It seems from what I have been reading that if we don’t want to deep-six the country, we will need to start taxing more and spending less. Ignoring the spending side for the sake of this discussion, what tax reforms need to happen?
I have heard proposals to remove the mortgage interest deduction, to limit deductions for charitable contributions, etc. Given free reign, what type of tax reform would you design?
Thanks,
Rob
Designing a whole tax policy is outside my abilities, but I’d start with eliminating benefit-based welfare and going to a negative income tax scheme, though it’d still be progressive, not flat. (Sometimes negative income tax proposals are also flat tax proposals, I don’t think that’s appropriate.) This and treating interest and capital gains as ordinary income would go a long way, IMO.
My gut feeling:
I’m not sure “reformed” really goes far enough. How about “scrapped and re-built from scratch.” My income tax statement from last year was 36 pages long.
What it comes down to is that we have no idea how we (collectively) want to tax people. It starts off as punitive, “He earned more than me so he should pay a higher rate.” And then gets into coddling: well, he donated to charity, and paid for tuition, and paid local taxes, and has a sick dog…
The weirdest experience for me and my wife was when we bought a house and switched from the basic deduction to “itemizing.” So now we start with a tax rate around 28% and end up at around 10% by the end of it.
Meanwhile my secretary pays 35% (kidding).
As a comparison, Canada’s system is much more progressive, but starts higher for lower income earners, stays some what flatter longer, then ramps up quickly after $80k. One of the problems I see when comparing taxes in the US with Taxes in Canada are than while the deductions seem similar enough, like deducting tuition as an example, in Canada it means a family earning $80k deducts $6k tuition. In the US the same family might be paying $30k for tuition.
Another example you mentioned was mortgage interest, which isn’t deductible in Canada, and has a weird way of encouraging people to take out high interest mortgages. So they pay less in taxes, but voluntarily make themselves house poor. Their property taxes end up being higher, but then that also gets deducted from Federal.
What it comes down to is that every election cycle people cry for “reform” so a reform is added, making the tax code 10 pages longer. No one ever seems to want to make the tax code shorter.
And the US needs a proper federal sales tax.
Reign in “charitable” deductions. For example, deductions to churches are all considered charitable when we know good and well they aren’t really charities. Just because a church hands out some food baskets a couple for times a year shouldn’t mean the members get to deduct every cent they give. And all charitable deductions should be limited per individual. You want to give to a charity? Good for you, you are a wonderful person, but I don’t want to pay part of that sight unseen.
Because income seems to be such a vague concept that many manage to get around we should tax on outgo. Basically a national sales tax that progresses for more expensive items. Food - no tax, clothes - some tax, private jet - take a big bit, they won’t notice. The government tries to encourage certain behavior with the income tax. They could do the same with such the outgo tax.
But really, we have enough taxes. Less spending is the answer.
I think that the goal here should be to raise money, not to promote or discourage certain behaviors. We could cut the living shit out of spending on SS, Medicare and Defense of course, but it might be better to meet in the middle. Incidentally, what portion of federal revenues does the rest of government take up?
Rob
Roughly speaking, defense is 20%, SS is 20%, Medicare/Medicaid is 20%, Safety Net Programs + Interest is 20%, and the last fifth is the “discretionary” stuff.
I think an important reform would be to give medals and certificates of success to people who are subject to the top marginal rate. Then when they complain about the unfairness of it all we can just point to their award and say, “Well of course not. You are being rewarded not punished!” If we made the medals into cute little American flags then politicians kill 2 birds with one stone by wearing them on their lapels.
That’s a great idea 2sense! The more taxes you pay the bigger your flag pin could be so that everybody could instantly know just how awesome you were and could thank you as you walk by on the street (as if you’d ever actually walk down the street… but still).