I'm in the midst of paying my taxes (you know what's more fun than freelance income and business expenses? That's right--moving between states mid-year!) So it's time for our annual Megan McArdle tax rant. Every libertarian fiber in my body has been quivering with indignation for a solid twelve hours. Obviously, like everyone else I do not enjoy contemplating my cash outflow to Uncle Sam--I can think of a lot of uses for that cash. That, however, is the price of living in a free society. What bothers me is that it's so bloody complicated.
I should not have, in the course of paying my debt to society, to spend nine hours answering questions about my educational habits, proclivity to recycle, the location of my potentially qualified small business, whether or not I happen to farm, or any of the 87 trillion other things TurboTax wanted to know. It might have been 87 zillion. Frankly, I lost count.
More than two hundred years ago, we fought a whole revolution and everything to get the government to leave us the hell alone. Now it thinks it's entitled to know whether I am a qualified small business owning woman. Small business? Check. Woman? Check. Qualified? Who the hell do you think you are, Mr. Tax Man?
All this useless activity is so that our politicians can look like They Care by giving tiny tax breaks to all of their favorite people--that is to say, the people who vote for them and give them money. All of these tax breaks, almost without exception, do the most good for the people who least need them. Meanwhile, they waste time for the rest of us, distort the economy, and require us to pay extra people to process tax returns. It's lose-lose-lose all around unless you owned a seal-fur farm between 1987 and 1991.
As others haul out the plastic inflatable Santa every Christmas, I showcase the Jane Galt Tax Plan every April 15th.
1) Get rid of all our poverty programs, except those aimed at the disabled, and temporary unemployment assistance, and institute the negative income tax. That is to say, the system should be continuously progressive, from a steep negative rate of up to 100% on very low earners, gradually declining until it zeroes out around $28,000 a year, and then rising gradually until it maxes out around 35% on the top brackets.2) Eliminate FICA and pay for Social Security and Medicare out of general revenue. It's time to stop pretending it's a pension system, when there are no assets in the "trust fund"
3) Eliminate the corporate income tax
4) Eliminate the special treatment for capital gains. All income should be taxed at the same level, regardless of its source.
5) Eliminate all deductions. Period, end of statement. No mortgate, student, child, etc. All causes are equally worthy in the eyes of the person who possesses the deduction; it is a waste of our time as a nation to sit around arguing about who deserves what.
6) Just say no to the Value Added Tax. In theory, it's a good tax. In practice, because it is extremely hard to tell what proportion of the price of anything represents the tax, it removes the good and natural pressure upon tax rates.
7) Get rid of the estate tax, and tax the capital gains on whatever is sold.
So why these particular features?
Well, the negative income tax does two things: encourages work by removing the disincentives created by potential loss of benefits; and means that the entire country, poorest to richest, faces a marginal tax increase if they want more spending: the poor have to give back some of their rebate, while the rich have to pay higher rates. For many on the left, that may of course be a bug, not a feature, as it forces the electorate to think much harder about whether or not they want new spending.
The arguments between conservatives and liberals often go like this:
C: The rich pay all the taxes
L: That's not true -- what about FICA?Both have points. But the central issue that the conservatives are trying to get at is that the majority of the electorate does not face a marginal tax increase when they agitate for new spending. FICA may indeed be regressive, but its rates are unaffected by the level of spending in government. So a majority is prone to agitate for higher taxes, because they will not be paying those taxes.
I don't think it's a healthy situation for the electorate when a large majority is voting for spending that costs them nothing. To the minds of someone who pays no income tax, there's no cost/benefit analysis to be made; they're getting stuff for free. Even something of trivial benefit to them is thus better than not raising taxes. So we end up spending money on a lot of crap, because most of the voters don't care -- it's not their money.
On the other hand, liberals have a point about fairness. It isn't fair to say that some guy who brings home $20K should pay the same quarter of his income as Warren Buffett. The decrease in Joe Schmoe's standard of living represented by that 25% is much greater than the decrease in Warren Buffett's SOL from taking a quarter of his loot.
A negative income tax increases fairness, removes perverse incentives from the current benefit system, and makes sure that everyone has to think about whether they really want that new spending they're voting for -- enough to give up some of their cash.
Killing FICA increases fairness while removing some of the obstacles to reform by eliminating the fiction of an insurance program.
