In a recent Economic Policy Institute paper, Thomas Hungerford discussed public opinion on taxes and some proposals to reform the tax system.
While this specific series is called a Fact Sheet, there is an important fact that Hungerford leaves out that is crucial for any discussion of the individual tax code.
He cites a Gallup poll that found 61 percent of Americans think that upper-income people pay too little in taxes. He uses this poll to extrapolate that taxpayers do not want “distributionally neutral” tax reform; they actually want the rich to pay more. Unfortunately he missed this opportunity to point out the fact that high income taxpayers already pay a disproportionately large share of the tax burden despite public opinion. According to IRS data, taxpayers that make more than $200,000 only make up 4 percent of the taxpayers and make 28 percent of the national income, but pay more than 50 percent of all income taxes.
By Marja Novak LJUBLJANA (Reuters) - A vote of confidence in Slovenia's government that was expected to take place on Thursday is likely to be postponed due to a prolonged debate on an unpopular new real estate tax, a parliamentary spokeswoman said. An expected "Yes" vote, which would shore up political backing for Prime Minister Alenka Bratusek's disparate alliance, which is struggling to avert a bailout, is now seen happening on Friday or Saturday. "It is likely that the confidence vote will not take place today because parliamentarians continue to debate the real estate law, which has to be voted on before the confidence vote takes place," spokeswoman Gordana Vrabec said. The confidence vote is to be linked to one on amendments to the 2014 budget which include the new real estate tax.
The Missouri Times
Nixon: Legally married couples who file joint federal returns must also file ...
“Missouri is one of a number of states whose tax code is directly tied to that of the federal government and under Missouri law, legally married couples who file joint federal tax returns with the IRS must also file joint state returns with our state ...
Mo. will mirror Federal taxes for same-sex couplesWPSD Local 6
Missouri to allow joint tax returns for legally married same-sex couplesSTLtoday.com
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Tax preparers needed in Phelps, other counties
The Rolla Daily News
The Internal Revenue Service (IRS) and the American Association of Retired Persons (AARP) are looking for volunteers to provide free tax counseling and basic income tax return preparation next filing season in Phelps, Pulaski, Dent, Laclede, Miller ...
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By John Shiffman WASHINGTON (Reuters) - A Democratic Senator introduced legislation on Thursday to bring greater government transparency, oversight and due process whenever authorities use information gathered for intelligence purposes to make domestic non-terrorism cases against Americans. The bill calls for prosecutors to notify defendants in non-terrorism criminal trials if intelligence information was secretly used in any part of an investigation and to provide access to relevant information that is not classified. A Reuters story in August revealed that the Drug Enforcement Administration routinely passes intelligence tips it receives from the National Security Agency to federal agents in the field, including those from the FBI, the Internal Revenue Service and Homeland Security, to help them start non-terrorism drug, money-laundering and tax cases. The Senate bill, introduced by Senator Tammy Baldwin of Wisconsin, is designed in part to prevent domestic law enforcement agents and police from using this process, known as "parallel construction," in which authorities claim, for example, to have pulled a suspect over for a broken taillight, when it fact the initial tip came from the NSA.
IRS Collection Activity and Levies Can Be Avoided
If you owe federal taxes and haven't paid, a federal tax lien arises for the amount owed. This gives the IRS a legal claim to your property. A Notice of Federal Tax Lien may be filed at your local courthouse and is available as public record. A ...
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Interestingly, the amount of federal spending that families at various income levels receive is not all that different. What does differ considerably is the amount of federal taxes they pay.
Not surprisingly, low-income working families pay very little in federal taxes of all kinds, but they receive considerably more in federal spending benefits. Families earning under roughly $17,000 pay less than $3,000 in total federal taxes, but receive more than $24,000 in federal spending benefits of all kinds. However, it is surprising that middle-income families—those earning between roughly $37,000 and $67,500—also receive more in federal spending benefits than they pay in federal taxes of all kinds. Indeed, middle-income families receive an average of $7,376 more in federal spending than they pay in federal taxes. By contrast, families in the top 20 percent of earners pay $65,573 more in taxes than they receive in all federal spending.
These findings come from our new report, The Distribution of Tax and Spending Policies in the United States. Read more here and here.
