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IF THIS IS REFORM, MAYBE WE'D BETTER NOT
June 13, 2007
The left side think tanks at The Hamilton Project and The Brookings Institution have a program going on, "Reforming Taxation in the Global Age." The conference gives a peek at the ideas that would form tax policy in a Democratic presidency.
This summary from one paper struck me:
We believe these principles should command wide assent as policymakers consider tax reforms, whether incremental or far-reaching:
1. Fiscal responsibility requires addressing both taxes and spending.
2. Rising inequality strengthens the case for progressivity.
3. The tax system should collect the taxes that are owed.
4. Tax reform should strengthen taxation at the business level.
5. Taxes for individuals should be simplified.
6. Social policy can and should often be advanced through the tax code—and it must be well designed.
Items 1, 3 and 5 all make sense, but items 2,4 and 6 put the other three out of reach. Making taxes "more progressive", and "well-designed" tax provisions to make a better society are almost by definition the opposite of "Simplifying taxes for individuals." It's like saying you want to drive a motorcycle safely through downtown going 100 miles per hour; You can drive a motorcycle through downtown safely, and you can ride 100 miles per hour, but probably not both at the same time.
Also, goals 2 and 6 - progressive tax and manipulating society through the tax law - make goal 3, collecting taxes, harder to achieve. If you make the IRS into a team of social workers with calculators, you make it harder for them to actually determine income and and collect taxes - and that's not always easy in the first place.
The TaxProf has coverage of the conference here and here.
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Comments
I am intrigued by the notion that progressive tax rates result in tax complexity. Even with a dozen brackets that topped at say 40% for amounts above $10 million, in all cases only a single calculation would be required once taxable income is determined, if all income were taxed the same.
The many deductions and special rates seem to cause much more complication. For instance, the various reduced capital gains rates seem to provide much more room for complexion. Do you advocate doing away with the various reduced rates for various capital gains, and taxing all income at the same rate, whether it is earned through actual work or realizing the profit on an investment? That would be true simplification, if that is the goal.
Posted by: Erich Riesenberg | June 13, 2007 5:23 PM
Erich, that's an excellent point. High rates breed complexity because they increase the stakes. The higher the rates, the harder special interests fight for loopholes, and the more people invest to to game the system. Also, higher rates increase the benefits of income-shifting, which then requires elaborate controlled group rules to maintain progressivity.
Examples of this include the estate tax and Iowa's corporate income tax. Iowa's corporate income tax rate is the highest in the nation, perhaps the most complex, and so loophole-ridden that it's revenue contribution is negligible.
And yes, I think you could get rid of special capital gain rates - again, by broadening the base to get rates down to a level where special rates are not needed. But if you insist on lots of progressivity, you're likely to see a push for lower capital gain rates.
Posted by: Joe Kristan | June 13, 2007 6:01 PM