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					Putting a Face
on America’s
Tax Returns:
 A CHART BOOK
                   Copyright © 2012 Tax Foundation

            ISSN 2169-9534 (print)   ISSN 2169-9569 (online)




                             National Press Building
529 14th Street, N.W., Suite 420 • Washington, D.C. 20045 • (202) 464-6200
                               taxfoundation.org
     Putting a Face on America’s Tax Returns:
                                        A CHART BOOK


Inequality has been at the forefront of                inequality. Therefore, critics conclude, raising
                                                       tax rates on high-income Americans will halt the
the nation’s political discourse recently              growth of inequality.
                                                           As this book shows, much of the perceived
thanks to a number of published
                                                       rise in inequality is really the natural result of the
reports purporting to show the rich                    business cycle as well as social and demographic
                                                       forces far beyond the role of tax policy. Indeed,
getting richer while the rest of America               there is no evidence of a long-term trend in
                                                       inequality over the last 20 years, only wide swings
is stuck in neutral. Indeed, one report                up and down.
suggests that Americans have not                           Thanks to misdirected tax policy, America is
                                                       becoming divided between a shrinking group of
been this unequal since the Great                      taxpayers who are bearing the lion’s share of the
                                                       cost of government today and a growing group of
Depression in 1929.                                    taxpayers who are disconnected from the basic cost
   Spurred by this news, support is growing in         of government.
both Washington and among the public to raise tax          The goal of this book is to put a face on
rates on the “rich” to reduce inequality in America.   the ever-changing demographics of American
Indeed, many believe that the tax policies enacted     taxpayers. The failure to understand these changes
in 2001 and 2003—which lowered marginal tax            has produced poor tax policy and threatens to
rates for all taxpayers—are a root cause of today’s    undermine efforts to overhaul the tax code.


                                                                                                        CHAPTER 1 | v
Table of Contents
Chapter 1: Who Earns What?
Introduction ........................................................................................................................................... 1
Of the 143 Million Tax Returns in 2010, Nearly Half Earned Less than $30,000 ......................................... 2
The Income Tax Burden Is Very Progressive ............................................................................................... 3
The Tax Burden Has Grown More Progressive Over Time.............................................................................. 4
Even After Credits and Deductions, the Tax System Is Progressive: Effective Tax Rates Rise as Incomes Rise... 5
More on Average Tax Rates ...................................................................................................................... 6


Chapter 2: Who Doesn’t Pay Income Taxes?
Introduction ........................................................................................................................................... 7
The Number and Percentage of Filers Who Pay No Income Taxes Has Reached Record Levels ........................ 8
How a Family of Four with $45,000 in Income Become Nonpayers ............................................................. 9
The Proliferation of Tax Credits is the Major Factor in the
Growth in Nonpayers—Especially Refundable Credits ................................................................................. 10
Because of Refundable Tax Credits, the Bottom Two Quintiles Have Negative Effective Tax Rates ................... 11
Refundable Tax Credits Exceed the Payroll Taxes Paid by Millions of Workers................................................ 12
Chapter 3: Are Americans That Unequal?
Introduction ........................................................................................................................................... 13
The Top 1 Percent’s Share of Income Has Fallen to 1997 Levels ................................................................. 14
The Gains of the Top 1% Don’t Come at the Expense of Other Americans ..................................................... 15
The Business Cycle Causes the Number of Millionaire Tax Returns to Fluctuate Considerably Each Year .......... 16
Millionaire Status is Fleeting: Half Are Millionaires Just Once ..................................................................... 17
Millionaire Taxpayers Tend to be Older ...................................................................................................... 18


Chapter 4: The Changing Face of America’s Tax Returns
Introduction ........................................................................................................................................... 19
Singles are Now the Majority of Taxpayers ................................................................................................. 20
In 1960, the Majority of Statistical “Middle-Income” Households Were Married Couples ............................... 21
Today, the Majority of Statistical “Middle-Income” Returns are Single Filers................................................. 22
America Has Become a Nation of Dual-Income Working Couples ................................................................. 23
High Income Households Have More Earners than Low-Income Households ................................................. 24
Incomes Tend to Rise with Age ................................................................................................................ 25
Nearly Half of all Taxpayers are over Age 45 Compared to 39% in 1997 ...................................................... 26
Taxpayers over 45 Now Pay 70% of All Income Taxes Compared to 60% in 1997 ......................................... 27
Median Incomes Vary Greatly by Educational Attainment ............................................................................ 28
America’s Income Gap Is Really an Education Gap ..................................................................................... 29
The Composition of U.S. Businesses Has Changed: Fewer Corporations, More Individually Owned Businesses . 30
More Business Income Is Reported On Individual Tax Returns than Corporate Returns................................... 31
72% of Total Net “Pass-Through” Business Income in 2010 Was Earned by Taxpayers Making Over $200,000 ..... 32
Taxing Income over $1 Million at 100% Won’t Erase the Deficit .................................................................. 33
Chapter 1: Who Earns What, Who Pays What

