What would the ideal tax code look like?

Great Debates
1

I’ve always found arguing about one tiny aspect of the tax code to be pretty boring. In the next few weeks, the talking heads are going to be at it again, debating the newly proposed tweaks to the current tax code.

If you could start from sctratch, what would the ideal tax code look like and why? Here’s my take:

Tax code purpose: To raise money for the functions of gov’t. AND NOTHING ELSE (i.e., not for social engineering).

General characteristics: Keep it fair, in that all participate. Special interests are not favored. You shouldn’t need an accountant or a lawyer to figure your tax. And it should be VERY DIFFICULT to change (how are people or corporations supposed to plan when you never know from year to year what taxes you are going to have to deal with).

I’ve always like the Flat Tax proposal, something like that proposed by Dick Army:

http://flattax.house.gov/proposal/flat-sum.asp

"The Armey-Shelby flat tax (H.R. 1040) scraps the entire income tax code and replaces it with a flat-rate income tax that treats all Americans the same… The flat rate would be phased-in over a three year period, with a 19 percent rate for the first two years and a 17 percent rate for subsequent years.

Individuals and businesses would pay the same rate. The plan eliminates all deductions and credits. The only income not subject to tax would be a generous personal exemption that every American would receive. For a family of four, the first $35,400 in income would be exempt from tax. There are no breaks for special interests. No loopholes for powerful lobbies. Just a simple tax system that treats every American the same."
The idea of a national sales tax (in lieu of an income tax) also seems to be reasonable, but might lend itself to creating an undergroud economy of smuggling and all the crime associated with it.

2

Fairness in the tax code can never happen. Taxation as a percentage of income will always favor wealthier Americans, and taking more from them is very unfair.

3

Airman:

If fairness can never be achieved, what can we do to minimize unfairness?

4

The 1986 tax act is always my answer to this question.
It was a compromise between the left and the right: the left got the elimination of a lot of deductions and equal tax treatment of capital gains in return for giving the right two brackets, 15 and 28%, about as close to a flat tax as the right is ever likely to acheive.
It was simple and in no one’s interests. Which guaranteed its short life.

5

I suppose the fairest tax would be one in which everyone paid the same dollar amount.
Practicly, however, the fairest tax would be one in which everyone paid at the same rate.

6

Why is it unfair? Where is it written that “thy tax must be the same percentage of thy income for all income or thou tax is unfair”? I’ve never understood how people can come up with some arbitrary rule and endow it with such a strong conception of fairness that everything else is unfair.

I say that the wealthy can both afford to pay a larger share of the taxes and should since they are, quite obviously, the ones who have benefitted most handsomely from our collective enterprise. (Imagine an anarchy with no central government…Could anyone become even 1/1000 as rich as Bill Gates except by force? [Even by force, it would probably be a pretty unstable situation!])

7

The current debate over here should provide ample support as to why it is not possible to have an ideal tax code.

8

Pantom:

Agreed. While not what I would call the ideal, the tax reform of 1986 was a major step in the right direction. And, of course, it got whittled away in on time. That’s one reason I think we need to make it very hard to change the tax code. I’d almost be happy if we could just freeze things the way they are, and let everyone get on with their lives knowing that you wouldn’t get socked with some new tax next year.

Jshore:

The problem I have with so-called “progressivity” is that once you concede one group should pay a larger percentage in tax, then there is really no logical way to determine how much more. The sky’s the limit. The “rich” would still pay a LOT more in absolute terms under a flat tax. You’d even get some sort of “progressivity” due to the large personal exemption.

9

The one key thing people should understand about the flat tax works is that it vastly increases the tax base: so many more things that weren’t before can be taxed that it makes up for the lower, and less progressive, rates.

I think Steven Landsberg does an excellent job of dissecting some of the theoretical underpinnings of a “perfect tax” in his book “Fair Play.” As well as in this shorter article: http://slate.msn.com/id/2030/

I concur with his assesment that calling something that demands different things of different people (instead of everyone having equal obligations) “equitable” is a crime against the English language. You might want to call the resulting distribution closer to some hypothetical distribution of equal shares of wealth, but to call the system such is simply ridiculous.

