Apparently, many economists support the idea of reforming the U.S. tax code. What do they have in mind, how broad is the consensus and how sensible are the ideas? Bonus question: how likely is reform to happen?
Thanks and apologies if this is too broad,
Rob
I don’t know about economists, but I have heard that some politicians are talking of simplifying and flattening out taxes somewhat, and also closing some loopholes.
Here’s a little something on it.
Flat tax. Every dollar you make, it’s ten cents for Uncle Sugar, and a nickel for state/local combined. No deductions, no credits, no loopholes. The respective governments will budget accordingly.
Just off the top of my head, we have about roughly a 14 trillion dollar GDP. We have about a 3.5 trillion dollar budget, so I’m thinking we would be looking at about 25% just to cover expenses on the national level.
If corporations are “persons” under the law, apply the same tax structure to them as well … “No deductions, no credits, no loopholes.”
No deductions? Really? Retail can’t deduct cost of their products? Manufacturers can’t deduct labor? If I invest in capital equipment I can’t deduct that? Landlords can’t deduct maintenance? Salesmen can’t deduct cost of gas, hotels, meals?
And the death penalty as well.
The problem with reforming the tax code is there is a lot of stuff people/corporations like in there.
It is akin to regulations. “Regulation” is a “bad” word but actually there are tons of regulations that benefit one side in business and screw another. Indeed such regs are often pushed by an industry. For instance many investment firms benefited from regulation that prevented banks from participating in their business. When those regs went bye-bye those investment firms could not compete.
Oakminster spouts the usual ill thought out bullshit when it comes to tax reform. A flat tax just seems “fair” therefore it is a good idea.
What about tax deductions when you donate to charity? There is a huge amount of work done by charity the government need not deal with. Remove charitable deductions and most of those entities go away. Now it is up to the government to pick up the slack. Guess who will pay for that? Charities at least are subject to market forces. If they do something people like and they are good at it they keep going. If not they get less money.
Then imagine all the people who bought a home expecting the tax deduction you get on the mortgage. If Oakminster got his way the last housing collapse would look tame. You’d instantly add a huge debt to homeowners nationwide. A debt many could not pay through no fault of their own (they accepted a given debt load they could handle understanding certain benefits accrued…yank that out from under them and it is not their fault when they default).
Flat taxes are also hugely regressive. As it happens, when you consider all taxes we pay (e.g. sales tax, income tax, etc) the percentage of income people pay, rich and poor, is actually pretty close to even (some minor variation but nothing to get fussed about). Flatten the income tax as Oakminster would have it and the tax burden gets heavily skewed towards the poor who can least afford it.
Also do not forget there is a HUGE industry of accountants out there who help prepare taxes for Joe Schmo to Exxon. If you made it, “Everyone pay $0.10 on the dollar and that’s it” you’d smash a substantial industry. Not to mention all the people employed by the IRS itself who’d be out a job.
Certainly the tax code could use cleaning up. It is a monster but people need to realize there are vested interests all over the place and knock on effects that are easy-to-hard to predict.
I am all for simplifying it and having it be comprehensible. Just do not think it is a simple matter to achieve. Given the above I seriously doubt it can ever be meaningfully revised. Just too much inertia and interests. Same as regulations. Everyone wants to be rid of them but no two people can agree which ones need to go because each has different interests.
I would like as transparent and as simple a tax as possible. Personally, I like a consumption tax. We could have a national, state and local tax one for all that was taxed only at the retail level. This would eliminate pretty much all other taxes including the income tax. I especially would like the real estate tax eliminated, and put on to the sales tax.
This sales tax would be almost our only tax, with possibly just a few exceptions including still having some kind of a death tax. SS would have to be looked at carefully as well to see if it could also eventually be phased into the sales tax too.
I know this is radical. I know the rate to cover everything right now would probably be about 40-50%. But I think it would be the fairest tax of all, and I think a step in the right direction. It would also be the easiest to understand.
This is the crux of the flat tax problem and a major problem with tax debates. There are a variety of taxes that are not Federal/State income taxes, and those are almost universally regressive, with the poor paying a higher percentage of their income than the rich. Folks look at one tax and proclaim that the poor don’t pay their fair share, and ignore other sources of taxation.
I don’t mind a flat tax percentage, but it needs to have a substantial personal allowance and appropriate deductions. Then at least you can get away from the idea of changing this rate or that rate, there is only one rate.
It’s a pipe dream for the US because of the entrenched income tax structure, but I tend to agree that it would be better to tax consumption rather than income. But you have to make sure the exempt essentials from consumption tax, unless you have an alternative way of making sure the poor, who currently pay no income tax, can buy things like food and clothing.
The poor shouldn’t be exempt, and this includes essentials like groceries and clothing too. If we want to start exempting the poor for essentials, this would only invite corruption. I can see every middle class or rich person getting him a poor friend to go in and get their groceries and clothes for them, all tax free. It would only make it more problematic by developing a system of who paid the rate and who didn’t. If one is poor, they still wouldn’t be paying as much, because they wouldn’t have the money to be spending as much. Everyone needs to pay the same rate. The poor get something out of society as do the rest of us.