With all of the talk about raising taxes on the rich and the wealthy not paying
their “fair share” of taxes, it will shock many Americans to learn that the U.S. has
the most progressive income tax burden of any industrialized nation. What that
means is that the top 10% of U.S. taxpayers pay a larger share of the income tax
burden than do their counterparts in any other industrialized country, including
traditionally “high-tax” countries such as France, Italy, and Sweden. Meanwhile,
because of the generosity of such preferences as the Earned Income Tax Credit
(EITC) and child credit, low-income Americans have the lowest income tax
burden of any OECD nation.
                To understand the
                distribution of the tax
                burden, we must first
                understand the distribution
                of tax filers. The median
                taxpayer earns roughly
                $33,000. This means that
                half of all tax filers (70
                million or so) earn less than
                $33,000 and half earn
                more. While only about 13%
                of taxpayers earn more than
                $100,000, they pay the vast
                majority of all income taxes
                in America today.




2 | CHAPTER 1
About half of the nation’s
income is reported by
taxpayers who make less
than $100,000 and half
is reported by taxpayers
who make more. However,
taxpayers who make less than
$100,000 collectively pay
just 13% of all income taxes,
while those who make more
pay about 87% of all income
taxes. The share of income
taxes paid by upper-income
Americans, those who earn
$250,000 or more, is twice
their share of the nation’s
income. Those making less
than $30,000 receive more
back from the IRS than they
pay in income taxes, due
to the generosity of such
preferences as the EITC and
the child credit.




                CHAPTER 1 | 3
                In 2009, the top 1% of
                taxpayers—which totals
                roughly 1.4 million
                taxpayers—paid about 38%
                of all income taxes. That is a
                greater share of the income
                tax burden than was paid by
                the bottom 90% of taxpayers
                combined, which totals more
                than 120 million taxpayers.
                The top 10% of taxpayers
                pay more than 70% of all
                income taxes. Meanwhile,
                the bottom 50% of taxpayers
                (about 70 million in total)
                pays just 2.3% of all income
                taxes.




4 | CHAPTER 1
People mistakenly think that
because the rich benefit from
many popular tax credits and
deductions they pay a lower
average (or “effective”) tax
rate than other taxpayers.
That is not the case. The
average tax rate for all
Americans is about 10.4%.
However, taxpayers earning
over $250,000 pay a 23%
effective rate, more than
twice the national average.
Meanwhile, the effective tax
rate for Americans making
less than $30,000 is actually
negative due to refundable
credits.




                CHAPTER 1 | 5
                More on Average Tax
                Rates

                Despite conventional wisdom
                that the Bush-era tax cuts
                disproportionately benefited
                the wealthy, the average tax
                rate for the bottom 99% of
                taxpayers has now dropped
                below 10%—the lowest level
                since the Tax Reform Act
                of 1986—well below the
                average for all taxpayers.
                Meanwhile, the top 1%
                of taxpayers still pays an
                effective tax rate that is just
                more than twice the average
                for all taxpayers.




6 | CHAPTER 1
Chapter 2: Who Doesn’t Pay Income Taxes?

Since the early days of the income tax, the tax code has contained provisions
that either exempt low-income workers from taxation or greatly reduce
their tax burden. The standard deduction, personal exemption, dependent
exemption, and Earned Income Tax Credit are all examples of these types of
provisions.

Today, the percentage of tax filers who pay no income taxes due to the generous
credits and deductions in the tax code has reached levels not seen since the
income tax was applied to all taxpayers in 1940. This trend raises serious
concerns about the equity of the U.S. tax system, the fiscal stability of the
federal government, and the political implications of disconnecting millions of
citizens from the primary means of funding government programs.
                Recent IRS data reveals that
                in 2010, over 58 million
                federal income tax filers
                had no income tax liability
                after taking deductions and
                credits. This amounts to
                nearly 41% of the roughly
                143 million tax returns
                filed that year. This is the
                second highest percentage
                of nonpayers since 1940,
                behind only 2009, when
                nearly 42% of income
                tax filers were nonpayers.
                By contrast, the lowest
                point in the modern era
                for nonpayers was 1969,
                when only 16% of filers had
                no income tax liability. As
                recently as 2000, 25.2% of
                filers paid no income taxes.