Here are my ideas for some fixes of the tax system. While they are all for new things to tax, the goal is be more equitable, broaden the tax base, and hence lower everyone’s rates. They also need some tricks to make them administratively simple (no careful audits). It helps that their point is NOT to encourage or disencourage particular behavior: in fact quite the opposite. It also helps that the value of most of these things can nowadays much more easily be worked out of publically available information, and done so systematically via computer.

First: Tax Leisure somehow
This is to remove the incentive to favor leisure over work (some think this might involve taxing complements to leisure, like video games, potato chips, and backyard pools, but I’d like to tax leisure ITSELF: if we know how much people work, we can figure out how much they don’t work)

Second: Remove the huge subsidy to homeowners in the form of NOT taxing imputed rent
If I own a house, I can either live in it, or rent it out. If I rent it out, I get income, which is taxed. If I live in it, I consume the same exact same goods and services as I’d be selling to renters, but don’t get taxed at all.

Third: Fix capital gains taxes
Currently, capital gains taxes only come due when you sell an asset. This gives people an incentive to hold onto their assets longer than they normally would: to avoid the tax. This is often highly inefficient. If capital gains were taxed when they were realized (when the value of the asset actually changes), people would be indifferent towards selling or not selling an asset with regards to the tax.

Fourth: Tax goods and services produced in the home somehow: probably the hardest of all my suggestions to work out, but potentially one of the most important. Stay-at-home parents produce goods and services that otherwise would be someone’s income… and taxed. Again, we have a case where one possible way of doing something is taxed, and the other isn’t. That’s fodder for inefficiency.
The other potential benefit (depends on how you look at it actually BEING a benefit) is that this would also allow us to give people who produce things in the home Social Security and other entitlements for their work, even though no one actually pays them for doing it.

However, as Landsberg notes: all these sorts of suggestions would make the tax code far far more efficient. Which means the government would have less and less of a natural check against raising tax rates. Landsberg’s “capped-out-tax” is one potential solution for that problem.

10

Tax leisure time.

Why should there be a coupling between tax and amount of work at all?
Because tax is coupled to income and you get income out of work?
This is truly warped thinking.
Everybody should work, even if they could afford not to? That is sick rationale!
Tax goods and services produced in the home somehow:
Yeah let’s tax breastfeeding, cleaning house, coocking your own food, polishing your own shoes, changing a lightbulb yourself…

Filling in my tax forms is a horror, as i is. Imagine giving the IRS (or your local equivalent) estimates on how many shirts you have ironed the last year.

11

Apos

"Second: Remove the huge subsidy to homeowners in the form of NOT taxing imputed rent
If I own a house, I can either live in it, or rent it out. If I rent it out, I get income, which is taxed. If I live in it, I consume the same exact same goods and services as I’d be selling to renters, but don’t get taxed at all. "

LOL!!! Try passing that one through any reasonably democratic government! You’d have better odds on getting rid of the tax on rents.

"Third: Fix capital gains taxes
Currently, capital gains taxes only come due when you sell an asset. This gives people an incentive to hold onto their assets longer than they normally would: to avoid the tax. This is often highly inefficient. If capital gains were taxed when they were realized (when the value of the asset actually changes), people would be indifferent towards selling or not selling an asset with regards to the tax. "

This is only true of some forms of capital gains - somebody with a Teddy Bear collection wouldn’t know what the value is until they actually sold them. And how would you treat art - one Monet sells for $50 million, so are now all Monet’s worth $50 million? You want to sell that to the public?

Or am I being whooshed here? hmmmm… I mean, re-reading your post there’s no way you can even hope to think of proposing such a tax act in the real world, is there? Taxing leisure, motherhood, homes, unrealized capital gains, the cookies you baked with your 6 year old daughter, the MP3 compilations that you made for your wife one weekend, breakfast … you’re not serious, right?

12

Apos has lost me as well.

My answer to the OP: The ideal tax code would be flat, and short. I think it could be cut from 10,000 pages to about 10. The economy would take a slight hit for a couple years due to the amount of tax lawyers and accountants and IRS people suddenly unemployed, but it would be worth it.

13

I can’t even begin to imagine how this would work. If you own stocks, are you supposed to calculate how much tax you owe at the end of each trading day and send it in. Does the IRS have to send you a refund if it went down a couple of dollars a share that day?

