I’m no economist and I’m struggling right now to improve my knowledge of how the economy works. The following tax reform suggestions, however, are making a lot of sense to me:
Right-of-center, tax reform is inescapable. All households other than the truly poor will be required to pay more in federal taxes. The key issue is that of incentives and excess burdens. A flat tax devoid of all exemptions save for the very poor, is the best solution. No personal exemptions, no child allowances, no mortgage relief, no charitable donations relief, no tax-subsidies to business enterprise of any kind. Almost every tub would be expected to stand on its own bottom.
The same flat tax would apply to all dividends and capital gains. Only households would be taxed, at the point of receipt. The corporation tax and the payroll tax would be eliminated (as would the entirely fictitious Social Security Trust Fund). The flat tax rate would have to be slightly above 20 percent across all income for all non-poor households to reach the tax revenue target. The flat tax ensures that all households – other than the poor – pay exactly the same proportion of their income to the federal government. Of course, the rich pay far more in absolute taxes than do their less rich compatriots.
I especially dig the part that I bold-typed. I don’t really know how the payroll tax works, so I can’t have an opinion about that part of the suggestion, but the rest of it seems eminently reasonable to me. My father, who is a small business owner, has been dreaming of just this kind of a tax system for decades. He says that this would do wonders for his capacity to manage his tiny company. When he comes back from Cuba (he’s on vacation there right now), I’m sure he will be happy to find out that this system is not a figment of his imagination.
Now some questions:
1) What do you, folks, think about this proposal?
2) The quote is from a blog by a Conservative economist who states from the outset that this is a right-of-center tax reform. But the tax reform seems very fair to me. Is this a generally accepted approach to taxes among Conservatives?
3) Can anybody suggest a website or a blog where I can see a Liberal alternative to this tax reform proposal? Or can anybody briefly tell me how it would differ? If I could at least figure out if I’m closer to the Conservative or the Liberal camp on this subject, that would already help me a lot in getting my bearings.
Yes, my questions might sound silly but I have already confessed my lack of knowledge in this area. I’m just trying to understand how things work.
Clarissa's Blog 
The “payroll tax” is really an insurance premium. This is why the “payroll tax cut” is so outrageous. It should probably cover all earned income, not just the first $106K or whatever it is this year, but it is vitally important. Describing the Social Security Trust Fund as “fictitious” is ridiculous. It is no more fictitious than a savings bond, for example, or the defense budget.
The Amish are permitted to opt out of the Social Security system precisely because it is an insurance program. Their faith prohibits insurance because it indicates a lack of faith that God will provide for them. It dies not prohibit the paying of taxes; they do pay their taxes. The fact that they are excused from it is proof positive that it is not a tax, but an insurance program, as far as I can tell.
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The trust fund is fictitious in the sense that the money the accounting department of a corporation owes to the IT department of the same corporation is “fictitious”. It doesn’t actually consist of meaningful liabilities, just like a check I write to myself drawn on the bank of me. To the extent that there are genuine liabilities, they attach to the government, not simply to one of it’s funds.
Further, one could just as easily claim that Flemming v. Nestor establishes that no one is entitled to Social Security benefits precisely because it is not an insurance program. The Amish do not have to pay this particular tax because forcing them to do so was so abhorrent to so many people that Congress could no longer bear to do it, not because the preponderance of the evidence indicated that it was in fact an insurance scheme, although that surely motivated at least some of the abhorence. In fact, these dirty details of policy have almost nothing to do with whether Social Security is “really” an insurance system or not.
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From what I understand, people say that Social Security is not a real system any more because the money that was in it has been taken out by the government to cover other expenses and now there is simply nothing there.
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Clarissa:
I support the eliminations of the various deductions highlighted, combined with a reduction of the tax-rate table, since only such a broad approach has internal logic. The statement that the Social Security trustfund is imaginary is, however, a bold faced lie, and the elimination of the payroll tax is a covert attempt to privatize social security. That said, the plutocrats in congress will never pass a taxcode disadvantageous to the plutocrats.
I am a left socialist, for all it matters
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“I support the eliminations of the various deductions highlighted, combined with a reduction of the tax-rate table, since only such a broad approach has internal logic. ”
– That’s how I feel, too, albeit in a more vague way. 🙂
“The statement that the Social Security trustfund is imaginary is, however, a bold faced lie, and the elimination of the payroll tax is a covert attempt to privatize social security.”
