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Simplification Bait and Switch

Tax code simplification is in the air. And it's a good idea. Also in the air is the flat tax. This is a bad idea. Importantly, these two ideas have no relationship to one another, mythologizing on the part of the flat taxers notwithstanding. Think about it. You've paid taxes. It was complicated. But did the existence of different tax brackets significantly contribute to the complexity? Of course not. What's complicated is calculating your income (especially if you, like me, derive income from several different sources) and calculating which deductions and tax credits you're entitled to claim. Simplification benefits of flat tax plans are almost entirely derived by eliminating deductions and credits. And eliminating deductions and credits is a good idea -- there are too many of these, and almost anything worthwhile that they accomplish could be better achieved by up-front spending programs rather than back-door social engineering through the tax code. And, of course, with fewer deductions and credits you could have lower rates. But none of this has anything to do with flattening the brackets.

November 16, 2004 | Permalink

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Comments

i've been disappointed for many years that the dems didn't follow bill bradley's lead and push for tax simplification while retaining progressivity, which, frankly, they still should be pushing.

i can't believe that the kerry economic team, if locked in a room for a week and joined by bob rubin, couldn't come up with a nice, simple, defensible, popular tax simplification approach that they could get out there long before bush even invents some phony version....

Posted by: howard | Nov 16, 2004 6:09:29 PM

Is "simplification" another word for elimination of most taxes besides the income tax? I'd have to guess yes.

Posted by: Brian | Nov 16, 2004 6:11:37 PM

Good point. I would vote for (a) single standard deduction for each taxpayer (and his/her dependents), (b) lower rates, (c) taxation of all income (capital gain, wages, dividends etc.) at the same rate. No charitable deduction, no home interest deduction, no child tax credit, etc. etc. etc.

Posted by: Ugh | Nov 16, 2004 6:11:38 PM

Simplification benefits of flat tax plans are almost entirely derived by eliminating deductions and credits. And eliminating deductions and credits is a good idea -- there are too many of these, and almost anything worthwhile that they accomplish could be better achieved by up-front spending programs rather than back-door social engineering through the tax code.

Yes, because its much more efficient to take money away from someone through taxes and give it back through some other program than just not to take it away in the first place, right?

Wrong. Putting it in the tax code is a simplification. It eliminates an entire programmatic bureaucracy associated with each of the standalone programs that would replace individual tax deductions and credits. Sure, it makes the tax bureaucracy bigger, but you get to share the overhead rather than having completely sepearate programs.


Posted by: cmdicely | Nov 16, 2004 6:18:39 PM

Brian, that's what it will mean if george bush gets to define it.

ugh, you're on the right track, but i have to say that i don't see any way that the home interest deduction is ever going to go away no matter what. at this point, that deduction is baked into home prices, which is baked into net worth, which is baked into lines of credit, and so on: eliminate the home interest deduction today and housing values all fall enormously tomorrow.

i've thought about this - and discussed it with people who actually know something on the matter - for years, and i have yet to see a way to avoid the negative consequence of doing away with the home interest deduction.

but everything else you say, yes, something like that....

Posted by: howard | Nov 16, 2004 6:19:14 PM

It's true, just like that old adage --

there are only three things in life that are certain, and those are:

1. You will have to pay your taxes.
2. When the getting gets good, and I mean universally good, like not-just-for-the-bad-guys good, then what the bad guys do is wait around until the non-bad guys aren't really looking, and they walk up behind the non-bad guys, and they PANTS them!
3. You're gonna die.

Posted by: americaisawesome.com | Nov 16, 2004 6:19:20 PM

howard -

Yeah, probably no way that gets repealed. My other suggestion would be to repeal the corporate income tax, but that's another non starter.

Posted by: Ugh | Nov 16, 2004 6:22:40 PM

Ugh, believe it or not, i'm with you on the corporate tax issue but i agree that it too is a non-starter: even the backbone administration wouldn't try it....