Capital gains are “realized” when and only when you sell. There is no way to predict what it will be worth until you actually sell it. You are arguing as if the value of such things only goes up so it doesn’t really matter (in your mind) when you get hit with the capital gains bill. How can it possibly be fair to get taxed on money that you don’t have and may never get even after you sell it if the value goes down. That feature of your plan alone would force people to sell assets that they don’t want to just to cover the capital gains bill if the value of the asset increases. How would you deal with those unintended consequences?

14

Debase: Yes! Keep it simple, and don’t filddle with it every goddam year. With all the various rates and special deductions we have now, the tax codes pits various groups of people against each other. Great for the power hungry politicians, but not for us.

Shagnasty: You are correct about capital gains, but you needn’t look any further than the current AMT (alternative minumum tax) on stock options to see what a nightmare is involved when you tax CGs before the gains are realized. For stock options of sufficient value, the owner must pay taxes as if he had sold them already even if he has no intention of selling. The result is that many people must sell the stock to pay the taxes, even though they don’t want to. So our tax code tries too make you save the stock by lowering the rate on CG, but then makes you sell immediately because of AMT. Crazy…

15

—Why should there be a coupling between tax and amount of work at all?—

The whole point is that there wouldn’t be to a lesser extent: that you couldn’t escape taxation simply by working less.

—Yeah let’s tax breastfeeding, cleaning house, cooking your own food, polishing your own shoes, changing a lightbulb yourself…—

Ok, let’s not. But while we’re at it, let’s not tax or deduct all sorts of such things in actual bussinesses as well. I wasn’t suggesting tracking every item, but rather trying to guage the value more generally.

—LOL!!! Try passing that one through any reasonably democratic government! You’d have better odds on getting rid of the tax on rents.—

Yeah, I guess we might as well hope for an equitable tax system, right? LOL! I know that homeowners are the most powerful lobby in the universe. But hey, so, apparently, are the elderly, and they don’t ALWAYS get what they want.

—I can’t even begin to imagine how this would work.—

Seems more like you only tried to imagine how it wouldn’t work.

—There is no way to predict what it will be worth until you actually sell it.—

What does that matter? The point is that people’s tax burdens not make any difference to whether its in their best interest to sell it or not in the here and now, with whatever expectations they have for future value.

—Does the IRS have to send you a refund if it went down a couple of dollars a share that day?—

Well, there’s no need for it to be paid daily. But in the longer term… yes, why not?

—That feature of your plan alone would force people to sell assets that they don’t want to just to cover the capital gains bill if the value of the asset increases.—

They earned income, they pay a tax on it. This is as much a burden as any tax.

16

Certain aspects of Apos’s suggestions are not only feasible in principle, but have been applied in practice in the past. The UK used to tax people on the imputed rental value of owner-occupied homes – this continued from the 19th Century up to (I think) the mid-1960s, so it can certainly be done. And a number of countries impose a wealth tax on the value of total assets measured at the end of each tax year. If that is feasible, then it is certainly possible to tax unrealised gains by imposing a tax on the growth in value of assets from one year to the next.

Other aspects strike me as more difficult to implement, though not necessarily impossible. Measuring, much less valuing, unpaid work done in the home is obviously tricky. Even an estimate could be little more than a figure plucked out of the air.

Besides, it raises another problem. If I am taxable on the value of work that I do for my own benefit (like cleaning my toilet) on the ground that, if I paid someone else to do it, they would be taxable, what about work that I do for someone else? If I iron my wife’s clothes, who is taxable on the value of the ironing? Me, because I chose to provide for free a service which I could have sold for cash to someone else? My wife, because she has had the benefit of the service and hasn’t paid for it? What about if I iron my child’s clothes? What about services I provide to neighbours (say, I put out Mrs X’s bin for collection because she is too frail to do it?) What about my voluntary labour at the shelter for battered women?

And another problem. I am a highly qualified professional and I can sell my services for (say) $100 per hour. My neighbour is an unqualified, inexperienced, unemployed and visibly substance-abusing teenager who would be very luck to get $10 per hour. Is the same value put on our unpaid work and our leisure time, or does the value put on it relate in some way to the amount we could have earned, had we chosen to?