Eliminating the corporate income tax while equalizing treatment between capital gains does a number of things. It mitigates the current bias towards (tax deductible) debt financing. It ends all the ridiculous distortionary crap that corporations do to get around taxes. It ends the bias towards retained earnings that helped produce such interesting results in the stock market. It takes away a large chunk of the ability of the rich to avoid taxes by deferring their income in capital gains. It ends the tax preference for stock options that helped make the start of the new millenium so lively. Under this plan, income is income is income, no matter where it comes from. Thus we can stop the multi-billion dollar industry in shifting income from tax-disadvantaged to tax-advantaged forms.
If you just end the corporate tax without changing capital gains, you keep much of the distortion and shelter for the rich. If you eliminate special capital gains treatment without eliminating the corporate tax, you bias the economy away from investment, because now income is taxed at a high level twice -- once when its made by the company, and a second time when its distributed to the company's owners. This way, we tax it once, when it hits a real person.
We eliminate deductions for two reasons. First of all, they're distortionary. If it makes economic sense for adults to go to school, they will go to school. Giving a tax credit for it just encourages marginal activity that wouldn't pay for itself without a subsidy. Try thinking of it not as a tax credit, but as you giving someone else money to follow their dream of learning Old Church Slavonic, and you see what I mean.
Second of all, deductions are the way that the rich make sure that they pay a lot less taxes than the upper middle class. There is a reason that Barbra Streisand thinks that income taxes should be raised; she isn't going to pay much more tax. Most of her money is in assets, earning more money. It's the guy who owns the gas station down the street who's going to get it in the teeth. If we want to tax the rich, let's tax them, not give umpteen zillion deductions so they have the same marginal rate as your average bike messenger.
That's fine, I hear you say, but why all the deductions? Why not just the bad ones?
Because, as we've found since Reagan's simplification, there's no such thing as just one deduction. If you want the mortgage tax credit, you're going to need to give someone else the land-use abatement, and then there's the guy with his Urban Empowerment Zone Qualified Small Business, and next thing you know, we haven't gotten anywhere. The only way to get a clean code is to get rid of all of them. This won't be fun for many people. Housing prices will drop, for starters. On the other hand, so will tax rates. And come on -- why should an apartment renter be paying more taxes so you can frolic in the greenery?
Why get rid of the estate tax? Because the revenues raised are trivial, and people spend an enormous amount of time and money structuring their estates to get around them. Again, a disproportionate share of the tax is paid not by the super rich, but by the poor schmucks with one or two big assets they can't structure to get around the tax. On the other hand, when it's sold the inheritors should pay all the capital gains -- if you get rid of the estate tax, you should get rid of the stepped-up basis as well.
As I wrote way back when, guaranteed to satisfy no one but it's owner . . . but at least I feel better.
The rest of you should probably get back to your taxes.
Are you serious? Do you realize how much higher the debt would go because of this? Do you realize the devaluing of the dollar is part of the reason why oil is where it is?
After 40+ years in the financial services industry, I couldn't agree with you more. The biggest barrier to any true tax reform is the power our current system hands to congress to engage in social engineering as well as to reward friends and penalize enemies. The second biggest is the entrenched interests who benefit from the current system. For example, consider the impact on the life insurance companies resulting from the demise of the estate tax.
While I would prefer some sort of consumption tax to an income tax, I like this plan. It follows KISS. I'm not sure if it would be workable, but some kind of tax deferral on investment might help encourage saving over consumption. Not sure if you'd count that as a deduction...
I wonder how much we'd save in tax preparation costs, tax attorneys, tax compliance departments, etc...?
JKC,
If you are going to complain that the debt is going to go higher, then why not tell us how much higher (I suspect your's is just a gut reaction without any thought at all)?
At a glance, it appears that Megan's tax scheme could actually balance out overall. Sure, the negative taxes add to spending, but the elimination of all poverty programs and deductions, and the equal treatment of capital gains to other income, will act to negate this. It certainly isn't obvious that debt will go higher.
I remember reading that same screed in high school. But whatever, just start taxing the bejeezus out of the churches first.
Every libertarian fiber in my body has been quivering with indignation for a solid twelve hours.
Ha Ha. Good one!
The Russell Newquist tax plan is much simpler:
Require all members of Congress to do their own tax returns by hand every year without the aid of computer software* or any other person (including their spouse).
Pass that one and watch how quickly our tax code simplifies.