8 | CHAPTER 2
This chart demonstrates how a
family of four making $45,000
in adjusted gross income can
become a nonpayer. After taking
a standard deduction of $11,900
and personal exemptions of
$15,200 ($3,800 times four),
the family’s taxable income is
reduced to $17,900. Most of this
amount ($17,450) is taxed at
10%, with the remainder ($450)
in the 15% bracket, for a tax
liability before credits of $1,813.

From this, they are allowed to
deduct two tax credits of $1,000
for each of their two children.
They also receive a $450
earned income tax credit. As the
chart indicates, these credits
bring their $1,813 liability to
zero. However, since they are
refundable, the family also
receives a check for $637 from
the IRS for the remaining value.
(Some families may also be
eligible for other credits such as
the child care credit, education
credit, or the tax credit for
purchasing a hybrid vehicle.)

                   CHAPTER 2 | 9
                 In the modern era, the
                 percentage of nonpayers
                 began to climb significantly
                 after the Tax Reform Act
                 of 1986, which increased
                 the value of the standard
                 deduction and nearly doubled
                 the size of the personal
                 exemption. In the 25 years
                 since then, the percentage
                 of nonpayers has doubled
                 thanks to the expansion of the
                 Earned Income Tax Credit and
                 the enactment of a plethora of
                 new credits, such as the child
                 credit and the more recent
                 Making Work Pay Credit.
                 In 2010, tax credits had a
                 combined budgetary cost of
                 $224 billion. Half of these
                 costs were refundable cash
                 payments to nonpayers.




10 | CHAPTER 2
Indeed, the majority
of nonpayers receive
“refundable” tax credits even
though they had no income
tax liability. The Congressional
Budget Office now estimates
that because of the large
amount of refundable tax
credits, the bottom 40%
of households now have
negative effective tax rates.
Remarkably, the effective
tax rate for the middle fifth
of households is nearing
zero because of the recent
expansion of tax credits.




                CHAPTER 2 | 11
                 Defenders of tax credits often
                 say that while nonpayers may
                 not pay income taxes, they do
                 at least pay other taxes such
                 as Social Security payroll
                 taxes (FICA). However, it turns
                 out that refundable tax credits
                 have become so generous
                 that their value now exceeds
                 the payroll taxes paid by
                 millions of taxpayers and their
                 employers. Indeed, Congress’s
                 Joint Committee on Taxation
                 estimated that in 2010, 23.1
                 million filers would receive
                 more in refundable credits
                 than their share of FICA taxes,
                 while 15.5 million filers would
                 get more back in refundable
                 tax credits than both the
                 employee and employer shares
                 of FICA taxes.




12 | CHAPTER 2
Chapter 3: Are Americans That Unequal?

By some accounts, America has not been this unequal since the depths of the
Great Depression.

Many people attribute this rise in inequality to record CEO pay packages,
Wall Street bonuses, and superstar athletes and entertainers. But there is a
considerable amount of evidence that inequality is not a steady state and that
it tends to rise and fall with the business cycle. As we will see, inequality today
is no worse today than it was during the Clinton administration. Moreover,
whatever gains have been made by the top 1% of Americans have not come at
the expense of those of us in the bottom 99%. In fact, the incomes of the 99%
are actually much higher than they were two decades ago.
                 Many people believe that the
                 fortunes of the top 1% are
                 an indicator of inequality in
                 America. If that is the case,
                 then inequality is no worse
                 today than it was during the
                 second term of the Clinton
                 administration. The top 1%’s
                 share of the nation’s income
                 is now roughly where it was in
                 1997. Inequality did actually
                 increase by 12% during the
                 1990s despite the tax hikes
                 of 1990 and 1993, which
                 increased the top income tax
                 rates on the rich. Because the
                 wealthy derive much of their
                 incomes from highly volatile
                 sources such as capital gains
                 and business profits, the
                 fortunes of the top 1%—and
                 inequality in general—tend to
                 follow the peaks and valleys of
                 the business cycle.




