not all of these deductions are considered loopholes, removing them would have minimal economic impact while raising nearly $ 1 trillion over a decade.
Mark Twain said, “Never let the truth get in the way of a good story.” Politicians need to create plausible narratives to generate public support for tax hikes, even if the facts don’t match the story. And many policymakers have repeatedly told Americans that the rich and big corporations don’t pay their fair share of taxes, so we tend to believe that. The facts do not support this claim, and these facts should not be ignored as Congress tries to make a very progressive tax code even more progressive.
Scott A. Hodge is president of the Tax Foundation, a non-partisan tax research group in Washington, DC.