Megan, as a frequent reader of your blog, and a longtime fan of 99% of your posts, I have to tell you that I can't even come close to taking your tax plan seriously.
I like this proposal.
My favorite story about tax deductions is the Dan Rostenkowski airline travel deduction.
For those who don't know the story, Rostenkowski had one or two daughters who worked for the airlines. In connection with that, he got free flights anywhere in the country. The problem he had was that those flights counted as income for anyone who was not a spouse or child of an airline employee. As a result, he used his position as chair of the Ways and Means committee to change the tax laws so that parents of airline employees didn't need to count those flights as income. Parents of railroad and bus employees, however, still had to count their free travel as income. To my knowledge this state of affairs remains to this day.
I agree with a lot of this, but I think Megan is falling into a typical Republican mindset when she trashes Barbra Streisand. Public opinion polls show that large majorities feel that the rich pay too little in taxes and that the US should go over to some form of universal medical insurance. Yet it's possible that our next president, like the incumbent, will be a right-winger. The reason is that many people, perhaps most, vote on the basis of personal likes and dislikes and cultural values rather than self-interest. I suspect Ms. Streisand is the same way. If it's OK for blue collar voters to support Bush because they feel he's a Christian and a patriot, it's OK for Streisand to support the liberal of her choice.
"That, however, is the price of living in a free society."
Keep telling yourself that; one day it might come true.
This is easily one of, if not the best, tax reform proposals I have ever read. I might add that certain indirect taxes, like a carbon tax, probably make sense as well, but I don't have any major quarrel with your plan. The tax code is insanely complicated, and while I don't think there's much hope for paring it down to something the layperson can easily digest, we can at least make filing returns a lot easier, and make the code fairer and more efficient.
Well, you've been proven wrong about one thing: you said the plan would satisfy nobody but its owner. Several people have already signed on for it.
Count me among them. I like this plan. Of course it could never pass, but it's still a good idea.
But think of the massive hit to our economy! All those businesses shut down. All those people who make a fortune out of preparing taxes for others, out of tax preparation software, out of advising clients on structuring assets and income to avoid tax -- all suddenly out of a job. And do they have any skills which would allow them to actually do something productive? Maybe a few of them....
Obviously you would need to make the unemployment benefit, at least for these people, both very high (so they can maintain their standard of living) and very long (because so many are unemployable).
Overall, those are good and rational ideas. (Although I did always dream of buying a big plot somewhere and getting paid not to grow anything.) This would probably have to go in-hand with eliminating other transfer programs like the farm subsidies.
But, here's a dilemma that I struggle with regarding taxing cap gains.
1. Should this be indexed to inflation? It seems that there is something unfair about the government printing more money and then taxing you for the purely nominal portion of a cap gain.
2. Isn't there something wrong with taxing savings? If I get taxed once after working and then invest, that feels a bit abusive to tax the gain on the post-tax remainder.
3. Maybe what would be more fair regarding #2 (but more complicated) would be to allow something along the lines of a 1031 exchange, where you can defer taxes on one gain by investing in another. That would give you 401k treatment to all investments.
Maybe that's not such a great idea, but I have not yet heard a really good one.
I believe in being honest and not living in delusion. If you assume that government is there to provide you benefits, which your taxes pay for, then of course your plan makes sense. But in the real world, government is an entity that claims monopoly use of force in a geographic region, and taxes are the method by which it extracts your wealth from you. As such, the more honest tax plan would be for the government to take all the money you earn, doling out to you what it determines you will need in order to keep producing at a reasonable (not optimal, as that would be too costly to it) level. On the plus side, it would finally shut up all the liberals who keep on crying for government control over this or that sector of the economy. And then, after enough time as passed that liberals have died away and people are actually willing to die again for their principled beliefs, the government can be overthrown, leading to a brief period of actual freedom, before the cycle begins again.
Leaving aside the tax plan for a moment, I want to contemplate Megan's "libertarianism."
The “libertarian” fibers of McArdle’s body are upset because the tax system is complicated? That’s it?! No problem with paying taxes, if only it were simpler.
And please, don’t feed us the line about taxes being the “price of living in a free society.” Just the other day Megan was babbling with rage over her friends getting arrested for dancing at the Jefferson monument. Where is the free society that you speak of? I thought you at least read The Agitator and its unending chronicle of police abuse (and please, no comparisons to dictatorial third world countries. Paying taxes is not basis for freedom).
