Tax Code Changes to Close the Widening Income Gap

080519_USEconomy1My Comments: By the time you read this, the State of the Union Address earlier may render these thoughts useless. On the other hand, our government, bound as it is by the language of the Constitution, is supposed to work in our collective best interest. And that still leaves a lot of room for biased interpretation.

If you agree that it is not in our best interest to promote a wider disparity between the haves and the have nots in this country, whether for economic or social reasons, then you have to be willing to explore ways to make it happen. This is one of them.

By Bonnie Lee / Taxpertise / Published November 21, 2013

As the gap between the rich and poor continues to widen in this country, there have been many proposals on how to change the tax code to bring about more income equality and avoid a bigger economic gap.

The Hamilton Project, a policy initiative from the Brookings Institute, has taken billionaire investor Warren Buffett’s complaint that he pays less taxes than his secretary —a common scenario for many low to middle income taxpayers—to heart.

According to The Hamilton Project Website, “More than half of American families earn $60,000 or less a year — outside of poverty but with limited economic security. Indeed, many of these families rely on government programs for support and one major setback could throw their lives into chaos.”

The secondary-earner tax deduction is designed to reduce the tax burden for working parents in this economic profile.

According to a statement published by the authors of the secondary earner deduction tax bill, Melissa Kearney and Lesley Turner, “The current structure of the tax and transfer system in the United States makes it particularly challenging for low-income married couples with children to work their way into the middle class. Specifically, the tax and transfer system has an inherent ‘secondary earner penalty,’ which discourages work efforts and reduces the return to work for spouses.”

This is especially true if the married couple has small children and must incur child care costs. When calculating in the tax liabilities with the child care costs, it is predicted that “A family headed by a primary earner making $25,000 a year will take home less than 30% of a spouse’s earnings,” the pair said in the statement.

Turner, one of the authors of the proposed legislation gives this example of how the secondary-earner tax deduction will work: “Take a family of four (two parents, two children) where each spouse earns $25,000/year. Under our baseline proposal (a secondary earner deduction equal to 20% of the first $60,000 in earnings), this family will experience an approximately $1,400 increase in post-tax income that consists of an approximately $700 reduction in their federal income tax liability and an approximately $700 increase in their Earned Income Tax Credit.”

With the passage of the second-earner deduction, the authors of this incremental tax reform anticipate an increase in disposable income and more economic stability and certainty for families in this income range.

Supporters of The Hamilton Project will be presenting a forum at the Liaison Capitol Hill Hotel in Washington, D.C., on Dec. 4 which includes opening remarks from former U.S. Treasury Secretary Robert Rubin. The general public is invited to attend and present questions.

Click here to read more taxation papers published by the Hamilton Project.