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The Impact of Tax Reform on Low- and Middle-Income Households

Testimony Submitted to the House Committee on Ways and Means

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Document date: June 08, 2005
Released online: June 08, 2005

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

Note: This report is available in its entirety in the Portable Document Format (PDF).


Chairman Thomas, Ranking Member Rangel, and distinguished members of the Committee. Thank you for inviting me to testify on the principles that should guide efforts to reform the tax system.

I applaud the committee on taking on this crucially important subject. I came to Washington 20 years ago to work for the Treasury Department on what became the Tax Reform Act of 1986. Although far from perfect, that reform was guided from the start by the bedrock tax policy principles of fairness, simplicity, and economic efficiency. Although some parts of the final bill were simple and some weren't, it clearly made the tax system fairer and more efficient. I would be delighted if we could repeat the trick again today, while also making the tax system simpler.

Although I think people exaggerate when they claim that the 1986 Tax Reform has been fully undone in the intervening two decades, the tax code is once again in need of reform. It is needlessly complex. It is riddled with loopholes. It imposes vastly different tax burdens on people with similar abilities to pay. And it does not raise enough revenue to finance current government operations, much less the growing costs of the retirement of the baby boom generation.

In my testimony, I will focus on how the income tax system affects low- and middle-income taxpayers and the potential effects of tax reform on those populations. I have six main conclusions:

  • First, despite its flaws and some recent erosion, the income tax is highly progressive. In other words, low- and middle-income families bear much smaller proportional tax burdens than those with high incomes. This mitigates the effects of other regressive taxes, such as federal payroll and excise taxes and state and local sales taxes.
  • Second, the income tax code is an important source of income support for low-income households.
  • Third, tax reform could help low- and middle-income households by reducing their tax burdens further-both by lowering their rates and by simplifying and consolidating tax benefits to which they are entitled.
  • Fourth, some so-called fundamental tax reform proposals could shift the tax burden away from those most able to pay to those least able.
  • Fifth, the claimed economic gains from such proposals are speculative at best, based solely on theoretical models that have little relationship to economic reality.
  • And, last, systemic tax reform presents the ideal opportunity to bring our fiscal system back into balance. If it closed loopholes under the income tax and used the revenues to reduce the budget deficit, such reform would spur economic growth by making the tax system more neutral, increasing national savings, and lightening tax burdens on future generations.


Note: This report is available in its entirety in the Portable Document Format (PDF).



Topics/Tags: | Economy/Taxes


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