For more charts like the one above, see the second edition of our chart book, Putting a Face on America's Tax Returns.
IRS Releases Tax Calendar For 2014
The Internal Revenue Service has released the tax calendar for 2014. The tax calendar gives specific due dates for filing tax forms, paying taxes, and key federal holidays that affect individuals and businesses. The tax calendar is not a comprehensive ...
IRS Collection Activity and Levies Can Be AvoidedHuffington Post
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The Nebraska Department of Revenue recently released a study suggesting that, in 2010, a $100 million income tax reduction would have created 1,788 new jobs, while a $100 million sales tax reduction would have created 2,615 new jobs. This finding comes on the eve of talks of tax reform in the state, a subject that we have weighed in on with our own comprehensive study of the state’s tax code.
But given that the economic literature overwhelmingly shows the positive effects of income tax cuts and shows that consumption taxes are less economically damaging than income taxes, these results are a little peculiar—they seem to show that sales tax cuts are better. Digging into the meat of the Nebraska report, here are some explanations I found for why their simulation gives different results than most economic literature would lead us to expect:
1. The report identifies investment as fully determined by the real rate of return on investment for investors outside of Nebraska. So income tax changes that alter Nebraskan savings have no effect on investment, and very limited effect on investment by non-Nebraskans. This assumption makes sense for making a mathematical model of one state, but doesn’t strictly hold for the real economy: if every state decided its state-level savings rate didn’t matter for investment, and so taxed income more, investment overall would fall sharply.
2. The report, as best I can tell, views income taxes are being fully borne by households. It doesn’t address that income taxes have large effects on after-tax business earnings for pass-throughs, which constitute a huge share of Nebraska businesses. Thus they miss a second conduit, aside from Nebraskan savings, through which income taxes affect investment, and thus growth. Again, this is a pretty fair assumption for modeling, because figuring out how to model pass-throughs would be very complex, and Nebraska’s DoR is using a standardized model they use for many studies. But while it’s a fair assumption for making a computer model, it ignores key features of Nebraska’s real economy.
3. The report assumes that net migration won’t be meaningfully affected by taxes. This probably isn’t a huge effect, but it does still matter.
As a rule of thumb, these types of econometrics models are extremely useful for saying if a policy will help or hurt, broadly speaking. They’re also good tools for saying which specific industries will be helped or hurt, or what the distributional consequences of a tax change will be. But using these models to make projections about future effects of policies, and putting much faith in the precise numbers, would be a mistake. Small changes in a simulation’s assumptions can lead to big changes in those final numbers: and when the amounts we’re talking about are only about 1,000 jobs (a small fraction of Nebraska’s workforce), we have to be extra careful in claiming too much about the different policies.
The crucial takeaway from this report is that a $100 million cut in 2010 would have increased investment and disposable income by much more than $100 million. Disposable income would have risen by either $181 million or $122 million, and investment by $123 million or $65 million. Those are huge effects: for every dollar cut in taxes, Nebraskans could have had between $1.23 and $1.81 in extra income. We’re certainly hopeful that, next year, Nebraskans will get to enjoy the benefits of such a pro-growth tax reform.
More on Nebraska.
NOTE: The model being used is what is called a “Computerized General Equilibrium,” or CGE, model. These models take extremely detailed data from a base year (in this case 2010) and run it through a mathematical model of the economy. They then adjust that model for, in this case, if taxes had been different. So a CGE model, put precisely, never predicts what will happen if a policy is implemented: it claims to show what would have happened if a policy had been implemented in the past. CGEs are not projections, they are simulations. All the same, CGEs are commonly misused to make claims about future effects of not-yet-implemented policies.
A recent report by the GAO comments on the tax expenditures on the table with Congress’s recent focus on tax reform. The report identifies corporate tax deferral on foreign earnings as one of these expenditures, and suggests it distorts investment decisions, and also provides multinationals a special benefit over U.S. corporations who only operate domestically or export without foreign subsidiaries. However, the report mischaracterizes why these problems exist with deferral.
