Now that President Trump has apparently given up on Health Care Reform – I mean, it was a heck of an effort though, amirite? – he has turned his attention to tax reform. I expect that his efforts will be just as successful as his first foray into policy-making. So much winning!
Like most Republicans for the last 40 years, his tax plan is going to amount mostly to cutting taxes, which I am not going to take specific issue with. Also like most Republicans, he seems to conflate that with government downsizing and enjoy it a whole lot more than the part where you have to cut spending on defense and entitlements (you know, the actual downsizing of government).
Today, though, I’m not going to take on the President’s specific proposal, or even any alternatives offered by anyone else in Washington. Our tax code, you see, has deteriorated past the point of “reforming.” It’s a mess and it is far beyond saving by simply making a couple of changes to marginal rates and deduction limits. It is an overly long (but not as long as you’ve heard), overly complicated hodgepodge of special interests with incredibly high costs of compliance and enough opaqueness to obscure rational debate about the funding of government.
Start with the basic question that drives much of our political debate: who is or isn’t paying their fair share? There are three major problems with this question. First, as I noted in my rant against the elderly last week, it is hard to argue that anyone is paying their fair share in a world of perpetual deficits. Second, the very idea of “fair” is quite obviously subjective. And finally, the tax code is so complicated that it is hard to determine who actually pays what. We can’t even have a discussion on what is or isn’t fair because we can’t really even tell how much different taxpayers are paying.
Democrats like to claim that the rich don’t pay their fair share. They base this largely on the idea that our marginal rate structure, as outlined in the tax code, is “fair”, and that the wealthy are therefore cheating the tax code because they get all of the deductions. They’re not wrong about one thing: the wealthy do get almost all of the deductions. But the wealthy get all of the deductions precisely because marginal rates are so high. If I am in the 39% Federal Income Tax bracket, then the interest that I deduct for paying my mortgage is going to decrease my income tax bill by nearly forty cents for every dollar I pay. If I were in the 10% bracket, then not only would I likely have less interest to deduct, but I am only getting a $.10 benefit for every dollar of interest paid. You can’t give a tax deduction to someone who isn’t otherwise in line to pay that tax.
Republicans like to point out, accurately, that the rich pay more than their fair share, and in fact pay virtually all of the income taxes. At last count, the top 20% of earners (about 10% Americans) pay 84% of the income taxes. Five of every six dollars in Federal Income tax is paid by only 10% of the population!!! This, however, only tells a small portion of the story, as something like half of all workers pay more in payroll taxes (Social Security and Medicare) than they do in Federal Income Taxes. Since those taxes have income caps, they cost low-income workers a higher portion of their overall income than they do high-income workers. Except, of course, for the supplemental Medicare taxes that are a part of Obamacare (and on and on it goes…)
Then there is the difference between those who are rich because they own a lot of stuff and those who are rich because they earn a lot of money. The former pay a substantially lower portion of their income in taxes than do the latter, despite the latter being the most productive members of society. Let’s also remember this brilliant piece of analysis by a witty, charming and devastatingly gorgeous writer who tackled the cost-of-living bias in our tax code.
What I am going to do, however, is propose “The AFB 2017 Comprehensive Personal Tax Code,” a new, simpler and substantially more “fair” personal income tax code (the corporate code is a bigger subject for another day). It will decrease compliance costs, close “loopholes” and dramatically reduce the incentive to seek out exotic tax shelters to avoid high marginal rates.
Important to keep in mind: I am tackling here only the subject of how government raises money, not how much it raises or how it spends that money. Since the Federal Government can run seemingly unlimited deficits, those are two wholly separate conversations. I’d rather we spend a lot less than we do, but I’m not addressing that here. I’m starting with the idea that the overall tax burden doesn’t change…it just gets recalculated. (I’m also sticking with the concept of an income tax, although I am not wholly opposed to a national sales tax in lieu of an income tax.)
Here, then, are 4 steps to a better tax code.
There is, of course, an obvious problem with all of this: every line of that however-many-pages tax code has a constituency, and repealing any of it leads to predictable outrage. There are big constituents, like charities and 401K providers, and there are small constituencies, like solar panel installers, but every single piece of that ridiculous code is written in to please someone. I get that, and I am not trying to pretend that the politics of this are at all feasible.
But c’mon, people…can’t we objectively look at this absurd tax code and recognize that we have a problem? And, more importantly, that our favorite deduction is a part of the problem? Would you feel better about losing your favorite deduction (for me it’s 401K contributions, Mortgage Interest and Charitable Giving) if you knew everyone else was, too?
Ultimately, the real problem with doing major tax reform is in telling voters that the government will no longer encourage the behaviors that those voters want encouraged. But I say we should do it. I’m willing to give up mine if you’re willing to give up yours!
Just a gaggle of people from all over who have similar interests and loud opinions mixed with a dose of humor. We met on Twitter.