America desperately needs tax reform. Our tax system is unfair, distortionary, wasteful, and a user’s nightmare. Most important, it’s limiting our country’s economic potential. I, like other academic public finance economists, have thought long and hard about how best to fix taxes. Last year, at www.thepurpletaxplan.org, I proposed a system of low-rate consumption, payroll, and inheritance taxation, which would be a major advance over what we’ve got. It would also be remarkably progressive. The reason is that raising prices, as consumption taxes do, reduces the purchasing power of existing wealth and hits the rich with what amounts to wealth tax.

Unfortunately, convincing the public that taxing consumption is a progressive move is nigh impossible. Consequently, I’ve shifted gears to design an extremely simple and fairer version of our current income-based tax system. It’s called the Common Sense Tax and features just two taxes. One is a payroll tax that taxes all labor earnings at a flat 13 percent tax rate. The other is a personal income tax with a 25 percent tax on all household income above $100,000, in the case of married households, and $50,000, in the case of singles.

The reform, which is designed to be revenue neutral, would eliminate annual tax filing for over two thirds of American households and kick start our ailing economy. The Common Sense Tax is also designed to be progressive, if not more progressive than the current system.

 

Fixing the Economy: The Common Sense Tax
by Laurence Kotlikoff

Laurence Jacob Kotlikoff is a William Warren FairField Professor at Boston University, a Professor of Economics at Boston University, a Fellow of the American Academy of Arts and Sciences, a Research Associate of the National Bureau of Economic Research, a Fellow of the Econometric Society, a former Senior Economist, President’s Council of Economic Advisers, and President of Economic Security Planning, Inc., a company that markets ESPlanner - an economics-based personal financial planning software program, a simplified version of which is available on-line for free use by the public.

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The mission of the Common Sense Tax organization is to promote a comprehensive tax reform plan known as the Common Sense Tax.