The U.S. taxes corporations on a worldwide basis, which means the 35 percent federal corporate tax rate applies to foreign earned income as well as domestic. When foreign subsidiaries of US corporations make profits abroad, they first pay income taxes in the country they were earned in. Any profits that are not reinvested in the subsidiary are then taxed at the 35 percent rate when they are repatriated to the U.S. To eliminate double-taxation, a tax credit is provided for the foreign taxes paid to ensure the overall rate does not exceed 35 percent. Deferral is the option taken to pay taxes when the profits are repatriated to the US, rather that immediately when they are earned.
Deferral is necessary in our current system of corporate taxation. If corporations were not able to delay paying the U.S. tax on foreign earnings, they would be at a competitive disadvantage with foreign corporations that don’t have to pay domestic tax rates on their foreign earnings. However, as the GAO report claims, there is a perverse incentive with deferral to keep earnings abroad.
The GAO report characterizes this as a distortion caused by deferral, when more realistically it is a reflection of the US having the highest corporate tax rate in the OECD. Since under the U.S. tax system taxes are owed on the difference between the foreign income taxes paid and the US rate, there is only this distortion if the US rate is significantly higher. This bias against being able to invest foreign earned income in the US would also exist without deferral, since foreign subsidiaries would face a higher tax rate than their counterparts, and would not be able to compete.
The GAO’s report also portrays this obstacle to bringing foreign earned income to the US as an advantage multinationals receive over domestic corporations. To equalize the treatment of multinationals and domestic firms, it is far more effective to lower the rate than remove deferral. A corporate tax rate that is closer to the OECD average of 25 percent would make deferral obsolete and would also make all US corporations more competitive versus foreign based firms.
It is important to point out that the US also falls behind the OECD when it comes to how it taxes corporations internationally. It is one of the remaining few who tax on worldwide income, a large majority (28 out of 34) now use a territorial system, which taxes only income earned within the country’s borders. Most countries have moved beyond the need to have any sort of deferral system (see the attached chart).
There is also a wider point here about tax reform. Ending deferral in an attempt to raise revenue would make foreign subsidiaries of US corporations unable to reinvest at the same rate as their competitors and remain viable. The economic damage caused could easily outweigh the benefits of the lower rates this move could finance, which is also the case with other ‘expenditures’ that are designed limit the tax bias against savings and investment.
Americans for Tax Fairness recently released results from a poll they conducted. The most unfortunate element of the survey is the notion that there is a difference between raising taxes on the middle class and raising taxes on corporations.
When respondents were asked if large corporations should pay more in taxes, less in taxes, or if they pay the right amount currently, 64 percent said corporations should pay more, 10 percent said less, and 19 percent said they currently pay the right amount.
When the same questions was asked regarding the middle class, 6 percent said they should pay more, 46 percent said they should pay less, and 45 percent said they are paying the right amount.
Unfortunately, the two aren’t independent, because only people pay taxes. You can’t raise taxes on corporations without indirectly raising taxes on individuals, many of whom would be classified as middle class.
The research shows that a corporate tax increase burdens both shareholders and labor. A Tax Foundation study finds that the corporate tax falls predominately on labor. Even a recent report by the JCT found that 25 percent of the corporate tax falls to labor with 75 percent going shareholders.
But no matter the share between labor and shareholders, the corporate tax still has the ability to hit the same people. Most Americans have stocks and this includes over 51 million Americans who are active 401(k) participants.
At some point, a tax increase on large corporation ends up as a tax increase on individuals, either through less economic growth, lower wages, fewer jobs or decreased returns in their retirement accounts.
Note: Many of the questions from the survey were about who should pay what in taxes, but to effectively answer most of the questions you first have to know who pays what currently. We help answer that questions with our new chart book, Putting a Face on America’s Tax Return.
About half of all nonpayers receive refundable tax credits even though they have no income tax liability. This means that, in addition to recouping every dollar withheld from their paycheck during the year, they also receive a subsidy check from the IRS. The Congressional Budget Office now estimates that, because of the large amount of refundable tax credits, the bottom 40 percent of households now have negative effective tax rates. Remarkably, the effective tax rate for middle-income households is nearing zero because of the recent expansion of tax credits. The net effect of these trends is that virtually the entire income tax burden is now being borne by the two highest groups of taxpayers.
For more charts like the one below, see the second edition of our chart book, Putting a Face on America's Tax Returns.
