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Monday, April 24, 2006

A Fairer Tax Code?

John Iron's has an interesting op/ed piece in the Washington Post, calling for a comprehensive tax code overhaul. In the article itself he's very shy about actual details of the idea. However, he does link to a group of presentations at Center For American Progress on the ideas behind his editorial.

When I went through the power point, I noticed that they complained that in 2004 the average person in the middle 20% of income (about $30-45K from my numbers, they don't say) got a $647 tax cut, which they found too small.

Under their proposal, the average tax payer under $200k would see a $600 tax cut. For some reason, that was an okay number under their plans.

Their presentation of the idea to "fix" the tax code has a few problems, and one thing I actually agree on.

What I agree on is restoring "PayGo", which they credit to Bill Clinton, but was actually a GOP compromise so he wouldn't veto tax cuts when they took over Congress. It needs to come back; for those who don't remember, PayGo required tax issues to be revenue neutral, you cut taxes you cut spending.

The presentation gives no other spending based solution, and because CAP's proposal is (supposedly) going to increase revenue (be a tax increase), it wouldn't require any spending cuts under a PayGo plan. Anyone who's looked at federal income since 2002 realizes it's gone up faster since then than it did from 1999-2001; revenue isn't the problem, it's spending.

That's where their second problem is. By lumping all kinds of taxing and spending, in a manner that is never explained into one group, the presentation is very skewed. For instance, it claims we've become more and more reliant on the payroll (FICA) tax to cover federal spending. DUH!, Social Security spending has increased by about 25% over the last 15 years due to retirements.

The CAP proposal addresses that by lumping all taxing into one category, money earned, and and removes the distinction between social security and other spending that's written into law now. Not necessarily a bad idea, but a reform of what's done with the Social Security Surplus would probably be better for the economy than the massive tax hike they suggest. Their suggestion only delays Social Security going broke. Their solution only reduces the 75 year imbalance by 50%, just pushing off fixing the system another 15 years or so.

The other portions of their proposal have been shown, time and again, to fail miserably, yet CAP want's to try one more time, thinking this time will be different. The first bad idea is treating all revenue sources as straight income, in other words capital gains, dividends, etc. become just another line on a tax form.

Why treat them differently like we do now? Because those are generally where a large amount of economic investment occurs. As I mentioned a week or so ago, since the latest reductions in the capital gains tax the number of small start up ventures that benefit from those reductions has tripled from when the rate was 28%.

The second job killer will be the method they've decided on to increase social security revenue, which is to lift the income cap on the employer end of the contribution. While it sounds good in theory, in practice what it will do is slow wage growth for the upper middle class pretty quickly. Companies aren't going to just hand out money over $90k per year, because it will cost them an extra 7.65% for each dollar over that amount.

For some folks that sounds like a nice wage, but if you live in San Diego County, or Alexandria Virginia $90,000 doesn't qualify you for the average mortgage. How will companies make up for that extra taxing, the way they always do, cut spending on wages by laying folks off to make up the difference.

The number of layoffs to make up the tax differences on companies aren't discussed. I understand why, when you are trying to sell the point that "evil corporations" need to be taxed more, why put the down side of the equation into the story. (The right is as guilty when it comes to the first year revenue drops that come with tax cuts).

The bottom line, with the editorial, and tax policy in general is that we still rely on linear models to calculate non-linear behavior. Does anyone at the Center really believe that if you put me into a 36% tax bracket I'm not going to find a way to reduce that to a reasonable number?

Do they truly believe that no business is going to adjust it's payroll to make up for the extra taxes, or that investors won't just hold onto investments, instead of paying 36% on gains again?

If they really do believe those things I'd suggest they do a study on the effects of cuts and increases over the last 45 years (Since JF Kennedy cut taxes because they were too high), and see how the economy reacted.

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Blogger Paula said...

And they should catch the fucking cheats, who are often the richie rich! (I don't know if that would end up costing more than it's worth, but it pisses me off.)

2:07 PM  
Blogger Tim said...

I think they SHOULD tax capital gains the same as they do wage income. Why should workers be taxed more than investment income? It de-values work, which I have a moral issue with. By raising the CG rate, they may actually be able to lower the wage rate. That would be fair, wouldn't it? And as far as raising the cap on SS withholding, why not? It's only fair. If you don't want to do that, how about means testing for Soc.Security? "Simplifiying" the tax code usually means a break for the rich, and frankly, they get enough breaks now.

3:22 PM  
Blogger Crazy Politico said...

