Category: Taxes

I’ve tried to avoid getting too upset about the Tax Advisory Panel’s preliminary recommendations. All indications are that they’re still deliberating possible reform ideas. I’m about 0.4% optimistic that their deadline isn’t until November, but it’s still something. Reducing the mortgage interest deduction and capping the healthcare exemption can’t be all they’re proposing. I know there’s the idea of extending the charitable deduction to non-itemizers and the (commendable) proposal to scrap the Alternative Minimum Tax, but there has to be more. Otherwise, and this not rhetorical, why bother? Why?

Instead, I’ll play around with this article explaining some of the recommendations. Consider:

At its last meeting, in July, the commission agreed to recommend abolishing the alternative minimum tax for individuals, a step that would cost the federal government $1.2 trillion in lost revenue over 10 years.

With a mandate to develop a proposal for changing the tax system that is revenue neutral – meaning it neither raises nor lowers total tax receipts – the commission must find enough revenue to offset the amount now generated by the alternative minimum tax.

That is mainly what led to an examination of ways to modify the deductions for mortgage interest and health insurance, two of the largest tax breaks now available to individuals. Together, the two deductions will cost the treasury about $250 billion this year.

Is this where the cynic in me reminds you that I said the panel started with a flawed mission from President Bush? The proposal must be revenue neutral. So, the panel recommends eliminating the AMT, but must find another revenue source to offset the loss of that abomination. How is that reform, exactly? As the final paragraph highlights, the recommendation does little more than shift the tax burden from one method to another (and indicates that deductions cost the government rather than benefit taxpayers). With this nonsense, the government still plays in the central planning sandbox. It just decides to use sand from a different beach. Brilliant.

Reading other responses on the Internets, I enjoyed this response to the panel’s announcement:

… And note, this is not in service of real reform of the tax code, like losing all preferences and replacing the current code with a flat tax.

No, it is merely scratching around for money to “offset” the cost of repealing the absurd alternative minimum tax. That is exactly backwards. Junk the rest of the code and keep the AMT and call it a flat tax. There is also nothing radical about proposing to use ability-to-pay standards to soak the “rich” in search of more government revenue. Wow, that’s a new one.

This is a horrible idea and needs to be taken out behind the barn and dispatched as quickly and as painlessly as possible before real and lasting damage is done. The Bush spending spree followed by the Bush tax hikes. Like night follows day, people.

I’d be remiss if I didn’t highlight this wonderful insight on why we should be thankful to the panel. Consider:

“We’ve got to make bold recommendations without regard to the politics of them,” said John Breaux, the panel’s vice chairman and a former Democratic senator from Louisiana. “The politics will be debated for a long time.”

The politics will be debated for a long time because the panel hasn’t eliminated them, or even changed them. It’s still the same scheme of preferences to soak the rich and offer handouts to the poor. Our elected officials, and the people they appoint to carry out tasks, should be able to lead. If they can’t lead, they shouldn’t be involved. Freakin’ idiots!

I do, in fact, know that I’m living in a fantasy land.

Apparently, Utah is considering a flat income tax. Or should I say, was considering. Here’s an editorial cheering its demise. I want to focus on one segment which gets the argument wrong. Okay, so the entire editorial gets it wrong, but I only want to focus on one. Unfortunately, I can’t decide which gets it more wrong. Thus, I offer them together. Consider:

But even if the tax rate is the same, and the dollars paid by the rich are more than those paid by the poor, a flat tax is not a fair tax. A tiny reduction in the income of a working family stings much more than the same percentage, or even a much larger one, charged to a higher-income household.

Besides, nobody pays only income tax. As part of the mix with property taxes and, of greatest impact, sales taxes, a flat income tax rate only serves to make the total tax structure more regressive, more burdensome on the lower-income brackets.

There are exemptions and rebates that could ameliorate the burden on the working class. But every one of them would reduce total revenue and require higher rates to make up the difference.

Keeping the charitable deduction, as the [Latter-day Saints] Church wants, is reasonable. The real solution, of course, is a truly progressive income tax structure, one that would increase the burden as a household’s ability to pay increases.

