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The Ralph Rant
Republicans and conservatives have lost a huge fight with the liberal Democrats in charge of the federal government, but in politics, no fight is really over – and certainly not this one. Sen. Jim DeMint and others are right to want to make the 2010 Congressional elections a referendum on repealing Obamacare and replacing it with market-based health care reform.
But Obamacare should not be the only main issue. Conservative candidates in both the primary and general election need to make major points on taxes and spending as well – and there is a way to do both with one issue – tax reform.
Republicans are good at cutting taxes, but they are weak when it comes to tax reform.
People say they are fed up with high spending and taxes. I'd like to test you on that.
What is the biggest expenditure in the federal budget? Is it Medicare, Medicaid, Social Security, national defense? It's none of those. It's something called “tax expenditures.” Tax expenditures are the collection of tax deductions, exemptions and credits that force the tax rate to be artificially high so the government can exclude huge chunks of income from taxation.
If you and your neighbor, George, are making the same income, but George saved up and paid for his house and you have a big mortgage on yours, the government is using some of George's income to help you pay for your house. Would you be willing to give up that mortgage interest deduction to bring down your, and George's, tax rate?
According to the Office of Management and Budget (OMB), the federal government's tax expenditure budget for fiscal 2008 totaled $878 billion. If it appeared on the spending side of the budget, it would be the largest expense of all – larger than Social Security, larger than national defense, larger than Medicare and Medicaid combined.
$878 billion also represents more than half (56%) of all of the personal and corporate income taxes collected in 2008. That means if the tax code was simplified and all of the tax expenditures were removed, the tax rates for both people and corporations could be cut in half and still collect the same amount of revenue.
Even if you kept the same progressivity that exists in the tax code now, you could drop the current 10 percent personal income tax rate to five percent and the top rate from 35 percent to 17.5% without reducing federal revenues at all. The top marginal rate that most taxpayers pay – 25% - would drop to 12.5%.
But, that would mean that you would give up all of your tax credits and deductions. Businesses would have to do the same. The money your employer spends on your health care benefits would be taxed as regular income – but at half of today's tax rate.
Some of the largest tax expenditures are: the exclusion of employer contributions for medical insurance; deductions for mortgage interest and charitable giving; exclusion of capital gains on the sale of homes.
The way the Office of Management and Budget defines tax expenditures to reach that $878 billion figure does not include the personal exemption we all take on our income tax form, nor does it include the standard deduction that many, if not most, taxpayers take. It includes some, but very little of the earned income credit. The part of the credit that takes many tax filers income tax liability below zero is already included on the spending side. If the tax code were changed to eliminate all tax expenditures, identified by the OMB, people could still deduct personal exemptions and a standard deduction to reduce their taxable income. Not all of your income would be taxed, even with the change I'm discussing.
The point of all of this is – tax reform is more than tax reform. Done right, it is also a major reduction in spending. If we the taxpayers can let Congress know that we are willing to give up the many personal subsidies that the tax code holds for us, in exchange for much lower rates, then we would have much firmer standing to demand spending cuts in other areas too, so that the budget could be balanced and we would not keep piling up more debt for our children and grandchildren to pay.
Make repeal of Obamacare a major issue in the 2010 and 2012 campaigns, but also demonstrate your sincerity about spending cuts by demanding tax reform that eliminates all tax expenditures in exchange for lower rates for everyone.
Those should be the two major planks in every conservative candidate's campaign in 2010 and 2012.
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