What would the ideal tax code look like?

[jshore]

*Originally posted by John Mace *
They’ll be more like mafia family heads with private armies, but that’s what it takes in an anarchy situation.

Whoops…sorry. I thought it might be understood that brutalizing, terrorizing, and enslaving other people to get your money doesn’t count! Yes, I admit that there may be ways like this to do it. But, I thought we were trying to constrain ourselves by some sense of morality.

Also your argument about lowering the tax rate on the poor is pretty hollow. How much income tax do the" poor" pay? In most cases, none! Now if you’re talking about the payroll tax, hey, I’m all for chucking that out the window and privatizing SS.

Even the poorest pay state and local sales taxes, in addition to SS & Medicare. And, if we are going to talk about opting out of taxes for things we don’t like, where’s my rebate for the missile defense system that won’t work, to name just one thing?

[jshore]

By the way, on one point, I do agree with you. Much of this is conjecture. That is why I believe, like TaxGuy, that fairness and equity are concepts that are hard to pin down and can’t be argued for absolutely. We can do some thought experiments, consider some different possibilities but in the end it definitely comes down to values and must be decided in the political realm.

[jshore]

*Originally posted by John Mace *
Concerning “social engineering”, I mean that no tax should be enacted for any reason other than to raise money from all taxpayers alike. The tax code should not be used to encourage or discourage any type of behaviour.

You call it “social engineering”, I call it “correcting for market failures and externalities (and providing the correct incentives for people to be most productive…I can’t figure out at 1:15 in the morning if this is a separate concept or incorporated into the other two)”.

Isn’t that what the market system is all about?

[Apos]

—However, the claim that you are going to vastly increase the productivity of the wealthy by lowering their marginal tax rate from 39.6% to 33%…Is there really hard evidence for this?—

The jury is still out. The two major problems against giving a definitive answer are 1) no one is sure how long it takes people to react to, or understand, the change, especially since it affects long term decisions as well as short term ones and 2) controlling for other factors in economies that might affect growth and productivity is very hard to do. Certainly, the experience of the Reagan cuts is pretty inconclusive as to whether smaller changes really affect anyone behavior all that much.

[lekatt]

I read this somewhere that the only fair tax would be a sales tax on everything anyone buys. The more money you spend the more tax you pay. It would be a reflection of your income from all sources.

If you buy a house or building or whatever you pay a sales tax. This tax could be a percent it needs to be and the same for everyone regardless.

I don’t know if that would be hard to do or not.

[Gangster_Octopus]

*Originally posted by John Mace *
**Gangster:

Can’t we assume that “we’re all in this together”, so we should all pony up for all the legitimate expenses of the gov’t? In other words, you don’t get to pick and choose what you are willing to support and what you are not (you vote for representatives who do that for you). Then you set up a tax code that makes everyone chip in as fairly as possible. **

WEll my point would simply be that you cannot discuss “correctness” or “fairness” without discussing the “fairness” of how the money is spent. You argue that governement spending is what it is because it is the result of a (Democratic) process, yet you would not argue the same for a tax code? If 51% voted for a flat tax but all the benefits to themsleves, is that fair? Is a flat tax fair because it better represents the fact that everyone benefits proportionally the same, or a progressive tax is fair because the reich benefit proportionally more? Or should the rich pay more beacue they suffer less pain, but if they get a incomeserate share of the benefits then maybe the “pain” isn’t equally distributed, is it?

I just don’t think you cna look at one side wihtout contemplating the other.

[jshore]

*Originally posted by lekatt *
**I read this somewhere that the only fair tax would be a sales tax on everything anyone buys. The more money you spend the more tax you pay. It would be a reflection of your income from all sources.

(1) Why would it be fairer? (2) Why would it be a reflection of your income from all sources?

In fact, not everyone spends as much as they earn. Some people spend more and go into debt (which they presumably pay off eventually in most cases but not all) while others don’t spend but invest the money instead. In particular, the rich on average spend a smaller fraction of their income than the poor. Hence, sales taxes are regressive, i.e., they take a greater percentage of a poor person’s income than they take of a rich person’s income. [There have been some proposals, e.g., by this guy at Robert(?) Frank at Cornell to implement a sales tax with a very large personal exemption to try to make it more progressive…although then the collection becomes more complicated than a traditional sales tax. And, like the proposal of a flat tax with a large exemption, it is quite progressive at the bottom end of the scale but much less so at the top which means, in effect, that you likely shift a lot of tax burden from the wealthy to the middle class.]

[ElJeffe]

Even the poorest pay state and local sales taxes, in addition to SS & Medicare. And, if we are going to talk about opting out of taxes for things we don’t like, where’s my rebate for the missile defense system that won’t work, to name just one thing?

See, here’s one thing I’ve never really gotten. The sales tax, to me, seems to be fairly voluntary. If I was extremely poor, I could pay for nothing but rent, food staples at the grocery store, and a bike to get to work, or maybe public transit if available. I can buy the bike at a garage sale, and I’ve essentially avoided paying for tax on anything. There are a few things I would need to buy - clothes, laundry detergent, and such - for which income tax would be unavoidable (though I could still by my clothes from garage sales and the like, and avoid even more sales tax).

Even for someone like me, I can opt to buy many things online, avoiding sales tax. I can shop on eBay. But sticking with the truly poor, it would seem that sales tax would be a non-issue. So why must sales tax be relevent when thinking to taxes charged of the uber-poor? Am I missing something, here?

