More Argument on the Tax Question

The problem, as always, is Congress. The tax code is hopelessly rococo because members of Congress pass out favors to their clientele in the form of tax preferences. It would be a blow for economic efficiency and fair dealing to repeal the preferences.

1. Define income as broadly as possible. Begin with the Bureau of Economic Analysis definition and make some peripheral amendments.

2. Define capital gains as real capital gains and record a credit balance for real capital losses which can be amortized each year by one’s new income tax liability.

3. Assess a flat common rate on capital gains and income.

4. Compute summary income tax liability as the common rate on income less a general credit for oneself and each dependent. The value of the general credit can be recalculated each year according to the change in nominal personal income per capita. The impecunious will have a negative liability and receive a net rebate. The rebate can be capped at a particular share of earned income; the cap can be relaxed for the elderly and the legally disabled.

5. Dismantle welfare programs which subsidize mundane expenditures sensitive to considerations of amenity – food coupons, housing vouchers, utility subsides, &c. Straightforward income redistribution through a negative income tax will suffice.

From Greg:

Has there been any discussion of taxing the states instead of taxing citizens? It seems to me this would be a politically palatable solution because it takes the burden off the federal government. Since nobody will ever agree on what is the best federal tax system, perhaps the best tax system would be one where the states raise the money however they want to and then pass it along to the federal government.
http://wh.gov/lq62U

I like that proposal, but think what the politics of it would be in California?  Or in New Hampshire or Delaware, or the other low tax states? Actually, that might be fun to watch.

From Mattb, under Pete’s original post, I also liked this, less about taxation than about the politics of taxation:

Honestly, I think it’s a reasonably simple argument to make.

All one has to do is
1. Point out the large disparity between the tax rate for the upper brackets and the effective tax percentage paid.
2. Proclaim that a rich person has access to more tax advisers and accountants to find all of those deductions, discounts, credits, etc.
3. Declare that if the rich actually paid a rate somewhere between the actual rate and the rate from their bracket, the rich will pay more and the middle class will (therefore) pay less.
4. As an added bonus, list the entire budget for the IRS and imply that it would be a tiny fraction of it’s current budget and that money would be returned to the general fund.

That should be an argument that can be made pretty reasonably even to low-information voters.

Of course, a few straight-forward deductions/credits, such as the child tax credit could remain, particularly because by it’s very nature it’s going to benefit the rich less (ie: the number of children in a family do not go up in proportion to the amount of income)

Still though, properly presented, it’s a very populist viewpoint. I do wonder if perhaps the trouble is that the GOP does not actually WANT to put in place a clear and properly graduated tax system, but simply likes the idea of talking about it.

And Brian:

Seriously, though, there surely are better methods of redistributive policy than using the income tax explicitly, as we do with the EITC, etc.

I’d also like to see a serious, mature analysis of:
1) How much actual total tax (income, payroll, sales–this is important, etc.) various representative families actually pay right now (step through the range of incomes, kids, etc.) if you add it all up. The system is so opaque that I don’t think anyone really knows what this looks like.
2) How that would change if income taxes were simplified/abolished/etc. If we abolished the income & payroll taxes, we’d all bring home way more money, and presumably could swallow the higher sales taxes that would be enacted to compensate. Could we exempt food, clothing, etc., that was under some price threshold and feasibly make up the difference? I just don’t know the answer at all, even to correct order of magnitude.

I know I have seen the kind of analysis Brian asks for, but maybe not in several years.  I can’t find anything helpful right now, just Googling, but the Laffer Center folks have this document on “The Economic Burden Caused by Tax Code Complexity ” which includes this,

The U.S. tax code is so complex that even experts disagree on the correct tax liability. The “correct answer” to questions about the liability of any specific taxpayer is becoming difficult to calculate. In 2002, the IRS help centers provided wrong answers to taxpayers 29 percent of the time. According to the 2010 TAS report, “Despite the fact that about 90 percent of taxpayers rely on preparers or tax soft ware packages, the IRS received 110 million calls in each of the last two fiscal years. That is a staggering number, and not surprisingly, the IRS was unable to answer more than 25 percent of them.

Do you wonder, as I do, how many Americans would be happy to see a proposal in Congress to scrap the current tax code in favor of a radical simplification as Pete and some of the rest of our readers would suggest?  A reset to default, with a few tweaks to reflect the modern economy?