The Internal Revenue Service has obtained court orders to force five U.S. banks to divulge information about U.S. account holders who allegedly hid money with banks based in Switzerland and Bermuda to evade taxes, federal prosecutors said on Tuesday. In two "John Doe" summonses authorized by U.S. district court judges in Manhattan, the five banks must turn over information on taxpayers suspected of hiding money with two foreign banks, Switzerland's Zurcher Kantonalbank (ZKB) and Bermuda's the Bank of N.T. Butterfield & Son Ltd. The IRS uses "John Doe" summonses to get information about possible tax law-breakers whose identities are unknown. They held correspondent accounts for the two foreign banks that were used to do transactions in U.S. markets, the statement said. "These John Doe summonses for correspondent account records show our determination to pursue evaders using offshore accounts even if the person hiding money overseas chooses a bank that has no offices on U.S. soil," said Daniel Werfel, the acting Internal Revenue Service commissioner, in a statement.
By Nia Williams EDMONTON (Reuters) - Canada is in better fiscal health than previously thought, the Conservative government said on Tuesday, predicting it would run a sizeable budget surplus in time for the 2015 federal election, the result of spending restraint and asset sales. The positive turn is good news for Prime Minister Stephen Harper, who promised in the 2011 election campaign to introduce personal income tax cuts estimated to cost C$2.5 billion a year once the budget is balanced. "Our plan was always to get to a balanced budget in 2015/16 to create room so that other initiatives can be undertaken, whatever they are," Finance Minister Jim Flaherty told reporters after delivering the report. Canada's federal budget deficits have paled in comparison with those of the United States, even adjusting for the fact that the U.S. economy is nine times as big.
Back in September we released a paper on American pass-through businesses. It outlines the fact that since 1980, the number of businesses taxed through the individual income tax code has tripled while the number of corporations has declined. As these businesses grew in number, the amount of net income they earned grew from $320 billion (2010 dollars) to more than $1.6 trillion in 2010. Their net income has surpassed that of corporate net income and now makes up 54 percent of all business income in the United States.
The IRS has recently released new data on a portion of pass-through businesses called “partnerships” for 2011. Partnerships, according to the IRS, are “relationships between two or more persons who join to carry on a trade or business, with each person contributing money, property, labor, or skill and each expecting to share in the profits and losses of the business.” As with all pass-through businesses, they are taxed through the individual tax code.
While this 2011 data doesn’t reveal much new information about pass-through businesses in general, there are some interesting things the data on partnerships reveals about the composition of pass through businesses.
From 1980 to 2010, the number partnerships grow steadily from 1.3 million to 3.2 million (Figure 1). S-corporations also grew at a slightly faster rate from 545,000 to 4.1 million. However, most of the growth came from sole proprietorships which grew from 8.9 million to over 23 million. Today, of the 30 million pass through businesses that filed a tax return in 2010, 11 percent, were partnerships. 13 percent of pass through businesses were S-corporations and the remaining 76 percent were sole proprietorships according to IRS data.
The most recent data on partnerships indicates the number of partnerships is still increasing at a slow pace. From 2010 to 2011, the number of partnerships increased from 3.24 million to 3.28 million.
Although partnerships are only 11 percent of pass-through returns today, they actually make up more than 50 percent of all pass through net income in 2010 and were responsible for the most of the growth in pass through income in the past thirty years. From 1980 to 2010, net business income of partnerships grew from $119 billion (2010 dollars) to $904 billion. Today, 55 percent of all pass through income is from partnerships. S corporations account for 25 percent of pass through net business income. Sole Proprietorships, even with their 76 percent share of returns only make up 20 percent of net business income. (Figure 2.)
The chart also indicates that the partnership net business income is slowing down according to 2011 IRS data. Adjusted to 2010 dollars, net business income of partnerships has actually declined slightly from $904 billion in 2010 to $885 billion in 2011.
The new data also shows how partnership returns and net income breaks down by industry. As the table indicates, the vast majority (48.6 percent) of partnerships are in the real estate and rental and leasing industry. The next largest share is in the finance and insurance industry with a 9.2 percent share. The smallest shares are management of companies (0.9 percent), educational services (0.4 percent), and utilities (0.1 percent).