– As I said, I’m still very unclear on how Social security and payroll taxes work.
Thank you for sharing your perspective!
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My taxes would probably go down a little under the proposed 20% flat tax, but poorer people would see theirs go up dramatically.
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I only paid 8% this year, so mine would definitely go up.
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I majored in economics in college about half a century ago but what I remember and remains relevant could be put into a shot glass with plenty of room left over for a refreshing tot of rum.
That said, the Internal Revenue Code (enacted by the Congress and signed into law by the President) is voluminous but is dwarfed by the Internal Revenue Service Regulations (adopted by IRS employees). Both have grown massively through accretion over many years.
Where do we start? Throw out the whole mess and start over from scratch? Try to fix the existing mess? I don’t know that one is much better than the other. Beneficiaries of the special interests noted in bold in your blog and many others will insist that those from which they benefit be enhanced or at least maintained. Our high minded CongressCritters will be well aware of their own needs, including campaign contributions.
I don’t think we will soon see either massive changes to the existing Code and Regulations or the junking of both in favor of a flat tax. On a visceral level, I would prefer the latter as do many sharing my conservative orientation. On a more thoughtful level, I would much prefer to see the proposed text of flat tax legislation before deciding. Too long? It would probably have many unintended (and therefore unanticipated) consequences. Too short? It would probably be so subject to interpretation that the courts would have to figure out its meaning.
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“That said, the Internal Revenue Code (enacted by the Congress and signed into law by the President) is voluminous but is dwarfed by the Internal Revenue Service Regulations (adopted by IRS employees). Both have grown massively through accretion over many years.”
– Oh yes. I have a very simple tax situation and still I go to an accountant because I can’t make head or tail of the paperwork on my own. But this entire mess feeds a lot of bureaucrats, so it serves some purpose. At least, the IRS people are not nearly as monstrous as the Canadian Ministry of Revenue folks. Those are vile animals. They destroy businesses on purpose and are not even apologetic about it.
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I retain my previous suggestion (that I made at a post last year) about adopting a negative income tax. Mine would have the advantage of being even simpler and also allowing complete welfare reform.
Such could be easily augmented with pigovian taxes to eliminate negative externalities and discourage destructive behaviours (eg a carbon tax to promote energy conservation and fight global warming).
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This sounds very profound but completely incomprehensible to me. 🙂
Imagine you are talking to a complete idiot. 🙂
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Here’s where I explained what a negative income tax is.
An externality is a benefit or cost that is not included in the price in a transaction. Using my example, the costs of air pollution and climate change are not included in the cost of (say) gasoline. A pigovian tax is a transaction tax intended to internalize (add to the price) a negative externality.
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Oh, now I remember! Thank you!!
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Just off the top of my head, what about disabilities? What about medical expenses? What about caregiver allowances? And what about the plight of authors, for example, who take three of four years to write a book, make a lot of money the first year it is out, and then almost nothing the next few years while they are writing their next book?
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Removing personal exemptions is highly regressive. Not even Steve Forbes advocated for that. Having said that, I would be all in favor of a system with a $15K personal exemption and a 35% flat tax above that. This gives a strong incentive for people to earn money until they are above the poverty level and removes loophole fishing which tend to benefit people proportionally to how rich they are (i.e. a highly regressive structure).
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“This gives a strong incentive for people to earn money until they are above the poverty level and removes loophole fishing which tend to benefit people proportionally to how rich they are (i.e. a highly regressive structure).”
– I agree completely! Loophole fishing is, indeed, a huge problem and it should go.
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I would be all in favor of a system with a $15K personal exemption and a 35% flat tax above that.
Interesting idea. Would you make the $15K personal exemption the same for those living in high cost areas such as New York City and for those living in low cost areas such as Swampville, Montana?
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Yes, I don’t see the need for the tax system to subsidize overbuilt places such as Manhattan.
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My exception is with the mortgage deduction……….if i didn’t have that i would probably have my home forclosed and go in to a rental. I am a senior……..my incentive to buy and stay is clearly with the tax benefit.
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I’m all for helping the senior citizens in any way we can because all we have is only there because of them. So I would leave the senior citizens alone in terms of the tax code change.