14 | CHAPTER 3
The data shows that the gains
of the top 1% don’t come at
the expense of the “middle
class.” Between 1987 and
2009, the overall incomes
of the “lower-middle class”
grew by 43% while the overall
incomes of the “upper-middle
class” grew by 55%. At no
time did the rise in incomes
at the top result in a decline
in income for middle-income
taxpayers. On the contrary,
even as inequality was
growing on paper, the incomes
of middle-income taxpayers
were hitting peak levels.




               CHAPTER 3 | 15
                 Listening to some politicians,
                 you would think that
                 “millionaires” were a
                 monolithic group that can be
                 taxed at will. But IRS data
                 clearly shows that the number
                 of millionaire tax returns
                 fluctuates wildly each year,
                 largely due to changes in
                 the business cycle. Indeed,
                 between 2007 and 2009,
                 the number of millionaire tax
                 returns fell by 40%, or more
                 than 155,000. Moreover, the
                 recession reduced the total
                 amount of income reported
                 on millionaire returns by 48%
                 and the amount of income
                 taxes they paid by 43%.




16 | CHAPTER 3
Numerous studies have
shown that millionaire status
appears to be fleeting or
episodic, because many
people become “millionaires”
as the result of a one-time
event such as the sale of a
business or stock. Indeed, a
recent Tax Foundation study
found that between 1999
and 2007, about 675,000
taxpayers earned over a $1
million for at least one year.
Of these taxpayers, 50%
(about 338,000 taxpayers)
were a millionaire in only
one year, while another 15%
were millionaires for two
years. By contrast, just 6%
(38,000 taxpayers) remained
millionaires in all nine years.




                CHAPTER 3 | 17
                 For most Americans, incomes
                 tend to rise with age. Thus,
                 it is not surprising that in
                 2009, 80% of millionaires
                 were older than age 45 and
                 close to half of all millionaires
                 (46%) were older than age
                 55. Despite the publicity
                 given to the growing number
                 of young millionaire athletes,
                 celebrities, and entrepreneurs,
                 only about 3% of all million-
                 dollar tax returns are filed by
                 taxpayers under the age of 35.




18 | CHAPTER 3
             Chapter 4: The Changing Face
               of America’s Tax Returns
In Washington, every tax discussion begins with the premise that tax policies
should either help, or at least protect, the “middle class.” And by middle class, most
politicians tend to mean the median taxpayers or those in the statistical middle—
taxpayers earning roughly $30,000 to $60,000 per year.
However, the composition of this group of taxpayers has changed dramatically
over the past 50 years. Whereas the middle was once overwhelmingly comprised of
married couples it is now comprised mostly of single individuals and single-headed
households. Indeed, the taxpayers we now find in the lower income groups tend to
be either: younger workers just beginning their careers, retirees, or less educated
workers.
By contrast, more and more married couples are now clustered toward the top of
the income scale because they are two-earner couples who are older, well educated,
and often have business income. They could be called the “suburban” or “successful”
middle class because they tend to make over $100,000.
The kind of sterile tax analysis that is performed in Washington ignores these
demographic changes and simply compares all tax returns as if they were the same.
As a result, it likely mistakes demographic changes for rising income inequality.
                 When we think of middle
                 class families, we think of
                 intact, working couples with
                 children—such as June and
                 Ward Cleaver from the 1950s
                 show Leave it to Beaver.
                 Once upon a time, June
                 and Ward represented most
                 taxpayers, but demographic
                 changes have made those old
                 notions obsolete. Because the
                 majority of taxpayers today
                 are single filers, the “typical”
                 taxpayer today looks more
                 like Phoebe and Joey from
                 the once-popular TV show
                 Friends. Married working
                 couples are now clustered in
                 the upper-income groups.




20 | CHAPTER 4
Fifty years ago, there was
far less variation among tax
filers than there is today. As
this chart illustrates, married
couples were the majority
of tax filers in every income
quintile but the lowest one.
While 73 percent of filers
in the lowest quintile were
single, less than half of
filers in the second quintile
were single, 52 percent
were married. In the middle
quintile—where June and
Ward Cleaver were thought
to live—there were twice as
many married couples as
single filers. Upper-income
groups were overwhelmingly
married couples.