The distribution of net income is slightly different. While finance and insurance has the second largest share of returns, it makes the largest share of net income (35.4 percent). Real estate and rental and leasing make 15.9 percent of partnership net income, and professional, scientific, and technical services earn 10.1 percent. Utilities (0.7 percent), other services (0.2 percent), and educational services (0.1 percent) make the smallest share. It is also interesting to point out mining and manufacturing. Although these industries make up a small share of the returns (1.1 percent and 2.0 percent), they make up a large share of net income (8.1 percent and 7.7 percent).
Share of Partnership Returns and Net Income by Industry, 2011
Share of Returns
Share of Net Income
Agriculture, forestry, fishing, and hunting
Transportation and warehousing
Finance and insurance
Real estate and rental and leasing
Professional, scientific, and technical services
Management of companies
Administrative and support and waste
Health care and social assistance
Arts, entertainment, and recreation
Accommodation and food services
The percentage of nonpayers (taxpayers who owe zero income taxes after taking their credits and deductions) 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. But the number of nonpayers has soared in recent years because of the expansion and creation of credits such as the Earned Income Tax Credit, the Child Credit, and various energy and education credits.
In 2011, roughly 54 million federal income tax filers had no income tax liability after deductions and credits. This amounts to 37 percent of the roughly 145 million tax returns filed that year. While high, this is not as high as 2009 when 58 million income tax filers, nearly 42 percent, were nonpayers. By contrast, the low point for nonpayers was 1969, when only 16 percent of filers had no income tax liability.
For more charts like the one below, see the second edition of our chart book, Putting a Face on America's Tax Returns.
Today’s map shows Standard & Poor’s (S&P) credit ratings for each of the 50 states. States are rated from AAA (the best and most creditworthy) to D (default on financial obligations). While no state is ranked worse than A-, there is still variation among them. California formerly held the title as the worst-rated state in our last version of this. Illinois now holds that title.
Here’s the breakdown of state rankings:13 states are ranked AAA, indicating that these states have “extremely strong capacity to meet financial commitments"; 15 states have a AA+ ranking; 16 states are ranked AA; 4 states have a AA- rating; One state (California) is ranked A; and Only one state is ranked A-, the lowest rank among states (Illinois).
Check out the map below to see how your state compares.
Six states had recent ratings actions. All but two (Vermont and New York) were negative. The changes in Vermont and New York weren’t enough move up a full rating level, but S&P changed their outlooks from “stable” to “positive,” which is a good sign for these states. The remaining five states either had a decrease in their outlook designation (Kentucky, California, and New Jersey) or a downright rating downgrade (Illinois). Illinois’ rating was downgraded twice—first in August of 2012 (from A+ to A) and again in January 2013 (from A to A-).
According to S&P, there are a few reasons why credit ratings can change:
The reasons for ratings adjustments vary, and may be broadly related to overall shifts in the economy or business environment or more narrowly focused on circumstances affecting a specific industry, entity, or individual debt issue.
In some cases, changes in the business climate can affect the credit risk of a wide array of issuers and securities. For instance, new competition or technology, beyond what might have been expected and factored into the ratings, may hurt a company's expected earnings performance, which could lead to one or more rating downgrades over time. Growing or shrinking debt burdens, hefty capital spending requirements, and regulatory changes may also trigger ratings changes.
While some risk factors tend to affect all issuers—an example would be growing inflation that affects interest rate levels and the cost of capital—other risk factors may pertain only to a narrow group of issuers and debt issues. For instance, the creditworthiness of a state or municipality may be impacted by population shifts or lower incomes of taxpayers, which reduce tax receipts and ability to repay debt.
Illinois’ most recent downgrade is directly related to their underfunded pension system. S&P issued the following statement in January:
"The downgrade reflects what we view as the state's weakened pension funded ratios and lack of action on reform measures intended to improve funding levels and diminish cost pressures associated with annual contributions," said Standard & Poor's credit analyst Robin Prunty. …The aggregate pension funded ratios on an actuarial basis declined to 40.4% at fiscal year-end 2012, compared with 43.4% in fiscal 2011. Based on the state's current projections, the funded ratio will decline further to 39% in fiscal 2013. The continued decline in pension funded ratios is due in part to contributions below the annual required contribution, investment returns below assumptions, and lower investment return assumptions. While legislative action on pension reform could occur during the current legislative session and various bills have been filed, we believe that legislative consensus on reform will be difficult to achieve given the poor track record in the past two years.