More to the point, taxes represent the coercive use of force by the government to rob its people. I will repeat my question: has Megan actually ever read any libertarian thinkers? I offer a suggestion, read Frank Chodorov’s masterful The Income Tax: Root of all Evil. Then get back to me about whether income taxes are the price for living in a free society.
You have a good point that deductions distort economic activity and are highly complicated for relatively low benefit. The cost of taking "no deductions" is high but each one makes surprisingly little difference.
Simple and transparent makes the whole system work better.
My only concern with the Jane Galt plan is how you would then handle state income taxes? Would they be gone or would they just move in to scoop up the negative income taxes on the poorer filers?
Just get rid of the AMT. Please.
wj,
You know nothing of my work.
Kisses,
Freddie (no relation)
I liked it then. I like it now. Will never, ever become law, though, as some of the reactions here prove. Too many people have a vested interest in one sacred cow or another.
If we ever eliminated the mortgage tax deduction, it would have to be phased out over a very long period. Eliminating it overnight would cause a meltdown in the housing industry that would make the current mess look like a hiccup.
Although I am probably more anti-tax in general than Megan, I have to take issue with her stance on the corporate income tax.
If corporations are incorporated persons, then their activities should be taxed in the same manner as the activities of natural persons.
If we get rid of the income tax for everyone, we can get rid of it for corporations. But not until then.
Cancelling the corporate income tax would merely incentivize me to form a corporation and leave all my income in it until it actually needs to be spent. I also would run as many personal expenses as possible through the corporation. Voila! I have successfully evaded most of my personal income tax obligation.
You might argue that you would prevent this somehow, but I honestly don't see how, especially since in the absence of a corporate income tax, corporations would not have to file returns, and without returns how are you even going to know what expenses or income my corporation has?
Frankly, I think the current tax treatment of corporations violates equal protection. If they are persons, they are persons. That means if they can deduct their rent from their income, natural persons should be able to deduct their rent from their income. If they can deduct 80% of their expenses on travel, meals and entertainment, natural persons should be able to do the same. Etc.
Taxes are what we pay to
-- allow porkfat members on Congress to get themselves reelected at our expense;
-- satisfy the urge of liberals to force others to spend on their compassion.
I don't like porkers, and I have my own bleeding heart causes that I should like to spend my own hard earned resources on. I don't need majoritarianism to tell me that I have a moral duty to show compassion for others.
I don't care if the tax system is complicated, I care that it costs too damn much for things I don't want to spend on.
That's not a libertarian twitching, that's a libertarian, deeply bitter rage.
I want Wicksellian taxation, but that won't happen. I want Jim Buchanan unanimity voting, but that won't happen either.
Since I live in a free society, at least I have a choice. I can pay those darn taxes, or I can go to jail. In truth, taxes are what you pay to stay out of jail.
Wow, makes me feel a real happy member of society. Just don't confuse it with liberty, please.
Conceptually, it's a great plan. Two questions:
1) have you run the numbers to see what % of GDP it would produce for Washington to play with?
2) Is your negative tax large enough to cover health insurance for those at the bottom?
So you're in favor of the FairTax? (only thing that would need to be changed is the size of the prebate for #1)
I agree with many of your suggestions, but strenuously disagree with the one about eliminating Social Security. Here's why:
As it now stands, almost everyone who thinks at all about Social Security considers it a sort of mandated savings plan. That is, every month that you work, you put away a chunk of money, and the government keeps track of that for you. Then, when you retire, you get back a monthly amount that is roughly proportional to the amount that you "saved." Some unlucky folks die young and don't get anything back; some luckier folks live a long time, and get back much more than they put in. But, by and large, you have a reasonable expectation of getting back an amount in proportion to the amount that you saved.
Because John Q. Public thinks of it this way, there is strong resistance to changing the structure, to make the payout proportional to need. ("I paid that money every month! You can see it as a line on my earnings statements! I have been planning for it, and I expect to get it back when I retire!)
If this gets changed to just another government entitlement program, lumped in with all the rest, the feds will lose all incentive to structure it in this way. Pretty soon it will become just another government tool to reward the non-productive members of society, and punish the productive members.
