News Release: Law

Jan. 28,  2011

Tax Reform Begins With Closing Loopholes, Says Emory Tax Expert

The call by President Barack Obama and others to reduce corporate taxes gets provisional approval from federal tax expert Dorothy Brown of Emory University School of Law. But she says the best way to reduce the overall corporate burden is to make the tax system fairer for all companies.

“We need to look at how many corporations are not paying taxes at all,” says Brown. “The GAO (U.S. Government Accountability Office) did a study not long ago that proves any number of corporations, because of tax shelters and other ways to reduce their taxable income, aren’t paying taxes. Let’s close some of the loopholes. If we do that, perhaps we can reduce the tax rate for all corporations.”

When work doesn’t pay

In terms of individual taxes, Brown suggests taxing “all other types of income the way we did during the Reagan Tax Reform Act of 1986.” As it is, “most Americans find themselves in a situation when work doesn’t pay,” says Brown.

“If you work for a living and get a W-2, your income is taxed at up to 35 percent,” she says. “But when your stockbroker works for you, when you get capital gains from selling stock or you get a dividend, you pay taxes at only 15 percent. Why is it fairer to pay taxes at 15 percent on income that you really didn’t earn versus 35 percent on income you did earn? It really makes work not pay.”

The current investment income tax rate is especially unfair, says Brown, because most Americans will never see the benefits of a lower tax rate on their investments. While almost half of Americans own stock, two-thirds of those holdings are in retirement accounts. “And guess what?” she says. “Retirement account income is taxed at 35 percent, not 15 percent.”

Brown says the so-called flat tax is a viable idea for reform, but she doesn’t embrace the version that has been proposed in the past, in which wages are taxed at a flat rate, but other forms of income aren’t. Brown’s flat tax would include all forms of income. “To me, a flat tax is a fairer tax. I think the American public is poised to embrace this idea.”

Mortgage interest deduction

One idea Brown has explored is elimination of the mortgage interest tax deduction, a particularly unpopular idea at a time of unprecedented decline in the housing market. She says that repeal of the deduction would save $200 billion a year, and could be phased in over several years.

“If the mortgage interest deduction were repealed, housing prices would fall. Whether that would be 10 percent or 30 percent depends on which group you ask,” says Brown. “But to the extent housing prices were to fall, that would mean more people could become homeowners who can’t now because they’re priced out of the market.

“Everyone’s saying ‘the housing market is low,’ and yes it is,” says Brown. “Except it’s not that low for people making $30,000 to $40,000 a year. The mortgage deduction would lower housing [prices]; that’s not a lose-lose. It’s a loss for those who have taken the deduction in the past, who are typically high-income individuals. The winners would be those who haven’t been able to take advantage of the deduction, those who have low to moderate income.”


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