Moody’s Investors Services, another credit ratings agency, also downgraded Illinois this year.
For a full explanation of the possible credit ratings, see S&P’s FAQ page.
Jason Fichtner and Veronique de Rugy in a recent Mercatus Center publication argue that absent any fiscal reforms at the federal level, the United States would need unprecedented economic growth to close the deficit.
“This week’s charts use data from the Congressional Budget Office to highlight the US fiscal position over the next ten years. These charts display projected outlays and revenues under the CBO baseline scenario and alternative baseline scenario, along with the revenues needed to eliminate the fiscal gap over the next decade and the average GDP growth rates needed to generate each revenue line.
“The first chart displays outlays and revenues under the CBO baseline scenario. The CBO’s projected outlays are plotted along with expected revenues, which are calculated as the historical average of 18 percent of projected GDP. Keeping in mind that GDP projections are typically optimistic, the chart shows that the United States will maintain a considerable fiscal gap over the next ten years, even with a projected nominal average growth rate of 4.76 percent.
To close the fiscal gap solely through increased revenues from increased economic growth by 2023, the US economy will have to grow by 6.94 percent per year. This is considerably higher than the simple average growth rate of 3.9 percent a year from 2002 to 2012 that the US economy actually achieved, reaching a maximum of 6.7 percent in 2005 and plunging to a minimum of negative 2.1 percent during the depths of the recession in 2009.”
Based on their calculations, it is not reasonable to assume that the United States will be able to grow out of its current fiscal problem if policy remains the same.
The United States’ is in need of both entitlement reform and tax reform. And if we structure tax reform to grow the economy and thus tax revenues, entitlement reform could be easier.
United States governments at all levels redistributed more than $2 trillion in wealth from the top 40 percent to the bottom 60 percent in 2012.
Gerald Prante and Scott Hodge present all the findings in our new study on redistribution in the United States in 2012.
On average, the top 20 percent earners lost $87,076 per person due to redistribution while the bottom 20 percent earners gained $27,071. Most of this is due to policy at the federal level, but in whole it results in a large amount of spending on behalf of the taxpayers.
In the United States, the average amount of government spending by quintile is relatively equal at around $30,000, but the tax burden is significantly progressive, with taxpayers in the top quintile paying an average of $122,217.
For every dollar in taxes, the bottom 60 percent receive more in government spending than they pay in taxes. The bottom quintile receives $5.28 in government spending for every tax dollar, the top quintile receives $0.29, and the top 1 percent receives $ 0.06. Looking strictly at federal policy, the bottom quintile receives $8.13 for every dollar in taxes. The top quintile receives $ 0.25 and the top 1 percent, again, receives $ 0.06.
Tax and redistribution policy in the United States significantly alters the distribution of income. Before redistribution, the bottom quintile makes 3.1 percent of the nation’s income. After redistribution that share rises to 11.8. On the other end, those in the top 1 percent earn 18.2 percent of the nation’s income before redistribution and 10.8 percent after.
In all, tax and spending policies in the United States redistribute $2.018 trillion from the top 40 percent to the bottom 60 percent, with an amount that has increased since 2000 going to the second and middle quintiles.
This is a lot of money. The $2 trillion in redistribution is the equivalent of about one-eighth of the economy. The average income for the top quintile drops over $87,000. That is a number larger than the average market income to begin with.
Perhaps more troubling than the shear dollar amount of redistribution is the fact that those in the bottom quintile have an average income after redistribution of over $36,000, yet if you asked them, they wouldn’t believe it.
This is because the current redistribution policy in the U.S. is more focused on taking money from the wealthy than giving money to those in need. Instead of promoting progressivity through the tax code as we currently do, we should move redistribution to the spending ledger.
As redistribution policy currently exists, government spending is fairly equal across the income groups, but the income tax system is highly progressive and also has more than $480 billion worth of social welfare spending through the tax code. This damages economic growth and investment, which leads to lower wages and fewer jobs.
Instead, redistributing wealth through government spending instead of tax policy would provide an opportunity to reform the tax code in a way that promotes economic growth, while maintaining society’s desired level of progressivity, and doing so in a way that actual helps those in need.