Wednesday, May 21, 2008

The Platform, continued

Part Two: Tax Simplification

The U.S. tax code runs to thousands of pages, exactly how many it’s not clear (see an amusing variety of guesses along with the correct answer at Compliance with this monster absorbs millions of hours of labor every year, labor that is thus diverted from productive work. The labyrinthine code is navigable only by specialists who devote years to acquiring expertise in its provisions, another waste of human intelligence. What on earth could possibly fill those thousands of pages? Mainly special favors, provisions that are specifically designed to allow people with friends in Congress to avoid paying taxes. The U.S. tax system is a scandal.

Efforts at tax reform crop up periodically; a major and somewhat effective reform was carried out in 1986, for example. In the twenty-two years since then, however, Congress has been hard at work re-packing the code with special favors, undoing the reform. Reform is tough because every exemption and deduction has eloquent defenders. Give a man a tax break worth millions each year, and he will bring tears to your eyes talking about how vital it is to the health of the nation.

The root of the problem is the idea of allowing reductions in tax liability to encourage certain behaviors. Once this principle is admitted, the system is ripe for gaming. Some exemptions and deductions are (or at least seem) well-intentioned, like the deduction for charitable giving, and others are shameless giveaways to people with influence, like the percentage depletion allowance for mining companies, which allows them to write off a portion of the value of the minerals they extract. (As if they’re not making money from selling the stuff.) All of these breaks reduce revenue, complicate compliance and distort economic behavior.

I say it’s time to scrap tax exemptions and deductions altogether. That’s right, no exemptions. None. Not for your mortgage payment, not for your charitable contributions. I can hear you gasping, “But I’m not a fat cat!” I’m sure you’re not. But I mean it: no exceptions. Nobody gets a break for any reason. By way of compensation, I’d lower your tax rates. “Close the loopholes and lower the rates” ought to be the battle cry of tax reform.

Designing a fair and efficient tax system is tough because there are genuine philosophical differences about what fair means when it comes to taxation. Let’s try to get back to first principles: what is taxation, anyway? As an exercise, write a short essay explaining the difference between taxation and theft. An employer agrees to pay you a certain amount of money in exchange for what you can do for him; the government comes along and says, “Hand over a certain percentage of that or we’ll put you in jail.” Of course, you do receive valuable services in exchange for your money, like sugar subsidies and air strikes on Somali villages. (Am I being too snide?) But payment is not optional. And the government can arbitrarily decide to take more of your money any time it wants.

My point is not to turn you into a tax rebel; a case for moderate taxation with democratic oversight can be made. But proper perspective on taxation requires the awareness that it’s our damn money to start with, something the political left too often forgets. Running the government ought to be like running your local PTA: you decide what you want to accomplish this year, calculate how much money you’re going to need to do it, and figure out a way to raise it. Instead, the government extracts a huge pot of money from us according to an impossibly obscure set of principles that have little to do with how much money is actually needed, and then lets people with clout fight over who should get the biggest chunks of it. Instead of the PTA we have the Black Hand.

Some people think that taxation ought to be used to redistribute money from people who have earned lots of it to people who have not figured out how to earn any of it. Some think taxation should be used to chasten people who were lucky enough to be born with lots of money. Some think we should use taxation to encourage the cultivation of certain crops or the purchase of certain kinds of cars or the setting up of certain kinds of businesses.

Some or all of the foregoing may be desirable; Paris Hilton evidently has too much money and the old woman bagging groceries at my local supermarket probably has too little. But the tax code is not the proper vehicle for achieving social justice. That’s too slippery a concept for congressional appropriations geeks to deal with. And the major problem with letting the tax system be gamed is that the largest faction in Congress is the one which thinks taxation should be used to make certain people wealthy.

So the only meaningful reform of the tax code will be one that scraps exemptions entirely, taking special favors out of the equation once and for all. Now, the next question is whether you go to a flat rate, as a number of countries in Eastern Europe have done recently, or whether you have a progressive rate structure. Here again reasonable people can differ. On the face of it, what could be fairer than a flat rate? Everyone pays X percent of their income, period.

Except that if food costs a quarter of your income each month, ten percent of your income is a lot more to you than it is to someone who spends only a fraction of a percent of his income on food every month.

I’m not outraged on principle by the idea of progressive taxation, but there are some serious caveats. First, there has to be a cap. The curve has to level off. If marginal tax rates get too high, people hide their money, game the system, take their money to Switzerland or just stop trying to make more (thus decreasing investment and job generation). How hard are you going to work to make another ten thousand bucks if the government’s going to take nine thousand of it? High tax rates reach a point of diminishing returns fairly quickly.

So cap it. Ideally the tax rate curve would be asymptotic; as it approaches a reasonably low limit calculated to yield about what the government will need in the coming year (we'll talk about spending control later), the rate would level off, never reaching that limit.

Yes, some people make obscene amounts of money. But then some people like to look at obscene pictures, too. Obscenity is in the eye of the beholder. Who’s to say whether they deserve it or not? Until somebody comes up with a compelling philosophical argument to the contrary, I’m going to say that unless it can be proved by due process of law that you came by your money illegally, you should be allowed to keep the greater part of it. Envy and class resentment are not philosophical principles.

So cap the tax rates. For one thing, people who make obscene amounts of money have to do something with it. Only fools just stuff it in a mattress. Most people invest it, thereby aiding capital formation, economic expansion, and the creation of jobs for people who need them. Even obscene wealth can be socially useful. The idea of taxation as punishment is intellectually bankrupt.

So my platform plank on taxes is the following: Radical simplification of the tax code, meaning close the loopholes and lower the rates. Look at either a mildly progressive income-based system, or one of the transaction-based systems that are being discussed. John Gunther proposes an interesting one in this article. There’s a lot of room for discussion once you’ve deep-sixed the current special-favor regime. Any system that excludes, on principle, the ability of legislators to write special rules for their friends will be an improvement over the current setup.

Of course, the only justification for taxation is to meet the government’s revenue needs, so the primary question remains “How much money does the government need?” I’m inclined to say, “A lot less than it claims.” This will bring us to the next plank in the Platform, the topic of the next post: Controlling Spending.

Sam Reaves

1 comment:

Anonymous said...

You think with all the people these candidates have working for them, they could figure this out. These are the same ideas the old guys were talkin about in the barber shop when Catrer was President.