But a still larger question is raised. The whole point of taxing income is that the tax burden is (supposedly) related to ability to pay. That is also the justification for progressive tax rates – the poor need all their income to pay for basic necessities, and so pay little or no tax, whereas the (relatively) wealthy can afford to pay tax at higher rates because they have more disposable income.

But if we are taxing unpaid work and indeed are taxing leisure, tax is no longer related to ability to pay. Logically, then, why relate tax to the value of work (paid or unpaid, or the “imputed” value of leisure time) at all? Is the logic of this position a flat rate tax, an even dollar amount for everybody, regardless of the value of the (paid or unpaid) work they do, or that they might do if they gave up leisure time?

17

I would eliminate the corporate income tax. It raises only $151 Billion (FY 01, see whitehouse.gov for data) out of $1.99 Trillion budget- only some 8 percent of the budget. Make up the difference with a national sales tax. What this would do is allow businesses to make decisions solely on what makes good economic sense, not on how to shelter income from taxation.

18

Consider this: if you work and work and work for say, fifteen years, scraping the bottom for everything you have, and you make enough to start your own business, and then within 20 years your business blows up and suddenly you’re a multi-millionaire, is it my right to demand that you pay more of your income to taxes than I do? You worked your way up, you earned every penny, you are now reaping the rewards of your labor, and then some dude comes up to you and takes a substantial amount of what is rightfully yours, more than the average American.

I know I’d be pissed. And yet, when it’s not your money, when the rich are just snobbish people in Armani suits and driving Ferraris, and you know nothing about what they do or how they happened to come upon this gigantic windfall, it’s sure easy to point at them and say that they should bear your burden, isn’t it?

Progressive taxation is rooted in jealousy: they have it and we don’t, so lets take it from them, since they won’t miss it.

19

This whole thread so far has been about how to define “fair” and how to define “ideal.” Since reasonable, intelligent, learned people differ on their definitions of both of these things, at least some segment of the population will believe that any tax code is not ideal or fair.

Aslo, I take exception (in a :slight_smile: kinda way though) to the assertion that the fact that one needs to hire a lawyer or accountant to understand the tax code means something is wrong with the tax code. Most individuals that have the need to get into the more difficult aspects of tax law also have the wherewithal to understand it (becuase the need exists due to a large amount of money at stake, and they were obviously smart enough to make the money in the first place). Also, large businesses would probably hire tax lawyers no matter how simple the code was because of the liability issues involved.

20

Said Airman:

I have to note disagreement with you here, Airman. Take for example the differences between you, me and Bill Gates.

Bill only has one life to give for his country, just as I–a guy with less than $200 in the bank–does, and furthermore neither of us currently has our asses on the line as you soon might. It takes millions of guys and gals like you to protect his considerable interests, at a cost which even he cannot personally, exclusively, subsidize.

Bill relies heavily on things such as a regulated stock exchange and insured banks, which costs our nation billions of tax dollars to maintain. I don’t, directly, because I’m damn near broke and probably will be forever. I doubt your theoretical fall from grace would be as precipitous as his, either.

Bill also gets a better ride out of American life than you or I do because his wealth and power better controls American politics than does our equal, singular votes. As we have seen, he has been able to utilize his power and influence to turn a decision that Microsoft was a monopoly using unfair business practices into a mere hand-slap. If you or I tried something like that on a scale equivalent to our wealth, we’d likely be in prison.

You and I are part of the millions of people nationwide who create the economic and technological climate in which he was able to assemble (and sequester from the general public) his considerable wealth–a wealth created, protected, and maintained by us, not him.

Bill Gates is who he is today because for every one of him there are ten or twenty million of us, watching his back as well as all our own. As Americans, we guarantee Bill Gates’ freedom to be insanely wealthy. Bill doesn’t do it all by himself, and he has a lot more to lose than we do–half a billion times more, if you’re just comparing him, me, and dollars.

Why then should he not be prepared to own up for the advantages we, the United States, allowed him to assemble and which we diligently protect for him?

But hey, that’s just my opinion. And by the way, Airman thanks for putting your ass on the line for me, too, despite the fact that I got nothin’ except a job and a birth certificate right now. You’re okay in my book, whichever side of this you’re on.