Posted by: howard | Nov 16, 2004 6:26:32 PM

It's true that tax simplification has nothing to do with eliminating "progressivity", or at any rate, very little. But I see no reason we can't do TWO good things at one time.

Posted by: Brett Bellmore | Nov 16, 2004 6:31:42 PM

Matt is correct with regard to earned
income. However, there are certainly
complications to do with investment
income and short-term vs long-term
capital gains, not to mention stock
options and the AMT. If all these
different classes of income were taxed
at the same rates, then you wouldn't
have to distinguish them all (and also
various tax-avoidance schemes and
strange distortions would vanish -
e.g. paying people with stock options
has tax advantages as well as
being a good dodge for corporate
accounts).

Having said that, I expect any
proposals from this bunch to be
completely terrible (for anyone
under $100K/year).

Posted by: Richard Cownie | Nov 16, 2004 6:41:31 PM

Yeah, probably no way that gets repealed. My other suggestion would be to repeal the corporate income tax, but that's another non starter.

I'd be all for repealing the corporate income tax if all corporate income (except for currently tax exempt non-profits, natch) was allocated, for income tax purposes, to the stockholders in proportion to their ownership of the corporation (and if the stockholder is itself a corporation, to their stockholders, etc., until you reach actual people).

As far as the mortgage interest deduction, that's a toughie. Probably the easiest way would be to cap it and let it inflate away, except that there will always be political pressure to increase the cap.

Posted by: cmdicely | Nov 16, 2004 6:49:08 PM

"if all corporate income (except for currently tax exempt non-profits, natch) was allocated...etc"

Please explain why this is necessary. I favor eliminating corporate income tax also, but if income is reinvested into capital spending, which makes share prices go up, and then income from stock sales are taxed as earned income, I can easily see a corporation paying no taxes. I have no problem with that.

What am I missing?

Posted by: bob mcmanus | Nov 16, 2004 7:07:11 PM

I'd be all for repealing the corporate income tax if all corporate income (except for currently tax exempt non-profits, natch) was allocated, for income tax purposes, to the stockholders in proportion to their ownership of the corporation (and if the stockholder is itself a corporation, to their stockholders, etc., until you reach actual people).

Well there are S-corps for that (though limited in # of shareholders); but for publicly traded corps, that becomes unworkable. Maybe tax a person's appreciation at year end (if any); but again this becomes hard for privately-held, non-S-corps where it's difficult to obtain a year end market value (or at least very expensive).

Posted by: Ugh | Nov 16, 2004 7:09:53 PM

Another example of an issue that is sure to be defined by Republicans and reamplified by the media. Poor people don't have the resources to figure out that conservative policies do not benefit them. Ever. (Any counter-examples?)

Posted by: mythrandir | Nov 16, 2004 7:22:28 PM

That renowned economist Andrew Sullivan has not only been conflating tax simplification with a flat tax, but he also has been justifying his self-contradicting idea by appealing to the 'liberal' principle that the government should not differentiate among its citizens, that old canard of welfare economics.

I took at shot at him here and here.

Posted by: Marshall | Nov 16, 2004 7:23:32 PM

Please explain why this is necessary.

Well, mostly because I want to turn things into current year gains to tax them rather than long-term capital gains which become impractical to tax in any fair manner.

Of course, as Ugh points out, its downright ugly to allocate the costs out for a publicly traded corporation (you probably could do it based on taxpayers of record over the year, weighted by length of ownership or something like that).

Posted by: cmdicely | Nov 16, 2004 7:24:46 PM

I am a pretty fast learner. Bush has taught me that when he speaks about taxes, he is talking about reducing taxes for the very wealthy. And, that holds true whether he is talking about tax simplification, tax cuts, or any other change in tax codes. It's like the shell game - you need to watch his hands very carefully, and you will still lose.

