I’ve long been a proponent of a overhauling the individual tax code and now might be the perfect time to promote the issue.
President Obama’s TAX THE RICH jobs proposal officially launched his 2012 reelection campaign. His plan lacks economic substance, but the class envy card has been played successfully in past elections. The ball is now in the Republicans’ court. Just saying no to Obama isn’t good enough.
The bipartisan argument for tax reform is simple. The system has become a tool for income redistribution with one-half of Americans paying no income tax at all. Meanwhile, the wealthy face punitive tax brackets and must game the system of tax incentives and credits to keep their taxes at a reasonable level.
But the best argument for major tax reform is one that is rarely articulated: Every tax deduction at the individual or business level represents costly social engineering that requires a higher tax rate to offset the negative effect on revenue. For example, the corn ethanol subsidy has diverted corn stock from consumption to fuel production, thereby raising the price of corn, poultry, and other commodities, all in the name of a green economy. Even the popular mortgage interest deduction encourages each of us to purchase more expensive homes that we should and pass along part of the cost to our neighbors, while they do the same to us. This was a contributing factor to the mortgage meltdown and has left the U.S. with an overstock of homes, thereby lowering prices.
Some of those who constantly seek government meddling via the tax code may have good intentions, but they never seem to account for the unintended consequences of their action. Removing most of the government intervention from the personal tax code is a winning proposition (I’d prefer all instead of most but this might be politically unfeasible at the moment). While most of us benefit from one or more “tax breaks,” we are paying for countless others in the form of higher rates, as all of this is a drag on the economy.
I won’t go deep into specifics here in the interest of space. Suffice to say that I prefer a national sales tax (not a VAT) as a replacement of the income tax system, but a relatively flat income tax system might be a necessary first step to get there. A single rate is best, but two rates might be needed for political reasons. Just brainstorming, Americans at income levels under the poverty line might pay nothing, but wealth redistribution schemes such as EITC would be eliminated; nobody gets a “tax refund” in excess of what was withheld in the firs place. All income above the poverty line could be taxed at a single rate with only a few deductions such as charitable contributions. Americans with income above the 90th percentile could pay an additional 10% on that portion of income. I’d prefer something even flatter than this package, but some compromise will be inevitable.
Of course, a tax overhaul is no substitute for spending cuts. A more effective and efficient system is a definite plus for the economy, but it won’t magically produce the additional revenue needed to finance the current state of leviathan. But serious spending cuts don’t stand a chance with Obama in office and will have to wait until 2013 pending election results. Many Democrats are open to the idea of tax reform, so now is the time to put an aggressive proposal on the table.