Most of those non-arguments can be countered with the fundamental point I linked in my previous post about the flat tax. Here it is again.

A flat tax on personal incomes combines a threshold (that is, an exempt amount) with a single rate of tax on all income above it. The progressivity of such a system can be varied within wide limits using just these two variables.

As I said, I believe we should remove as much progressivity as possible from the tax code. Completely removing it, though, isn’t practical or reasonable for the most basic reason listed in the editorial. But we can’t pretend like it’s logical for a household’s burden to increase as it’s ability to pay increases. That’s so anti-success as to be downright socialistic. I hide under no delusion about the editorial author’s likely inclination to socialism, however, given the ideas thrust forward in the editorial.

The editorial suffers from two particular flaws. First, in its argument for progressive taxes, it highlights the existing tax burden, consisting of property, income, and sales taxes. This burden is not the fault of the flat tax, but instead suggests that Utah needs tax reform. The author points to the sales tax as the greatest trouble for the poor. My interpretation of the author’s failure to attack this instead of the flat tax suggests an animosity for the so-called rich rather than concern for the poor. That’s an ideology rather than a solution.

According to this article about the Utah flat tax proposal, the flat tax appears to reduce the burden for the poor(er). Is this wrong? If so, explain why. If it doesn’t imply the correct income level for “poor”, explain why and consider a modified plan. Solve the problem or get out of the way for those attempting to do so.

That, of course, reveals the editorial’s second problem. The author dismisses the flat tax, calling for a “truly progressive income tax structure”. Fine. I disagree, but I’m listening. Show me why it makes more sense to increase a household’s burden as its income increases. Do the rich not take care of the poor if they’re allowed to keep the money they earn? Should they? I don’t know because the editorial never says. As I said, I’m left to interpret the author’s intentions as a socialistic “soak the rich” mentality. If that’s right, say so. If it’s not, enlighten me. I’m waiting.

Until then, the flat tax is the right answer, for all the reasons I’ve listed.

One of the reasons I advocate a flat tax is that it incentivizes wealth-building without a class mentality. It encourages success across the nation without punishing people for achieving that success. I believe this can work and want the discussion to start so that we can get to real change. Debate on this issue is productive. This, however, is ridiculous.

I would offer Americans an even lower flat tax rate–14% as opposed to 17%–and at the same time do more to help low-income people. Boston University economist Laurence Kotlikoff and I have put together a plan that works in the following way.

First we’d get rid of the across-the-board $9,000-per-person exemption in the Forbes plan. Why should billionaires like Bill Gates get an exemption? Forbes is giving too much money away to rich people. We’d save that exemption money and give it instead, in the form of a rebate, to the bottom third of earners, those who bring home roughly less than $25,000 for a family of four.

Second, Forbes ignores the 12.4% Social Security payroll tax (split between employer and employee). Currently, income over $90,000 a year is not subject to the tax. We don’t think it’s fair that a $50,000-a-year autoworker has to pay payroll taxes on all his income while a million-dollar-a-year auto executive does not. Under our proposal all wages would face the same income and payroll tax rates.
…

We would also use the rebate of tax dollars to the bottom third of taxpayers to solve other social problems. For example, instead of people automatically getting the 14% rebate, we would require them to show that they have health insurance and a retirement pension as a condition. Specifically, to get one-half the rebate (7%), low-income families would have to produce proof of health insurance. This would encourage millions of people who qualify to enroll in Medicaid or in their employer’s health plan. Barring that, families could apply the tax rebate to health insurance they purchase on their own. We propose making the other half (7%) contingent on proof of a pension, an IRA, a 401(k) or some other savings account.

So instead of national health insurance and more government spending on the elderly, we would use our flat-tax proposal to urge people to solve these problems on their own.

