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September 05, 2007
Tax Time!
I largely agree with Steven Tele's critique of Michael Lind's tax plan: Big thinking on liberal tax reform should substantially change the tax code, and more to the point, simplify it. Extending credits to payroll taxes may be good for equity, but it's making the system ever more byzantine. This alternative proposal from Mike Graetz, however, is rather interesting:
a) Eliminate the income tax entirely for families earning up to $100,000, indexed for inflation.
b) Impose a flat rate tax on income above that level, at a rate of 20-25% (I lean strongly toward the upper end of the range).
c) Impose a VAT tax at a 10-14% rate.
d) Lower the corporate tax, aligning it closely to the new, lower income tax rates (while also forcing corporations to use the same accounting standards when they deal with the IRS and the SEC).
e) Mike would deal with the EITC's elimination by providing a refundable offset to the payroll tax. I think that my suggestions above could do roughly the same thing, or we could establish some compromise between what I want and what Mike wants.
I'd alter this substantially, noting that taxes would be done automatically for those making up to $100,000 (April 15th will be just another spring day, as the righties like to say), making the rates above $100,000 substantially more progressive, not lowering the corporate tax, and keeping the EITC as is. So maybe I don't much like Graetz's idea. But I do like VAT's, particularly of the sort that exempt the goods the poor buy the most (i.e, food). And more generally, Democrats need to get better at making the case for dedicated taxes, like a 4% VAT that pays for health care. Taxes shouldn't be giving money to the government for unspecified purposes. They should buy things.
September 5, 2007 in Taxes | Permalink
Comments
"Taxes shouldn't be giving money to the government for unspecified purposes. They should buy things."
Good politics; lousy policy. That's how they do taxation in New Orleans. Everything is dedicated, leading to zero governmental flexibility in response to changing times. Yuck!
Posted by: Joe S. | Sep 5, 2007 11:22:31 AM
Problem: you seem to propose ending the deduction for mortgage interest payments. While the deduction should never have been started, eliminating it would cause huge disruptions in the housing market because, among other things, demand for housing would plummet.
Posted by: ostap | Sep 5, 2007 11:22:53 AM
> c) Impose a VAT tax at a 10-14% rate.
VAT is an utter and absolute disaster from every perspective, providing politicians with thousands of knobs and levers that can be tweaked to affect revenue without having to change the code in public.
Cranky
Posted by: Cranky Observer | Sep 5, 2007 11:31:42 AM
I think you are missing an important point on corporate tax.
Lowering the corporate tax rate is not lowering the corporate tax collected. GAAP income (Graetz' proposed base) is much higher than tax income (current base.)
Posted by: SamChevre | Sep 5, 2007 12:07:04 PM
while also forcing corporations to use the same accounting standards when they deal with the IRS and the SEC
This should be done regardless of any other tax law changes.
And what makes VAT so much different from a national sales tax? Even if you exempt food, you're still going to hammer the poor more on purchases of disposable and (shoddily-made) durable goods than those with more means (who can afford to buy better-made stuff less often).
I do like the idea of no taxes on the first $100,000 - that would be a very, very popular mandate to have among your electorate and as someone who's family income probably won't rise much above that (indexed for inflation), I can get behind that 1000%. Also, I would like a pony.
Posted by: NonyNony | Sep 5, 2007 12:35:39 PM
This is similar to a proposal I made a few years ago: make the standard deduction equal to the poverty line for a family of 4 (which indexes automatically); keep exemptions as they are; cap deductions at 3 times the standard deduction (rendering AMT obsolete); allow "over and above" deductions for 4-6 top national priorities (I suggest health care costs/premiums, charitable donations, mass transit passes, and adoption expenses); pay some number crunchers to figure out what the tax brackets should be. Taxes done in 15 minutes on one page for most Americans, priceless.
Posted by: ShortWoman | Sep 5, 2007 12:48:39 PM
"And more generally, Democrats need to get better at making the case for dedicated taxes, like a 4% VAT that pays for health care. Taxes shouldn't be giving money to the government for unspecified purposes. They should buy things."
Known in the jargon as hypothecation and it's an idiot thing to propose.
Tax where you can and spend where you must, all into and out of one pot.
Here's why. There's an amount that can be raised from a specific tax. The reasons you can't get more from it might be economic or political rationality but we all agree that there is indeed a limit on hte tax that can be raised from one single activity?
Good. So, what is the relationship between the amount you can raise from one tax and the amount that you want to spend on a specific problem?
That would be none, wouldn't it?
So why are you limiting the amount you can spend on a problem by insisting it be paid for by a specific tax? Or, why are you insisting that the excess money raised from a specific tax is spent on a particular activity when there are better places the same money could be spent?
An example might be the higher tobacco taxes of recent years, mandated to be spent on tobacco education as most of them are. The hundreds of millions raised here might well be spent on better things that billboards: but because the tax is hypothecated the can't be.
Posted by: Tim Worstall | Sep 5, 2007 1:00:28 PM
I'd like to see the marginal tax rates go back up to 70% to take care of the problem of corporate execs and Wall Street financiers getting paid massive amounts while the rest of us get to squeak by on our 2.5% per year cost of living increases.
Posted by: FS | Sep 5, 2007 1:10:26 PM
FS,
We'd all (i.e., nontrolls on this site) like to see marginal income tax rates on the plutocrats go up to 70% or 99% or 200%. The bastids deserve it.