It would seem the taxes with the most effect on the poor would be payroll taxes, to which I would say: Kill SS, and institute am optional government-overseen private account system, with a considerably lower minimum pay-in to participate.
Jeff

[The_Ryan]

I think that this idea of "no deductions at all’ is rather simplistic. Obviously, you have to have some deductions. If I own a store and I buy $500,000 of merchandise, and sell it for $550,000 are you really going to tax me on the $550,000 I “made”? If you allow me to deduct the $500,000, then where do you draw the line?

Furthermore, it seems to me that raising money from taxes, and then spending it on things that are good for society (roads, schools, etc.) is less efficient than simply taxing things that are good for society less.

[jshore]

Here are some links about Robert Frank’s proposal:

http://www.inequality.org/frankconfr.html
http://twotom.home.mindspring.com/timmy_s_rover.html
http://www.news.cornell.edu/releases/Feb96/aaas.frank.dg.html
http://www.res.org.uk/media/frank.htm
I had misremembered it somewhat. It turns out that he proposes a progressive consumption tax, i.e., it could work the same as an income tax with different brackets and such. Consumption would be computed similar to income tax now except you would not only account for your sources of income but then also for how much you had saved. The difference would give how much you consumed. (This is, amusingly enough, precisely the method I currently use to figure out how much I spend in a year without having to keep track of my purchases.)

His basic motivation is summed up here:

In brief, the interests of high-, middle-, and low-income families would be better served if we spent more on basic public services and less on luxury consumption.

…

Our problem, in a nutshell, is that the incentives guiding individual spending decisions are much like those that generate military arms races. Spending less on luxury goods and more on other things would be better, but only if everyone did it. Continued carping by social critics has not, and will not, make this happen. If we want to get off the consumption treadmill, we must alter the incentives that have led us to spend so much in the first place.

[kanicbird]

My own fav (made up by me)

(Annual income - $50,000)*.2

Negitive answers are set to $0

[pantom]

John Mace: it occurred to me while thinking about this that we may be getting accidentally set up for another round of a 1986 type reform. I read in the paper this morning that by 2006 or so a huge number of middle and upper middle income people will be subject to the AMT. At that point there will doubtless be a hue and cry to make the tax code comprehensible to mere mortals.
It could be a huge opportunity for simplification and another grand compromise.
BTW, I’ve never been able to find any hard data on how the AMT works. Anyone know?

[Scott_Dickerson]

JOHN MACE–

“…A question about your scenario 1. Why get the gov’t invovled in HOW you spend the deductions? Just give everyone the same $ amount for a deduction (say $30k), let them decide how it’s spent and then tax the rest. I don’t see the need to get so intimately invovled in how …you’ve taken a nice simple plan (the flat tax) and made it unnecessarily complicated.”

There are two levels to this.

I am saying: the government ought not tax income that is used to pay for either (1) the necessities that keep you alive and well and employed, or (2) uses that you yourself judge likely to have a positive impact upon your future earning ability. Actually, we may place both categories under “self-maintenance, short-term and long-term.” (Remember, we’re talking about all sorts of entities, not just individuals.) Now that’s the first order of classification, and it reflects the basic fairness-premiss; if you don’t accept the legitimacy of THAT, then “let’s be friends”!

But there is also the second order of classification, or “getting into the details.” Yes, I would propose “something like” the subcategories I mentioned. I would argue that the government is MORE involved in the details of your life when it forgives a lump-sum (ie, standard deduction) than when some detailing is specified–in the following sense. A Standard Deduction assumes that necessities and self-investments are the same for everyone, anywhere. And that is false. Even speaking only of individual persons, the cost of living is radically different depending upon whether you live in Palm Springs, Honolulu, Butte, or Topeka. Actual transportation costs–the costs of commuting–depend not only on fuel costs, but have to do with the availability (and drivability) of roads, cost of alternative transit, whether you can afford housing that is close to work–all that. Rents and home prices obviously vary wildly, as do education costs, insurance, medical care…you get the idea. A Standard Deduction purports to make a sort of “national median guess” and then take it as gospel, forcing its guess upon you the taxpayer. I regard it as fairer and LESS oppressive to allow me to determine for myself what constitutes my package of necessities and self-investments. If it costs $1000 to rent a 1-bedroom near work in Santa Monica, I don’t want the govt to second guess that by, in effect, telling me I shouldn’t be paying more than $450.

And of course you could hardly have a Standard Deduction anyway, going with my notion that the system will apply to all sorts of entities, including businesses, families, and big corporations.

“…Scenario 2 scares me in that it’s unclear what checks the gov’t will have on keeping spending down…” (I presume you mean, what checks the govt will have on keeping its OWN spending down.)

My answer is that the voters have to make an issue of spending decisions–not only TOO MUCH spending, but TOO LITTLE spending–and express their ideas at the ballot box. The idea of determining government action by the vagaries of tax-starvation seems fundamentally wrong to me: if something ought to be done as a matter of civic obligation, we ought to commit to doing it for its own sake, and then pay for it in the best manner possible.

[John_Mace]

Pantom:

AMT is kind of funny. Theoretically, everyone needs to calculate both their regular income tax AND the AMT, then pay whichever is larger. But, for most people AMT is lower. It’s hugely complicated, but the most common thing to be hit for (unless you’re super rich, or a corporation) is tax due on incentive stock options (ISOs). In that case, when you excersice the options (i.e., buy them) you have to pay tax as if you had sold them on that day also. But the AMT is at a different rate (I believe it is 28%, but I could be wrong) and it also has a personal deduction of around $33k (could be wrong on the exact number there, too). Then you lose all your deductions. Most people I know end up having a tax guy figure it out, again because it’s just really complicated.

K2dave: Congrats. You just (re)invented the flat tax!