By the way, I just finished my taxes last night, and my fibers are quivering, too, even if they are not Libertarian. I really like the Newquist plan. I have been an engineer for over 30 years, so I am reasonably proficient with numbers, and following directions, and the tax forms read like a bad joke. I give the typical congressman about 30 minutes, before he would be dashing off to introduce a tax simplification bill. I wish you could reprint the old Jeff MacNelly tax form cartoon, which won the Pulitzer that year...
You libertarians are so cute sometimes... :)
My taxes took me 2 hours. That's including doing them TWICE: once on paper, once online so I could e-file through taxact.com (for free). Of course, I don't have a lot of the complications Megan has. I'm not a "qualified small business owning woman" and thus didn't qualify for that tax credit. I don't happen to farm, so I didn't qualify for that tax credit either. Nor did I have to waste time calculating whether I qualified for the Earned Income Tax Credit, as I don't have children.
Most of those "complications" you are whining about are tax credits meant to give back some money you would otherwise have had to pay. So of course it's completely logical that you want to get rid of the entire system that gives you all these credits, and instead give a massive windfall to corporations (no corporate tax at all? are you crazy? what keeps Mr. CEO from just leaving all his money in the corporate till and living off a massive expense account?) and the wealthy (eliminate all entitlements? so what do the poor do, go hang? or do you think your "negative income tax" will redistribute enough money to them to survive? how do you plan to convince the wealthy to let that happen, given how much they squall about "redistribution" already?).
As a rabid anti-corporatist it should be no surprise that I simply fundamentally am appalled at the idea of giving corporations a free ride. No way.
Don't like all the questions TurboTax asks? Don't use TurboTax. I've never used a tax preparation program in my life and never plan to. If I'm rich enough to where it becomes an issue, I'll be rich enough to pay a tax preparer to take care of it for me.
1. My wife and I had 4 state returns this year because of a mid-year move, in addition to a federal return and corporate state and federal returns for her S-corp. Most of our refund is paying for our accountant, so I feel your pain.
2. But, as a law student who is considering a career in tax law, simplifying the tax code is a very scary proposition. This multi-billion dollar industry in tax avoidance is likely to fight tooth and nail to prevent tax simplification.
Cancelling the corporate income tax would merely incentivize me to form a corporation and leave all my income in it until it actually needs to be spent. I also would run as many personal expenses as possible through the corporation.
You can already do this with an LLC; it turns out it doesn't work very well because almost anything the LLC buys for you counts as income to you anyway. It can work for some people--movie stars usually technically work for LLCs that they control--but it won't save most of us much money, if any, and it's a huge pain in the ass.
One last thought. It's really not that hard to file taxes. IMHO 95% of what the US goverment does could be discontinued or just outsourced. It sucks to see all of the strange rules and special breaks, but for most people the filing process is relatively simple.
Lets do a real simple tax to replace the income tax.
How about taxing people by height and weight?
That would be a neat way of taxing people for their impact on the environment as well!
what keeps Mr. CEO from just leaving all his money in the corporate till and living off a massive expense account?
The fact that he would be (personally) taxed on what he took out of that account?
Should inheritance count as part of "All income should be taxed at the same level, regardless of its source?" If so, I'm on board with scrapping the estate tax.
The fair tax is unenforcable (too much cheating with a 20% retail sales tax), so we have to use a VAT or an income tax. Since the VAT seems to be too easy and problem free for Megan, I guess we're left with income.
The Jane Galt plan wouldn't collect nearly as much revenue as the current system. Care to share what you'd cut? (Note that farm subsidies are a rounding error, so I mean real cuts.)
liberalrob,
no corporate tax at all? are you crazy?
The idea is that the end-owner of the corporation pays any resulting tax. This is similar to what a REIT does already. It's just more economically efficient as it reduces the massive incentive now faced by corporations to engage in elaborate tax gamesmanship. Also, by lowering the tax rate that a corporation faces you lower the hurdle for investment, allowing a corporation to invest more that they otherwise would. ie, a corporation might need a 20% after-tax return to make it worth it to build a new factory.
The net taxes paid is the same. (Or more if you factor that removing inefficiencies can grow GDP).
@A-ro: did you make up that revenue estimate? Remember she's getting rid of all deductions and increasing tax rates on cap gains and dividends.
The fact that he would be (personally) taxed on what he took out of that account?
No he wouldn't. Not if he framed the expense as a company expense.