With this proposal, we receive a progressive tax system with special incentives and loopholes. Brilliant. This is little different in spirit than what we do today. I can’t comprehend how keeping the same screwed up mentality qualifies as reform. Specifically, who would administer all of this? Some bureaucrat has to sit in a government office and verify health insurance. Some other bureaucrat has to sit in another government office and verify pension accounts. This does not reduce the size and inefficiency of government. The question of affordable private healthcare remains. And if taxpayers have to have pensions to qualify for half of the rebate, why bother perpetuating Social Security? Just funnel FICA into private pension accounts. It also leads to interesting conundrums regarding privacy and self-determination.

Ultimately, though, the obvious flaw is that this plan assumes people won’t do these things if they have money in their bank accounts. It imposes a blatant Nanny State oversight upon poor people, condescending to them that perhaps they’re just not responsible enough to do these things. In some cases, that’s undeniably true, but we can’t legislate against stupidity. If people wish to do dumb things, so be it. No amount of new, creative laws will change the fundamental self-determination, however stupid, that people exhibit.

Worse, the government has shown for decades that it doesn’t trust the citizens who elect it. Like every other tax reform that changed only the redistribution effect, the scope creep of this tax recommendation will not stop with the poor once Congress begins playing with the parameters. Tax reform is essential, but as important as the numerical details are, changing the tax mentality is most important. The flat tax can do that, but not when supporters rig it with patronizing gobbledy-gook.

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration. — Article XVI.

The word “progressive” appears nowhere in the 16th amendment. Yet, America has tinkered its way to an elaborate maze of exemptions, credits, and refunds, supported with a “soak the rich” mentality, that wastes economic resources and retards growth. Every few years, politicians promise tax reform only to fail when action becomes necessary. There are occasional blips of rational behavior, but they’re rarely perfect and never permanent. The descent into economic foolishness plods along.

As part of his economic agenda, President Bush established the Advisory Panel on Tax Reform to determine reform possibilities for our ridiculous tax code. Specifically, he expects “a report containing revenue neutral policy options” meeting the following objectives:

o simplify Federal tax laws to reduce the costs and administrative burdens of compliance with such laws;
o share the burdens and benefits of the Federal tax structure in an appropriately progressive manner while recognizing the importance of homeownership and charity in American society; and
o promote long-run economic growth and job creation, and better encourage work effort, saving, and investment, so as to strengthen the competitiveness of the United States in the global marketplace.

I think the “revenue neutral” assumption is a terrible foundational assumption because it implies that our government deserves a specific, minimum monetary amount. When the Congress spends nearly $500 million on two bridges in Alaska, and the President willingly signs the bill over his own protests, the government has shown that taxpayers need to be rethink the government in its entirety. There is no ongoing victory in our battle for economic survival. But this is the mandate from President Bush, so I don’t expect a deviation from that by the Advisory Panel. I’ll accept that grudgingly as I deal with the objectives.

Obviously one of the key expectations of tax reform is to simplify the code enough to reduce cost and administrative burdens; otherwise, why bother? I won’t challenge that. And the third objective also begs little irritation. Again, if we’re not looking to improve America’s economy, why bother with the tax code? We’re screwing it up fine and can continue screwing it up without reform. We can continue electing politicians content with economic suicide; eventually we’ll get the result we seem so indifferent about. But since we’re supposedly interested in true tax reform, I contend that the government’s job isn’t to promote anything economically as much as it is to get out of the way of business, but that’s mostly semantics in the way I read the objective. Thus, I’m willing to let that one slide without attack.

That leaves the second objective, which any reasonable economic thought quickly discredits. This objective does little more than rig the reform system to a predetermined outcome. Being a new homeowner, I will definitely enjoy the tax benefits from homeownership through the mortgage interest deduction. Now that I’m itemizing, I’ll also enjoy the charitable donation deduction. It’s all wonderful and I’ll take advantage of them as long as they’re in the tax code. That doesn’t mean they should be in any final recommendation, though. Not only do those exemptions guarantee a greater level of complexity on their own, they imply that other special favors and handouts are reasonable and justified. That’s how we got to where we are; perpetuating that is absurd. Politics is as politics does, I suppose.

