Harry Reid Has a Glass-House Quandary on Taxes

Illustration by Neil Klugman Close

Illustration by Neil Klugman

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Open

Illustration by Neil Klugman

Would you want your tax returns made public? The good news is that federal law prohibits the U.S. Internal Revenue Service from releasing them. The bad news is that it is also generally illegal to make anyone else’s returns public, too.

Democrats, including Senate Majority Leader Harry Reid, continue to make much of the refusal of Mitt Romney, the Republican presidential nominee, to release more than two years’ worth of tax returns. It is all a red herring. The key to bringing fairness to our tax laws would be for all 535 members of Congress -- including Reid -- to release their returns.

One thing that congressional tax records can tell us is how many members of the House and Senate benefit from the tax breaks they enact. To take one example, if you own stock outside of your retirement account, then you are eligible for the preferential rate of 15 percent. But if your income is mostly from wages or from the amounts drawn from your retirement account, then your tax rate can be as high as 35 percent. While fewer than one in five Americans have incomes eligible for the 15 percent rate, almost nine in 10 senators do.

This information isn’t easy to obtain. I had to go through every senator’s financial-aid disclosure form found on OpenSecrets.org and check for stock ownership that wasn’t in retirement accounts. It was a painstaking process, which may understate things because assets owned by members of Congress that are held in blind trusts aren’t required to be included in their financial-disclosure forms.

Lower Rate

You shouldn’t have to trust my survey. The tax returns should be made public so we can all see how often the legislators actually benefit from the 15 percent rate.

The reason so few Americans can benefit from this lower rate is because most of them don’t own stock, or don’t own it in the right way. About half of all Americans don’t own any stock. Of the half who do, more than two-thirds own it in their retirement accounts, which are ineligible for the 15 percent rate. One reform idea, which was included in the Simpson-Bowles commission report in late 2010, is to tax wage and stock income at the same level, which would mean lowering the 35 percent rate while raising the 15 percent rate.

That change would have a negative impact on senators’ wallets, but it would be positive for middle-class Americans. Does tax-return privacy keep us from getting meaningful reform?

The argument for the low 15 percent rate is that it spurs investment, encourages savings, creates jobs and promotes economic growth. How has that been working for us lately? In reality, U.S. laws encourage only certain types of savings. If I buy stock, I am eligible for the 15 percent rate, but if I put my money in a savings account, I am not. According to estimates in a Joint Committee on Taxation report, $90 billion of revenue will be lost for 2013 because of the 15 percent rate that less than 20 percent of Americans will benefit from.

Some will argue that even if there should be one rate for wages and capital gains, now is not the time to make that change. According to the Center on Budget and Policy Priorities, when tax rates on high incomes were cut in 1981, the economy grew at about the same pace as it did in 1990 and 1993, when tax rates on high incomes were raised (adjusted for inflation and population growth). What is more telling, however, is that government revenue grew about twice as fast when tax rates were higher in the 1990s than in the 1980s when they were lower.

Legislators’ Inaction

No member of Congress -- Democrat or Republican -- has ever introduced the Simpson-Bowles proposal that I described. The Democratic platform says the party wants a tax code that is fairer and simpler. Yet when the Democrats controlled both houses of Congress and the White House, tax reform was not forthcoming.

Democrats and Republicans in Congress do nothing to make our laws fairer for the average taxpayer. If the lawmakers were required to release their returns, would they be more likely to take action? The next step is up to you. The American public must demand not only Romney’s tax records, but the returns of each senator and representative. When members of Congress understand that in order to keep their jobs they must put the financial interests of their constituents above their own, we will get the type of tax system that we deserve.

(Dorothy A. Brown is a professor of tax law at Emory University in Atlanta. The opinions expressed are her own.)

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Today’s highlights: the editors on the mad expansion of occupational licensing, on India’s bold reforms and on Istanbul’s potential to be a financial hub; Albert R. Hunt on Mitt Romney’s tax plan; Simon Johnson on Deutsche Bank and the German taxpayer; Virginia Postrel on middle-class job security.

To contact the writer of this article: Dorothy A. Brown at dabrow7@emory.edu

To contact the editor responsible for this article: Katy Roberts at kroberts29@bloomberg.net

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