Posted by: Vaughn Hopkins | Nov 16, 2004 7:27:53 PM

As with any magic trick, the idea is to get everyone gazing at the distraction (tax simplification) and ignoring the real action (flat tax). At least the GOP learned from Social Security privatization (oops, what's the current buzzword?); if you want people to swallow bullshit without complaint, then add the sugar (er, saccharine is a better metaphor--no nutritional value) to the dose BEFORE you administer it.

Posted by: Eat them up,Yum! | Nov 16, 2004 7:38:08 PM

Everything you've said, Matt is absolutely correct. Simply base the progressive income tax on gross income and let the government provide any subsidies for various groups or causes by simply writing them a check.

It might be worth noting here that a voice from the right wing has apparently expressed some grudging respect for the theoretical arguments that Taxwisdom.org advances in defense of the Progressive Income Tax.

Joe Kristan, blog host and CPA at Roth & Company, P.C. described Taxwisdom's content with this statement:

“Reading their tax policy prescriptions is like reading Dr. Kevorkian’s works on wellness and long life, but they probably present the case for steeply progressive income taxes as well as it can be presented.”
(emphasis added)

Hmmmm. If someone who favors Republican tax policies found Taxwisdom's defense of the progressive income tax to be the best that he's seen, shouldn't Democrats be taking notice?

Posted by: Linette | Nov 16, 2004 7:46:22 PM

If someone who favors Republican tax policies found Taxwisdom's defense of the progressive income tax to be the best that he's seen, shouldn't Democrats be taking notice?


No. Usually when your opponent says of someone on your side "they probably present the argument as best as it can be" and then proceed to rebut that sources presentation of the argument, they mean "this source provides the easiest to rebut articulation of the argument that can even credibly be passed off as serious, so we'll pretend its the best our opponent has and that, by rebutting it, we've demolished the opposing cause utterly, since we've knocked down their strongest support".

And its pretty clear that's pretty much what is intended here.

It can be a clever rhetorical trick the first time you see it done, after that its just tedious.

Posted by: cmdicely | Nov 16, 2004 7:59:49 PM

Progressive taxation is a euphamism for enforced inequality. Progressive taxation is discriminatory and evil and violates the Fourteen Amendment.

Posted by: Modern Crusader | Nov 16, 2004 8:47:01 PM

DREAM ON...

It's a complicated world, and tax policy will always reflect that. Giving up all those complicated deductions and credits sounds great until you start to think of how much good the Earned Income Tax Credit has done, or whether you really want a family faced with catastrophic medical expenses to have those treated, tax-wise, like a bunch of fancy vacations. There is no hope for a system that is both truly simple and generally perceived as fair.

Vis-a-vis Matt's idea of replacing tax gizmos with direct government subsidies of good things, this seems to apply mainly to charitable contributions. To me it seems that an important advantage of the current system is precisely that it encourages charitable activities that government wouldn't be very good at or shouldn't get involved with for other reasons.

Posted by: Andy | Nov 16, 2004 8:59:16 PM

re: home interest deduction...

Allow for only the primary residence.

Posted by: /b | Nov 16, 2004 9:24:19 PM

Progressive taxation is discriminatory and evil and violates the Fourteen Amendment.

quick, call a lawyer. i think you have a good case!

Posted by: cleek | Nov 16, 2004 9:34:55 PM

How come when the Republican's call the current progressive tax scheme complicated and unfair we just sit there like we've been paralyzed?

What they are proposing are tax hikes, straight and simple.

A flat tax, a value added tax, a national sales tax, a per mile driven tax (Schwarzenegger) are all regressive taxes that shift the tax burden to people making less money. They are incredibly complicated in one very important way: most people won't be able to easily calculate what their total tax burden is and be able to compare it to what they pay now. The new republican taxes will be divided up over a 1000 different transactions.

All Republicans want to do is raise your taxes and make it hard for you to figure out exactly how they are doing it.

Posted by: fle | Nov 16, 2004 9:52:37 PM

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