The major mistake in the second objective is the dangerous phrase “in an appropriately progressive manner.” This is garbage. Our progressive tax code is an abomination against every ideal we allegedly possess. It builds an inherent class system into our expectations of who should pay for government and how. It entrenches our economically-ludicrous policies of redistribution, conveying that our poor citizens need to be forever supported by their benevolent economic superiors, while encouraging those most affected by higher rates to buy their way out of high taxes. This is wise? This is fair? How much growth and progress do we destroy because we legislate that success is good, but not too much success? It’s insanity. The Advisory Panel should recommend scrapping the progressive nature of our tax code.

The prevailing ideas for (significant rather than minor) reform are a national consumption tax and a flat tax. For various reasons, I think a national consumption (sales) tax is a bad idea. First, it would require at least one (repealing the 16th Amendment), and probably two (authorizing the consumption tax), amendments to the U.S. Constitution. Even with congressional support, the anti-reform lobbying will be out of control. With a hostile Congress, which seems to be a given with the inevitable talking points and resultant partisan bickering, the anti-reform lobbying will fracture any nugget of support. Yet, “reforming” the Constitution is essential if the Advisory Panel determines that a consumption tax is the solution. If we don’t repeal the 16th Amendment, we’ll soon enough enjoy a consumption tax and an income tax. That’s not particularly good reform.

Second, a basic consumption tax, at whatever rate ultimately reigns, would be horribly regressive. When the poor, who presumably spend the bulk of their income on necessities, face a consumption tax, it will eat away an obscene amount of their ability to afford even food and clothing. The increase in poverty would be atrocious, so naturally exemptions would appear. First it would be food, with all the varying debates on what food. Fruits, yes. Vegetables, yes. Candy, no. And don’t forget the potential to retain a “sin tax” aspect against items such as fast food and cigarettes. We’ve already seen that sin taxes rarely work, so a “consumption as sin” tax isn’t likely to be different.

Then the discussion moves to clothing and medicine. Will only clothing at (favored) discount retailers and only generic drugs, for example, be exempt? It doesn’t end until every lobby has carved out some protection or special tax rate for its preferred item or distribution channel. With the ever-growing list of exemptions, we’d have to return to the income tax, but any rational understanding of our government implies the conclusion that the consumption tax would remain long after the government dusted off the 1040. The whole idea is an economic Hindenberg.

That leaves the flat tax, which has been around for years in various theoretical iterations. My first exposure to it came in the 1992 presidential race, when Jerry Brown ran for the Democratic nomination. I supported him then because of the flat tax, and I’ve thought it our best possible tax outcome since. The guidelines for the Advisory Panel almost exclude the flat tax by definition, but the it should set aside that stupidity. America should adopt the flat tax.

Someone new publicly advocates the flat tax every few years. Usually, it gets a little national play before the advocate gets his political legs chopped off. In 1996, it was Dick Armey. Today, it’s Steve Forbes. No doubt Mr. Forbes’s plan (and book) are timed to coincide with the deadline for the Advisory Panel. This article by Mr. Forbes offers a decent introduction. Above all else, I want to highlight this point:

The economic boom the flat tax would unlea
sh would be stupendous, ushering in a long-term, noninflationary expansion of historic proportions.

The practical evidence offered by emerging economies in Eastern Europe shows that this concept is workable, but I’m concerned about the ease with which anti-reform and pro-consumption tax folks will use such predictions to appeal to economic, class-based fears because the way Mr. Forbes phrases it, we’ll all get exceptionally wealthy and be able to roll around in our money. Regardless of the potential rhetorical misperceptions, his point is valid. Moving to a flat tax will foster economic growth. The most obvious, immediate benefit is saving time and money previously wasted in tax compliance. Instead, those resources could be pushed to more productive economic purposes.