However, if we are talking about people other than senior citizens, I really don’t understand why I should be punished for doing the responsible thing and not getting into a huge debt and choosing to rent instead. I just don’t get that at all.
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As much as it sounds “fair” for everyone to pay the same proportion of their income, the tax bracket system is meant to account for the marginal utility people get out of their income.
To someone who earns 50,000/year, paying $10,000 in tax is much more of a hardship than for someone earning $200,000/year to pay $40,000 – because the person earning $200,000 per year still has plenty of money left over to pay for housing, food, etc. Neither one will starve because of it, but the person with more income feels less “pain” economically.
However, getting rid of lower taxes on dividends and capital gains makes sense to me, because the people benefitting the most from that by definition are already doing well. However, I’d probably still be in favor of a progressive tax on those items too.
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Correct, this is one of the reasons to keep a basic personal exemption in place.
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It makes sense, though, that people who make $200K should have a much higher standard of living than those who make $50K, right?
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Don’t worry, Clarissa, they still will.
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Prior to Reagan, all interest payments were tax deductible, so it was not a specific benefit to home mortgage holders.
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So this means that having a huge credit card debt helped one with taxes??
Sheesh. . .
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So this means that having a huge credit card debt helped one with taxes??
Yes, although of course there was no net saving. You still had to pay the interest, just with before-tax money. The underlying concept was that interest was a different kind of expense from other expenditures. My father always said that the government recognized that interest was money wasted, and that the people you paid it to would pay taxes on it, so it was not appropriate to tax it twice. I am not sure I believed it then, and I do not understand it now.
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I have two thoughts on issues raised in these excellent comments on my suggested tax reforms.
1. The negative income tax. This is an excellent way to deal with poverty. You will note that I exclude the poor (properly defined) from paying taxes. The current subsidy system – food stamps, rent subsidies, heat subsidies etc – come at high excess burdens. Instead of these, a negative income tax would kick in at a prescribed poverty income point. Any household earning less than that income would receive a subsidy say at 20 per cent of difference between the poverty income and the actual household income. Top-ups could be provided for the truly poor to provide an income floor.
2. The payroll tax. The payroll tax is a regressive tax because it stops at $106,000 per annum of earned income. It was designed to cover the cost of social security payments for each individual. Unfortunately, the monies that should be in the Social Security Trust Fund have been purloined by government and spent on regular government outgoings. All that remains in the Fund are IOUs from the Treasury (Treasury Bills). When those Bills mature new taxation or borrowing is required to pay them off. So I suggest that the charade should be stopped and social security and medicare payments rolled into the general tax system. That is why the 20 per cent flat tax would apply to all households except for the poor. At the present time, workers pay 15 per cent in payroll taxes up to the income ceiling. So even relatively low income households would pay only 5 per cent above that rate.
Flat taxes are not progressive in the usual sense. But the rich pay much more in absolute taxes than the less rich. And capital gains and dividends would be chargeable at the same rate.
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This is interesting. My question is, what about offshore assets? http://www.democracynow.org/2011/4/15/offshore_banking_and_tax_havens_have
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Under which system? What is the alternative proposal?
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Under all systems. Are you really worried about them?
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“Under all systems. Are you really worried about them?”
– I’m worried about living in a system where it becomes unprofitable to work harder and make more. As a person who consistently chooses to make less in exchange for having more free time, I still recognize that those people who work like maniacs all day and night long should have a better standard of living. No economy can survive without this.
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Again, until which system, that is a real possibility here and now, is this a concern? Seriously?
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“Again, until which system, that is a real possibility here and now, is this a concern? Seriously?”
– It’s going that way in Quebec, so yes, for me it’s a worry.
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“, I still recognize that those people who work like maniacs all day and night long should have a better standard of living. ”
So does that include the working poor who are working 2 or 3 jobs? Cuz it sure doesn’t work that way under the current system.
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“- It’s going that way in Quebec, so yes, for me it’s a worry.”
So, in Quebec, a person making 200K will pay more than 180K taxes? Somehow I have trouble believing this 🙂
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“So, in Quebec, a person making 200K will pay more than 180K taxes? Somehow I have trouble believing this ”
– No, of course not. I must be getting tired. What did I say to make it sound this way?
