Tax Reform for the Rich: Reduce the Rates but Lose the Breaks

The top 1 percent paid a total of $542.6 billion in federal tax, or an astounding 39.5 percent of the total income tax. If you want to take a more expansive view of rich, the top 10 percent (who earn upward of $133,000) pay 71 percent of the total tax.

Do they pay the top rate? Not by a long shot. The average rate for the top 1 percent is 27 percent of their adjusted gross income. (It’s even lower — 24 percent — for the superrich in the 0.001 percent bracket.) The top 10 percent pay an average of 21 percent.

That’s why tax reform is all about them. They take most of the itemized deductions and have a disproportionate share of capital gains and dividends, which are taxed at a much lower rate than salaries and wages.

Reform means ending those tax breaks, a move that always draws protests and intense lobbying from those who have benefited from them.

Getting rid of them all would enable a huge reduction in overall rates and would have the advantage of penalizing just about everyone in the upper income brackets (not to mention radically simplifying the tax code). The nonpartisan Congressional Budget Office estimated that the 10 largest tax expenditures (its term for what most people consider tax breaks) would amount to $12 trillion, or 5.4 percent of gross domestic product, over the decade from 2014 to 2023.

While such breaks may yield benefits, the budget office warned that they also “may lead to an inefficient allocation of economic resources by encouraging more consumption of goods and services receiving preferential treatment” and “may subsidize activity that would have taken place without the tax incentives.”

The report specifically cited the home-mortgage deduction as encouraging taxpayers to “purchase more expensive homes, investing too much in housing and too little elsewhere relative to what they would do if all investments were treated equally.”

But it’s mostly hard-core libertarians and free market purists who want to get rid of all tax breaks for the rich. The political reality is that some of these “expenditures” are off the table. The charitable deduction has proved untouchable for decades. The top 1 percent gave $77 billion in 2014, 37 percent of total charitable contribution deductions. Perhaps it’s not so bad for the rich to pay a lower marginal rate, if it’s because they give away so much.

So what’s left?

LONG-TERM CAPITAL GAINS The biggest revenue target is the…

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