The most useful benefit is tied directly to who would do the pushing. The flat tax allows the marketplace to determine how best to allocate resources. Gone would be the socialist central planning that now occurs through tax subsidies to lesser, insignificant or obsolete businesses. Businesses that aren’t viable should be allowed to die. The market terminates any business not enticing sufficient revenues from customers to meet basic costs. Get the government out of favoring one business just because it will offer jobs or community improvements or whatever and the market will decide what needs to happen. It might be ugly initially, but that’s because we’ve tampered with the system. Once the bureaucratic detoxification occurs, the economic changes will be astounding.

There’s an additional reason for implementing a flat tax. The consumption/sales tax may be re-labeled the Fair Tax in a marketing ploy to make it more palatable, but the flat tax is the true fair tax. In America we supposedly believe that “All men are created equal.” The flat tax is inherently fair, since all people will be paying the same percentage of their income above eventual threshold. The dollar values will change, but that follows the idea that all men aren’t equal in outcome. Any person who puts effort and skill into earning success would no longer see the fruits of that success stolen because it’s considered in excess of necessity. That’s the meritocracy our capitalist society should hold as the example and to which we should perpetually strive. The progressive nature we glorify defeats what’s true with what’s appealing to the masses.

As I’ve already stated, I think progressive taxes for the sake of punishing the rich are a bad idea. Don’t punish incentive because the results of such thinking are detrimental. But some level of progressivity resides in the flat tax, which this article from The Economist indicates. Consider:

A flat tax on personal incomes combines a threshold (that is, an exempt amount) with a single rate of tax on all income above it. The progressivity of such a system can be varied within wide limits using just these two variables.

The least progressive flat tax would set the exemption at $0 and tax everything at the flat rate. That’s stupid, and a non-starter since everyone needs a basic, humane level of income to pay for necessities. Some progressive scheme must end up in the code to account for that. I can live with that. Further analysis can determine the (theoretical) optimum balance between exemption and tax rate, but I think Mr. Forbes’ plan is reasonable as an initial assumption.

The progressivity is where most fiscal liberals will chime in about the warm, fuzzy definition of fair and call for mimicking what we have today or worse. It’s already begun with subtle lies such as this [emphasis added]:

Bush should understand, [Mr. Forbes] warns, that “to tinker with the tax beast won’t work.”

Tinkering, of course, is just what Congress has been doing since the progressive income tax concept was enshrined in the Constitution in 1913.

So we can’t abandon the travesty of progressive income tax rates because it’s enshrined in the Constitution. It’s no more enshrined there than the notion that blue, three-legged aliens from the planet Zoldor live in Peoria. It’s more subtle than I expected to find this early in the current debate, but it’s a bold move. I’ll be surprised if this ignorance isn’t chanted repeatedly in the weeks following the Advisory Panel’s recommendation. Anyone who believes it is a fool deserving of the economic theft that results.

Obstacles to implementation exist. Do we scrap the current system and adopt the new system immediately? That would be outstanding, but it’s not practical. The change is too radical, the need for adjustment greater than merely adapting to a different brand of chewing gum. Mr. Forbes offers an idea, which may or may not be the best possible outcome, but he shows that the obstacles are not insurmountable.

When the flat tax is implemented, you can file your postcard return under this new, simple system, or continue to file your tax returns, with all of their mind-numbing complexity, under the old system. See for yourself which is better. I think most would conclude that the flat tax is best.

As much as it works for the psychological effects, it works for the procedural effects, as well. According to Mr. Forbes, existing taxpayers may choose either method. Once a taxpayer files under the flat tax, though, she is no longer allowed to file under the old system. All new taxpayers would be required to file under the flat tax. This eases the transition to a period of years rather than an immediate, massive switch.

The flat tax always meets enthusiasm before falling to hysterical criticism, but it’s the best tax plan for our economy. It modernizes our government’s economic approach while freeing our citizens to imagine a better economy. The Advisory Panel should recommend the flat tax to President Bush. Convincing Congress and the nation might be politically hard, but the path of least resistance lead us here. Who’s happy with here?

I propose that the annual IRS tax deadline be moved from April 15th to the day before election day. Pay Monday, vote Tuesday. How would that change the way politicians treat the tax code?