Sorry, very tired today.
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Instead of eliminating the corporate tax, I would eliminate the loopholes for corporations as well.
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The problem with the flat tax is that it is regressive.
There is much more to say about taxes for corporations. There is so much money kept offshore it’s unreal.
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That’s nonsensical. -1 is negative, +1 is positive, 0 is neither positive nor negative. A regressive tax is regressive, a progressive tax is progressive, a flat tax is neither regressive nor progressive.
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Conservatives are currently catapulting the “flat tax”=”fair tax” meme. While I admit the right (sometimes to its credit) has shown most of the interest in radical tax simplification,* equating this with flat tax is at best misleading, since the “bracket system” is a tiny tiny fraction of the total complexity of the of the Internal Revenue Code, which is more than 24 megabytes in length. If anything, it’s one of the simpler features. The laundry list “no personal exemptions, no child allowances, no mortgage relief, no charitable donations relief, no tax-subsidies to business enterprise of any kind” is appealing, and I think is the set-up for a transition of the tone of the message to “no social engineering.” Fine by me, as like you I’m tired of being engineered into a society of homeowners. Of course application of the principle also means no (income) tax incentives for energy conservation, but there may be better and simpler strategies for that, such as carbon tax. “No tax-subsidies to business enterprise of any kind” sounds like code for “no picking the winners,” but could also be a snarky play to milk electoral opportunities out of the Solyndra scandal. I propose “no rewarding the winners for being winners,” by which I mean no preferential treatment for non-wage forms of income. No doubt the conservatives have something up their sleeve regarding the mythical “marriage penalty.” How they plan to convince us that the alleged marriage penalty complicates the tax code and their strategy for reversal of this alleged penalty simplifies it, I’ll be interested in seeing.
* The best test of whether this is being accomplished is whether those lawyers and accountants specializing in tax practice start screaming bloody murder. Democrats have a soft spot when it comes to displacing classes of workers, even occupations whose job description consists largely of gaming the system. The Republicans have the momemtum on the tax policy issue, which is unfortunate.
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” I propose “no rewarding the winners for being winners,” by which I mean no preferential treatment for non-wage forms of income. ”
– I agree completely with this suggestion.
“No doubt the conservatives have something up their sleeve regarding the mythical “marriage penalty.”
– I might be mistaken but from what I understand the “marriage penalty” has to do with the desire to reward people married to housewives and punish couples where both partners make a good income. As we probably all guessed already, I find this practice to be appalling.
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Re: simplification – for large numbers of people, whose only income is from their job and maybe some interest on bank deposits, it would be easy to keep them from having to “do their taxes” at all. The IRS already knows how much money you make, how many kids you have, and so on and could do your taxes for you. You’d just get a copy of the return in April and either a check or a note saying “You owe $XXX, please mail us a check.” If you agreed with the return, that would be that, and if not you could submit your own version. This idea is opposed by tax preparation companies but more importantly by conservatives because they want tax day to be a big pain in the ass so that you hate taxes. This is also why they want everyone, even your disabled old grandma, to pay income taxes, so everyone will hate taxes. Then when they float plans like Romney’s which cut rich people’s taxes a lot and poor people’s taxes a little, or cut funding to the IRS so that they can’t go after rich tax cheats, poor people will be happy and excited about it because they hate taxes too.
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“for large numbers of people, whose only income is from their job and maybe some interest on bank deposits, it would be easy to keep them from having to “do their taxes” at all. The IRS already knows how much money you make, how many kids you have, and so on and could do your taxes for you. You’d just get a copy of the return in April and either a check or a note saying “You owe $XXX, please mail us a check.””
– I really like this idea.
“Then when they float plans like Romney’s which cut rich people’s taxes a lot and poor people’s taxes a little, or cut funding to the IRS so that they can’t go after rich tax cheats, poor people will be happy and excited about it because they hate taxes too.”
– As scary it is to recognize this, I think you are right. 😦
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Kind of late to the party, but…
I see no reason why the tax system can’t be radically simplified in the ways suggested but with one progressively-bracketed tax on all the money you get (whether income, capital gains, whatever), instead of a flat tax.
The problem with having a flat tax on “everyone but the poor” is that those above the poverty line but still not doing that great will be utterly screwed.
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