                CHAPTER 4 | 21
                 The distribution of tax filers
                 today looks almost like a
                 mirror image of 1960. As in
                 1960, single filers dominate
                 the lowest income group.
                 Today, however, there are
                 four-times as many singles as
                 married couples in the second
                 quintile and twice as many
                 singles as married couples
                 in the middle quintile. Even
                 in the fourth quintile, single
                 filers are nearing parity with
                 married filers. Only in the
                 top quintile do we find an
                 overwhelming percentage of
                 married couples compared to
                 single filers and single-headed
                 households.




22 | CHAPTER 4
America has become a nation
of dual-income working
couples. While it is clear from
the chart that the husband-as-
sole-breadwinner stereotypical
family of the 1960s was
probably not the norm then,
it is most certainly less so
today. Moms worked during
the 1960s but fewer than half
of all married couples during
that era were dual-earners.
Today, that number has risen
to 67%, more than twice the
number of sole-earner married
couples. The disparity is
even higher among working
professional couples.




                CHAPTER 4 | 23
                 All evidence indicates that
                 one of the biggest factors
                 separating high-income from
                 low-income households is the
                 number of workers in each.
                 The further we look up the
                 income scale the more likely
                 we are to find two and even
                 three income households.
                 For example, here we can
                 see that 50% of households
                 earning between $50,000
                 and $55,000 have only one
                 worker, whereas 73% of the
                 households making over
                 $200,000 have two or more
                 workers. Two single middle-
                 income people can become
                 “rich” on paper simply by
                 saying “I do.”




24 | CHAPTER 4
One of the most overlooked
explanations for the difference
in incomes between taxpayers
is the issue of life cycle.
Our income tends to grow
as we mature and gain work
experience, reaching its peak
as we near retirement. As this
chart illustrates, the average
income for taxpayers age 55
to 65 is nearly $80,000—
well above the $56,610
average for all taxpayers.
Even taxpayers over age 65
make more than the national
average. Naturally, as the
Baby Boomer generation of
taxpayers moves into their
peak earnings years, there
will be more high-income
taxpayers than younger
low-income ones, giving
the appearance of rising
inequality.




                CHAPTER 4 | 25
                 This chart clearly illustrates
                 the aging of America’s
                 taxpayers over a very short
                 span of 13 years as the Baby
                 Boomer generation moved
                 through adulthood into their
                 pre-retirement work years.
                 In 1997, just 39% of all
                 taxpayers were older than age
                 45. Today, nearly half (48%)
                 are over 45 and that figure
                 will likely continue to climb.
                 Moreover, in 1997, taxpayers
                 over age 45 earned just over
                 half of all income (53%).
                 Today, they earn 61% of all
                 income.




26 | CHAPTER 4
As Americans age, more and
more of the tax burden will
be borne by older taxpayers.
In 1997, 60% of all income
taxes were paid by taxpayers
over age 45. Today, that
burden has jumped to 70%.
Naturally, this raises concerns
over the ability of this older
generation to save both for
their own retirement while
financing the lion’s share of
the cost of government.




                CHAPTER 4 | 27
                 One of the biggest
                 contributors to rising
                 inequality in America today
                 is the growing earnings gulf
                 between workers with college
                 degrees and those without.
                 Indeed, the median income
                 for a worker with a 4-year
                 college degree was $75,568
                 in 2010. By contrast, the
                 median income for a worker
                 with only a high school
                 diploma was nearly half as
                 much—$38,976. There is an
                 even greater income disparity
                 between those with high
                 school diplomas and those
                 with advanced degrees.




28 | CHAPTER 4
Perhaps nothing illustrates the
causes of income inequality in
America today more than the
vast differences in educational
attainment between high-
income households and
low-income households. At
the bottom end of the income
scale, nearly 70% of these
Americans have a high school
degree or less. At the other
end of the income scale,
nearly 80% of high-income
households have a bachelor’s
degree or higher. Raising
taxes on highly educated
taxpayers will not correct for
this disparity.




                CHAPTER 4 | 29
                 What also sets the successful
                 middle class apart from
                 other taxpayers is that they
                 derive a large share of their
                 overall earnings from “pass-
                 through” businesses such as
                 S corporations, LLCs, and
                 partnerships. These pass-
                 through business owners pay
                 their business taxes on their
                 individual tax returns. Since
                 the 1980s, the number of
                 traditional C corporations has
                 shrunk while the total number
                 of pass-through businesses
                 such as S corporations,
                 partnerships, and sole
                 proprietorships has grown to
                 over 30 million in total.