Why? This seems like it would be good for people that don’t spend all their money on consumption, but aside for them, I don’t see what the advantage would be. Plus, I imagine consumption is even more vulnerable to economic shocks then income, so gov’t revenues would take an even larger hit in the event of a recession.
We badly need tax reform and simplification in this country. I don’t expect it to happen. Politicians love all their little “tax credits” to reward one group of people, and other taxes to punish others (i.e. alcohol, gas consumption, etc.).
What’s the matter, you think 6.1 billion manhours to comply with the 3.8 million words in the current tax code is getting out of hand?
I’m not sure that a flat tax is necessarily the answer, but I don’t think it’s too far from the answer. There are plenty of similarly simple tax systems, and they all have beenfits and drawbacks. I think simplicity is important because so many people and corporations spend so much time and money preparing taxes when that time and money could be spent on actually producing something. As such, even if everyone gets taxed slightly more relative to what they’re getting paid now, by virtue of spending less time and money preparing taxes, they can potentially end up with the same or more afterward.
The biggest problem with taxation for me though isn’t the fact that it’s complicated, though that is a big problem too, but that it has deviated from its intended purpose. That is, the purpose of taxation is to raise money for essential government services. When we start giving out tax deductions for things, even things that we almost all agree are good, we’ve just conflated taxation with social engineering. For instance, I think home ownership is a good thing, but people should do it because it’s the right decision for them, not because it’ll get them a tax break. People should get married or not get married because it is the right thing for them in their relationship, not because of potential tax implications.
All this said, I don’t think anything signficant will happen any time soon. The reason is, everyone wants the government to do more, which costs money, but tax us less. This is also a huge problem and it is something that seems possible because revenue and spending aren’t directly connected.
As such, I think the real solution is to ultimately do a full review of the total budget and each item will have it’s projected cost put into the total amount to be taxed. That will be compared to the projected GDP and that’s how tax rates are determined. If we end up in the red, we add that value to the projection for the next year, and if we’re in the black, we subtract it. Nice and simple, and we never have a rolling surplus or deficit unless the formulae from which the projections or rates are made are flawed.
The benefits of this are also very simple. If people get upset about taxes being too high, fine, but it’s directly connected to spending, so we don’t just cut taxes, we have to cut some spending too. Similarly, if we want to add a new program, fine, but we’ll see a coresponding tax increase.
Of course, none of this will ever happen because politicians like being able to use tax breaks and such to help their constituents and contributors, but we can dream.
Your taxing something that is a better measure of what that person is getting out of the government. Just like taxing gas is closer to a use tax that if you were to fund roads by a tax on the purchase of cars.
Is it?
razncain: Right now, the poor pay no federal income tax. If you shift to a consumption tax, you’re going to shift some tax on the poor, unless you exempt essentials. Then you’re going to have to subsidize their income somehow to make up the difference. Unless you take an extreme libertarian position and argue that there should be zero government aid to the poor. If that’s the case, then fine. I’m not taking that position, though.
I didn’t want to debate things like whether or not we should have a flat tax or what dopers favorite tax strategies are. I wanted to first find out what reforms professional economists had in mind and debate the merits of those. The question was prompted by this article which was unsatisfying.
It’s too bad we can’t tax stupidity, just from the comments alone in this thread the govt would be awash in money. First, flat tax and simple tax have nothing to do with each other. It is not graduated rates that makes the income tax code complex.
Second, a flat tax would shift the tax burden from the rich to the poor and middle class in such a dramatic fashion that there would literally be blood in the streets. Do you all really think that the big problem facing America is that the poor don’t pay enough income tax?
Third a sales/consumption tax would end up being regressive. Poor and middle class people would pay a much bigger proportion of their income in taxes than rich people would.
Fourth, though they don’t pay Federal income tax, poor and middle class people do pay taxes for Social Security and Medicare, as well as federal excise taxes, and a whole variety of state and local taxes.
Fifth, taxes are not high relative to historical rates or to other countries. I’m sorry, they are just not. Obama did not raise your taxes, he was not born in Kenya, and there are no black helicopters. Take some medication and get over it.
Maybe it’s good that we have the 2nd amendment, because there is no way the population is going to put up with a 30 or 40% consumption tax, or raising taxes on 90% of Americans so the the richest 10% can get a tax cut.
You guys are so far out in outer space that you have left the solar system entirely.
Let me start by saying there is not tax code system in the world that is not eventually going to get so laden down with special provisions that a new set of ideas wills tart floating around for fixing the tax code “for good this time”
That doesn’t mean we don’t fix the tax code, it means we abandon the notion that we are ever going to get some perfect bullshit free tax code that will remain that way forever.
With a consumption tax, how much would the consumption tax have to be to raise 3.5 trillion dollars after exempting stuff like baby formula and prescription drugs and ll the other stuff that people will try to jam into the exemption?
Many of the simple rules that people talk about disintegrate when we get into more complicated structures and transactions.
But I think what the economists are talking about are tax expenditures. Its the tax breaks we give to people who have mortgages on their homes and second homes, its the special breaks we give for the oil and gas industry, its the special tax regime that insurance companies operate under, its all the tax breaks that are intended to encourage specific behaviour (solar energy tax breaks, non-economic accelerated depreciation, breaks for hybrid cars or getting new windows, HOPE tax credit etc).
We spend about a trillion dollars a year in tax expenditures.