Paula, for sheer numbers, waitresses are the biggest tax cheats, not reporting tips. However, $$ wise the rich do avoid the most. The difference is most aren't "cheating", they pay for the accounts to find all the loopholes.

Tim-One of the reasons that capital gains income goes down as the rate goes up is it stifles investment. Instead of selling off an investment to start a new company, the "investor class" just holds what they have, borrow against it, then write off the loan interest as a business cost. It costs double to the gov't. They get nothing on the capital gains, and less for the business overall as they write off money expenses they wouldn't incur.

On social (in)security I have no problem raising what the "rich" pay on it. So long as their benefit goes up if we are going to continue paying it as an entitlement based on what's payed in. But the down side is that the extra business expense WILL cost jobs, period. Is that worth it?

9:02 PM  
Blogger Tim said...

CP, you can always "tweak" the tax code so they can't "borrow and hold". You seem to always be biased in the direction of big business and the rich. They will still participate because they will still be making money. They will whine about paying more in taxes, but in the end they will still make a profit and therefore not just "sit out the game".

On soc. sec., I am in favor of raising the base rate for all only if the money is there. We have to do something to shore up the system if we want to get anything out of it. Privatization means we'll get a one time check and told that we are on our own. You and I may be able to cope with that, but there are a certain element out there that does not save and they will just wind up on welfare and we will be paying for them anyway. As for costing jobs, you could say that ANY taxes cost jobs. Why is it okay to borrow a trillion dollars to go to war in Iraq (which, basically is already a loss) but not okay to take that money to shore up soc. sec.? Our priorities are out of whack here.

8:15 AM  
Blogger Crazy Politico said...

I don't think it's okay to borrow to do anything. Fixing Social Security is SIMPLE. Make it the program it was designed to be in 1935. Assistance for those with limited or no means of support in retirement. that would probably cost me most of my social security benefits, but would also drop my taxes on it to a much lower rate. Instead, we've turned it into a vote buying entitlement scheme.

You are right, all taxes do cost jobs. It's a matter of how much job loss and growth loss is acceptable and palatable.

As much as folks want to bitch about business, if they all decided to take a week off, we'd all be worse off. I used to advocate the "producers vacation week" where every business shut down at once for a week, with unpaid layoffs. At the same time all investors stopped trading for a week.

When the depression from that hit, maybe folks would get the hint. When everyone's 401's tanked, they'd understand why investors are important.

3:49 PM  
Blogger Steve Selengut said...

How To Create A Fairer Tax Environment

Can lawmakers who don't have the courage or intelligence to outlaw texting while driving really be expected to create a saner tax structure? Hmmm.

Developing a fairer tax environment is much less an economics problem than it is a political dilemma and, as many of you observed, it is unlikely that anything "tax" will be improved upon until there is some serious facial (and cultural) change in Washington.

Politicians focus on one issue at a time, and pretend to have problems dealing with inter-related programs. Tenured politicians have a vested interest in resisting any change that involves their spheres of influence. Both parties are embarrassingly mired in twentieth century class warfare that stifles all forms of productive debate.

Tax cuts don't just benefit the rich. In fact, they provide the opportunity for everyone to attain greater wealth. Demand directs resources far better than punitive taxation. Money in consumer hands will fuel social and environmentally friendly change.

"You cannot eliminate revenue from one program without replacing it from another, equally complicated, one", career politicians will say philosophically. They have little to gain from simplifying the tax collection system --- yet it is obvious that a whole new approach would solve most of the economic woes plaguing us today, domestic and international.

So what would become of all the CPAs, tax attorneys, and offshore laundries--- new jobs as consultants, auditors, and regulators perhaps?

Survey responses outlined constructive and manageable solutions to our multiple tax problems. If they could only be dealt with as a whole "New Deal" (catchy phrase), a fairer tax structure would be in reach.

Several basic concepts need to be accepted: (a) don't tax the job creators, (b) tax consumption instead of income, and (c) regulate shareholder abuse in the form of obscene executive pay. Then, enforce compliance with the intent of a simplified tax code.

A smarter tax system would allow more people to become wealthy honestly; smarter regulation of thieves in high places would improve the image of big business (and big government) significantly.

There are 44,000 pages in the Internal Revenue Code (IRC) alone, 5.5 million words, incomprehensible at best. Obviously, there is a lot more to be said about each of the ideas that follow. Here are the top survey ideas; the first two were discussed in previous results articles as consumer spending enhancers and job creators, respectively.

For the rest of the Article, just Google the title.

Steve Selengut
sanserve (at) aol.com
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"

2:49 PM  

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