Personally, I’m ready to say yes to a radical simplification of the tax code, but no to the flat tax. Flat tax advocates (including Gov. Rick Perry, who released his big optional flat tax proposal Tuesday) always solder the simplicity and the flatness together. But there’s no reason we can’t have the one without the other.
With his gift for fun phrases, Herman Cain has labeled the existing tax code a “ten-million-word mess.” I agree. Nobody knows what-all is in there and a great deal of it was lobbied in by special interests. Tear it up. Fine with me. Start over with no deductions or tax credits and just a basic exemption tied to the number of dependents in the household.
Treat all kinds of income equally. That includes investment income. Righties have developed a whole religion around the idea that investment income, which already receives preferential treatment compared to wage income, shouldn’t be taxed at all. The “double taxation” canard should be laughed out of court.
The Ink-Stained-Wretch Plan (ISWP) would be the ultimate simplification. If it’s income, it’s subject to income tax, and all forms of income would be treated equally in that regard.
But there’s no reason that you can’t have three to five brackets so that the wealthy pay a higher rate on their income above a certain level. Well, maybe there is a reason, which is that as soon as you introduce the principle of progressivity into the equation, a lot of righties lose interest in simplification. Funny how that works.
Once you do away with all those deductions and credits, you could certainly lower the rates from their current levels and still raise more revenue than the current tax code does. Yes, more revenue to reduce the deficit, eventually balance the budget and ultimately start to pay down some of the national debt. For starters, let’s set an interim goal of getting the debt down below 50 percent of GDP.
During the Reagan era, the definition of a “fiscal conservative” morphed. It used to mean someone who favored a balanced budget. Now it means someone who favors tax cuts in all circumstances despite their deficit impact and especially tax cuts for the rich. I’m a serious deficit/debt hawk and want my tax plan to help us get on a fiscally sustainable course.
I noticed that Perry didn’t emphasize that his version of the flat tax would explode the deficit. That is pretty amazing. His plan should not get serious consideration until he puts out a serious deficit/debt impact statement that doesn’t rely on pixie dust.
Of course, I’m not really qualified …
…to have a tax plan of my own. But before I finish pretending that I am, let me mention a few talking points in favor of my stupid idea, including some for conservatives and some for liberals.
The ISWP is a freedom plan. Conservatives should like it because it would greatly reduce the level of government intervention in your daily life. All of those deductions and credits basically amount to the government giving you incentives to do this and not do that because of the tax treatment.
The ISWP is progressive. Liberals should like it because the basic logic of all tax deductions is inherently regressive. If I’m rich and fortunate enough to be paying at the current top marginal rate of 35 percent (taxable income above $379,151 in the current table), for every dollar I give to charity (and every dollar I pay in mortgage interest, and same for every other dollar I spend for something deductible) the tax code “reimburses” me (so to speak) with 35 cents. If you pay at the 15 percent marginal rate (up to $34,500 for an individual on the current table) you get only a 15 cent kickback from the tax code for every deductible dollar you spend. How is that fair?
Herman Cain should love it because it is bold, transparent, fair, simple, efficient and several other adjectives.
Flat taxers love to talk about how great it would be to simplify the tax code dramatically so that you wouldn’t have to spend days or weeks managing your receipts and wouldn’t have to fire a tax accountant. The ISWP would do that too. The complexity of tax preparation has little to do with the existence of brackets and would add only a couple of lines to the postcard-sized tax forms. I do worry about jobs for those now toiling in the tax preparer industry, which must surely be one of the few growth industries in our country in recent years.
Last three points
I know my plan would have to be phased in. The tax code is so deeply enmeshed in the current economy and in the earning and spending habits of Americans to do it all at once.
I know that tax deductions do incentivize all sorts of socially desirable behavior — giving to charity for example. And some people who favor a radical simplification would nonetheless prefer to retain certain key deductions. I prefer a clean break with tax code incentivization, which will eventually lead us back to where we started. My preference would be to use some of the additional revenue that the Black plan would generate to mitigate the damage in areas of greatest need with direct subsidies. But we can talk.
Lastly, we’ve almost done this before. The (Bradley-Gephardt) Tax Reform Act of 1986 was a major simplification that greatly reduced the number of tax brackets and eliminated a zillion or so tax preferences. Reagan signed it into law. And then we set about recomplicating the tax code and have succeeded beyond our wildest dreams.