Tax policy

[dmaze]

Google News decided I needed to read this diatribe pushing Republican tax policies.  They all seem like terrible social policy to me.  I'd think the basic rules should be:

• Taxes cover the cost of running government


• People who can afford to pay more should


• The tax code should be comprehensible by mere mortals

This second point is the big one: I'd argue that it's "more unfair" to pay a significantly higher tax rate if you're struggling to pay for food and basic shelter than it is "unfair" to have the same unit of earned income taxed when you earn it, taxed again when you're able to reinvest it, and taxed again when you pass it on to your childrens' trust funds.

I don't believe tax rates have a large effect on economic activity, I believe billionaire "job creators" are a myth.  Making the top income tax rate 30% vs. 40% still means many people write large checks that require some planning and might take some money that would go to other things, but so do high gas prices, Comcast, and so on (admittedly to a much smaller scale).

All of these proposals seem like they reward people handsomely who don't have to spend all of the money they make.  If all of your money goes to food and housing, you can't take advantage of Marco Rubio's proposal to exempt capital gains from income tax, the benefit all goes to the upper quartile with significant investment income.  Ted Cruz seems to want to tax income from dollar one.  The purely consumption-based "FairTax" makes an effort to protect the extremely poor (by giving households a monthly advance rebate of spending up to the poverty line) and again doesn't tax investment at all, though it does apparently (there's some weaseliness I can't quite penetrate; if I buy a "used" $2 million house, is it taxed at all?) tax actually doing anything with your savings.

So the system I would start with would look like this:

• All income from all sources is taxable at the same rate.


• There are no deductions, credits, etc. as in the current system.


• Keep the current payroll-deduction infrastructure; tax payrolls at the standard rate with no adjustments.


• Every April, every taxpayer gets a refund on the tax on their first $60,000 of earned income.


• Somebody annually adjusts the tax rate for the coming year by dividing actual federal expenditures from the past year by taxable income (less what got refunded) for the past year.

Footnote: The FairTax FAQ spends a long time harping on the cost of compliance.  I don't think it's the complexity of the Earned Income Tax Credit that sends the poor to paid tax preparers: it's the big billboards claiming you'll get a bigger refund by using H&R Block, and it's the prospect of putting a check in your pocket today instead of waiting for the IRS to do it.  Any of these tax-reform schemes would probably solve this problem, and I won't shed a tear for tax preparers' parasitic business model being legislated away.

Comments

[dmaze]

P.S.: We'll pay you $5,000 a year in (taxable) salary, plus an option to buy one "A" share of Berkshire Hathaway for $1, which will be (untaxed) investment income. Everybody wins!

[dmaze]

Also: the FairTax people never quite say it explicitly, but their real estate white paper does make it pretty clear that "new things are taxed, used things aren't" applies to housing too...so my custom-built mansion I pay tax on, but merely buying a large existing house in an upscale neighborhood isn't.

If the FairTax system was implemented and I was buying a very expensive new house, it's very much worth my while to incorporate, have the corporation build and own the house, and then lease the house back to me. That way the house is capital for a legitimate business charging its customer rates that at least cover its costs, and therefore it's not taxable. Anything that says "business income should go totally untaxed" is extremely prone to this kind of gaming — again, mostly by the upper echelon who have the most to gain from it.

The other thing that makes FairTax complicated is broad (correct) assertions that prices of everything will change. The housing paper above asserts that mortgage rates will drop 0.25%, for instance, which is a partial offset of paying a high sales tax on buying the new house. Compared to other tax code rewrites this is much harder to say "this will be better for them and worse for them"...though it also seems like the sort of thing a first-year economics final exam could have on it.