30 | CHAPTER 4
Because of the remarkable
growth of pass-through
businesses over the past two
decades, there is now more
business income reported
on individual income tax
returns than on traditional C
corporation returns. The U.S.
Treasury has estimated that as
much as 40% of all business
taxes are now paid on
individual tax returns rather
than on corporate tax returns.




               CHAPTER 4 | 31
                 It is often said that raising
                 top tax rates will have little
                 effect on business activity
                 because only 2% of taxpayers
                 with business income will be
                 impacted. However, the more
                 economically meaningful
                 statistic is how much overall
                 business income will be taxed
                 at the highest rates. In 2010,
                 the vast majority (72%) of
                 pass-through business income
                 was reported by taxpayers
                 earning more than $200,000.
                 Millionaire tax returns earned
                 36% of all private business
                 income while taxpayers with
                 incomes below $100,000
                 earned just 12%.




32 | CHAPTER 4
The federal deficit has grown
so large that tax increases only
on America’s millionaires will
not be our silver bullet. Even if
the government took all of the
income earned by those who
have an after-tax income of $1
million or more, the amount of
revenue generated would fall far
short of eliminating the deficit.
The expected federal deficit for
2012 is about $1.2 trillion. The
latest IRS data indicates that
the total after-tax income for
all millionaires is roughly $709
billion. If every penny of that
after-tax income were taken by
the government through a 100%
tax rate, and we assume that
no spending cuts are made to
accompany the tax increase, this
would account for only about
60% of the amount needed to
erase the deficit.
With numbers like this, one
thing is clear: soaking the
wealthy with increasingly higher
tax rates simply cannot be the
only answer to our nation’s fiscal
problems.

                   CHAPTER 4 | 33
                                   Conclusion



The United States tax system is in         While tax cuts will always curry more favor with
                                           voters than creating new spending programs,
desperate need of simplification           Washington needs to call a truce to using the
                                           tax code for social or economic goals. The
and reform. The relentless growth          consequence of trying to micromanage the
of credits and deductions over the         economy through tax policy has split America
                                           into two groups: a shrinking group of payers and
past 20 years has made the IRS a           a growing group of nonpayers. This is a recipe for
                                           both fiscal and social instability.
super-agency, engaged in policies as
unrelated as delivering welfare benefits   Fundamental tax reform can restore the nation’s
                                           competitiveness and put us on a growth path
to subsidizing the purchase of electric    for the future. Not only will this improve living
                                           standards in America, it will improve the nation’s
cars. Were we starting from scratch,
                                           fiscal health. That is a win for every American.
these would not be the functions we
would want a tax collection agency to
perform.
                      Attributions


Scott A. Hodge
President, Tax Foundation


William A. McBride, Ph.D.
Chief Economist, Tax Foundation


Donald R. Johnson
Publications Manager, Tax Foundation


Nick Kasprak
Graphic Designer, Tax Foundation
About the Tax Foundation

What Do We Stand For?
As a nonpartisan educational organization,                of taxes is to raise needed revenue, not to micromanage
the Tax Foundation has earned a reputation                the economy. The tax system should not favor certain
for independence and credibility. However,                industries, activities, or products.
it is not devoid of perspective. All Tax
Foundation research is guided by the                      Stability: When tax laws are in constant flux, long-
following principles of sound tax policy,                 range financial planning is difficult. Lawmakers
which should serve as touchstones for good
                                                          should avoid enacting temporary tax laws, including
tax policy everywhere:
                                                          tax holidays and amnesties.
Simplicity: Administrative costs are a loss to society,
                                                          No Retroactivity: As a corollary to the principle
and complicated taxation undermines voluntary
                                                          of stability, taxpayers should rely with confidence
compliance by creating incentives to shelter and
                                                          on the law as it exists when contracts are signed and
disguise income.
                                                          transactions made.
Transparency: Tax legislation should be based on
                                                          Broad Bases and Low Rates: As a corollary to
sound legislative procedures and careful analysis. A
                                                          the principle of neutrality, lawmakers should avoid
good tax system requires informed taxpayers who
                                                          enacting targeted deductions, credits and exclusions.
understand how tax assessment, collection, and
                                                          If such tax preferences are few, substantial revenue
compliance works. There should be open hearings
                                                          can be raised with low tax rates. Broad-based taxes can
and revenue estimates should be fully explained and
                                                          also produce relatively stable tax revenues from year
replicable.
                                                          to year.
Neutrality: The fewer economic decisions that are
made for tax reasons, the better. The primary purpose

				
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