But there does seem to be a certain point beyond which high taxes on the rich are self-defeating. Most of them are pretty good at structuring their income to avoid taxes. It's not worth it to them if the marginal rate is below--I dunno, about 40-50%. Below that rate, they grumble and pay Uncle, and hire Republican politicians to lower their rates. We can counter that by electing real Democrats. But beyond that rate, the distortions kick in.
Now if you want to soak the bloated rich, without the distortions, I would recommend an automatic recognition event for all capital gains that are not on first residences. It is trivial for publicly-traded holdings, and possible for nonpublic holdings. Tee, hee!
Posted by: Joe S. | Sep 5, 2007 2:05:29 PM
Seems like many of the things you are looking for would be addressed / improved by the FairTax (www.fairtax.org)
- It eliminates the income tax entirely
- Sets the tax rate at 23% -- inclusive to the products you buy (similar to a VAT in this regard) so that if you pay $1 for something, 77 cents is the cost of the product and 23 cents is the tax.
- Provides a prebate to address taxation on essentials
- Shifts the taxes for what you earn to what you spend.
Just a thought.
Posted by: m | Sep 5, 2007 2:11:48 PM
Seems like many of the things you are looking for would be addressed / improved by the FairTax (www.fairtax.org)
Except that the FairTax cultists -- and cultist is the word -- are full of shit, yeah.
Posted by: pseudonymous in nc | Sep 5, 2007 5:50:49 PM
... shifts the tax from income to spending means that those who do not have money to hand over 23% of their income on tax, and those who have enough money to save half of their income hand over 11.5% of their income on tax.
Sure, go ahead and exempt food ... it will only switch the tax from obscenely regressive to egregiously regressive.
Posted by: BruceMcF | Sep 5, 2007 6:22:58 PM
I agree Dems should be better at making the case that taxes buy things (we used to call them "services" back in the day)-- but I also agree you need make that case generally, not with gimmicky dedicated taxes. Aside from the other problems, what happens when all your taxes are dedicated and there's nothing left to cover the things that aren't sexy and popular, but are still necessary and important.
This argument can be made, but it takes work (and it is admittedly easier to make the lower the level of gov't).
Posted by: Doh | Sep 5, 2007 7:52:15 PM
I think dedicated taxes are fine, and even preferred, when they finance Social Security benefits or healthcare. There is value in transparency so people can better understand exactly how much these easily identifiable (and desirable) benefits cost both the society generally and each taxpayer individually. A reasonable case can also be made for gasoline taxes to finance roads and mass transit.
Most other government services including defense, law enforcement, regulatory apparatus, the State Department, EPA, Commerce Department, etc. are best financed by income taxes and other non-dedicated general revenue.
As for a VAT, a dedicated tax for healthcare would be reasonable if payroll taxes are not sufficient to cover the cost, but payroll taxes would be my first choice for health insurance financing. The other key virtue of a VAT is that it pulls in some tax revenue from the underground economy which the income tax does not.
Posted by: BC | Sep 5, 2007 8:33:11 PM
"Except that the FairTax cultists -- and cultist is the word -- are full of shit, yeah"
Except Bruce Bartlett was misinformed -- excuse me, on this forum the word is LYING -- in his representation of the FairTax. The organization that you and Bruce are thinking of can be found at http://www.cats.org/www/index_main.php?id=32
For actual information on the FairTax it might be valuable to get actual / accurate information from a source that actually knows what they are representing: http://www.fairtax.org
How would a VAT tax of 10% to 14% and a flat tax of 25% (with Ezra's leaning) be preferable to a single tax of 23%?
Why is there such a desire to hang on to a tax system that is broken?
Posted by: m | Sep 5, 2007 9:04:51 PM
I looked at the FairTax website that m mentions. Not only is it actual/accurate, it is even bipartisan. I know that this is true for the same reason that I know that fairtax.org is actual/accurate. They claim so on their website.
Which gives me additional useful information. Opensecrets.org is a liar, because it claims that the Fairtax board directors' political contributions go overwhelmingly to the Republicans. (I would say "exclusively," but I only worked on the basis of donees that I recognized. There might be a D in there somewhere.)
Thank you, m, for leading me to double enlightenment. And please tell your employers in the VWRC to scrub any embarrassments from their webpages.
Posted by: Joe S. | Sep 5, 2007 9:42:27 PM
How would a VAT tax of 10% to 14% and a flat tax of 25% (with Ezra's leaning) be preferable to a single tax of 23%?
Then the VAT on the wealthy would be in the range of an income tax of 5% to 7%, and add in the income tax, they would pay 30% or so income tax.
I don't see how its better than a payroll tax of 10% with payroll tax extended to all executive remuneration, plus an income tax of 25% on incomes over an indexed $100,000 threshold.
The normal argument for the "tax the poor more than the rich" tax is to reward saving ... and since the aggregate amount of personal saving is determined by the government budget deficit, trade surplus, and rate of private investment in plant and equipment ... after first subtracting corporate savings ... rewarding individuals for getting a larger share of a fixed total seems a remarkably silly reason to tax the poor at a higher rate than the rich.
Posted by: BruceMcF | Sep 5, 2007 10:42:58 PM
BruceMF- I'm sympathetic to your argument. I've thought about this myself some- but isn't it the case that the trade surplus is determined, to some extent, by consumer choices? That is, the total is not fixed but determined by the aggregate of personal savings versus spending decisions and that the potential for variation would be reflected in the trade surplus?
Posted by: mpowell | Sep 6, 2007 1:05:31 PM
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