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The · Psychohistorian


"Lower the rate, broaden the base"

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Generally when you hear calls for tax reforms, they involve lowering tax rates and broadening the tax base. That's the type of tax reform that was done to some extent by Reagan, that was called for by the bipartisan Simpson Bowles commission, and that Romney talks about. But what exactly does that mean?

Well, here's an example. It's a family of four with an adjusted gross income of about $93,069 in 2011, about the average - mean, not median - for married couples in the U.S.

This particular return has a federal taxable income of $54,158, and paid $4835 in federal taxes. That's at a marginal tax rate of 15%, and an average tax rate of 13%. You don't think 13% of $54,158 comes out to $4835? The difference is due to tax credits, which further narrow the tax base.

The family's Massachusetts state taxable income, in contrast, is $70,119; Massachusetts is fairly generous with deductions, but not as generous as the federal government. The Massachusetts tax paid is $3731 at at 5.3% rate - more than 3/4 of the taxes at only about a third of the marginal tax rate. The tax revenue could be increased to equal the federal tax revenue while still leaving the tax rate at only half the federal rate.

That's what it means to lower the tax rate and broaden the base. Reduce the tax rates, and remove deductions and credits to make up for it. The federal government still gets just as much revenue, and with lower marginal tax rates, people can keep more of every extra dollar earned, providing an incentive - or rather reducing the disincentive - to work hard and make more money. And with more people working harder and making more money, the economy grows as well.

Average married household income was $92,839 in 2010:
http://www.census.gov/hhes/samesex/files/ssex-tables-2010.xls
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On September 12th, 2012 07:34 pm (UTC), (Anonymous) commented:
I don't think that's right. To broaden the base means to increase the percentage of people that actually pay taxes. Currently, only (roughly) 50% of Americans pay taxes. If that number goes higher (i.e. more people paying taxes) and lower the rates (less tax revenue per person), it could theoretically get you to the same net tax revenue.

I could be wrong but I think that's what it means to broaden the base and lower the rate.
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On September 12th, 2012 11:27 pm (UTC), psychohist replied:
Broadening the base means increasing the total amount of income that is taxes. That can be done either by increasing the number of people subject to income tax, or by increasing the amount of income subject to tax from existing taxpayers, or both.

In this example, the family in question would pay taxes on more income. For the roughly 50% of people who don't currently pay income taxes, they would also pay taxes on more income - on some positive amount of income, versus zero now.

And you're absolutely right that this can result in equal revenue with lower tax rates.
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