If my corporation buys cars, condos, travel, meals, entertainment, health insurance, dues and subscriptions for health clubs, magazines, country clubs, etc., art, antiques, computers and electronics, cell phone service, etc. - how am I going to be taxed on any of that? Unless you are proposing calling all of that income to the person using it, in which case there are a whole lot of people working for big corporations whose income taxes just got a lot more complex to calculate.
Unless you are proposing calling all of that income to the person using it...
Not me. The IRS, and yes, many (not all) of the things on that list are taxable to the person who receives them unless they are provided solely as part of the person's employment and for the convenience of the employer or are excludable or deductible for some reason.
A company car is taxable to the guy who gets it unless it's exclusively for company business (say you're a delivery driver) and driving it home is a "de minimus fringe." A condo is clearly income unless, say, you're a condo manager who is required by the company to live on-site and be available 24/7 to fix problems. Travel for other than business purposes is income. Meals are income unless they are incidental to travel, incidental to actual business discussions, or provided on the employer's premises so that the employee may be prevented from leaving. Entertainment is income unless it has a substantial business purpose. Health insurance is excludable for everyone, not just CEOs. I'm not sure about health clubs; might be a qualified fringe beneift. Computers, electronics and cell phone service are all income unless primarily for the convenience of the employer with personal use being a de minimums fringe. Magazines are income unless for a legitimate business purpose. Country club membership is almost certainly income. Art and antiques are most definitely income.
The fact that people don't report all this doesn't make it non-taxable, it just makes them tax evaders. And of course there's lots of gaming of the system; the CEO will stay at the Ritz and (legally) fail to include it in income it when staying at Motel 6 would have worked just as well.
The tax code isn't as easy to legally bamboozle as you seem to think it is.
@A-ro: did you make up that revenue estimate? Remember she's getting rid of all deductions and increasing tax rates on cap gains and dividends.
Larry,
I am basing my assertion (that the Jane Galt plan would not collect as much revenue as the current plan) on point #2 of the plan:
This would do away with a lot of revenue; payroll taxes collect 75% as much as the income tax with deductions. Removing deductions and increasing the cap gains would have to almost double the income tax collections to make up for the payroll taxes.
http://en.wikipedia.org/wiki/United_States_federal_budget,_2007
Rob, eliminating the corporate income tax would make it easy to bamboozle.
First of all, the overwhelming majority of the items we're discussing ALREADY escape the notice of the IRS, even though the corporations have to file returns.
If the corporations don't have to file returns, and aren't in industries where licensing or bonding requirements make it necessary to produce GAAP auditted financials, good luck tracking all of that.
If the corporations don't have to file returns, how would any tax collecting agency know what the corporation has spent its money on? How do you establish whether [for example] meals and travel had a legitimate business purpose, when you have no legal grounds for even looking at the corporate books or auditing its receipts? If I don't have to file a corporate return, I can burn my receipts at the end of every week. Without corporate returns, there is no way to track what a corporation is spending its money on, and therefore no way to know what is or is not being inappropriately used.
Unless the rule is going to be that corporations have to document their expenses in the case of an audit of a shareholder or employee - in which case the system isn't really a paperwork improvement as Megan avers. I'm sure that major corporations would look forward to the prospect of responding to discovery every time the IRS wants to know if the corporation bought someone a laptop or paid for their wireless card.
If the corporations don't have to file returns, how would any tax collecting agency know what the corporation has spent its money on?
They wouldn't care what the corporation spent its money on, the corporation having the right to spend it however it pleases with no accountablity.
They'd care where the individual, who is the target of the hypothetical audit here, got his stuff. If he's living in a house which is way beyond his stated income, then that's something interesting to investigate, isn't it? Just exactly like it is today. You don't need the corporation's records to nail the tax evader at all, you just need the bank's records showing who pays the mortgage or the file from the escrow company showing who's check paid for it. Or you just haul the guy into court and ask him, under oath, where the money came from.
I don't see any problem here, or any way in which the corporate income tax is necessary to enforce the personal income tax.
"If we ever eliminated the mortgage tax deduction, it would have to be phased out over a very long period." We did it in Britain over (about) a dozen years, starting under the Conservatives and finishing under Labour. I hate to think how even more absurd our house prices would be now if we hadn't. We also used to have inflation-linking for Capital Gains Tax, a rather good Conservative idea that Labour scrapped. As compensation, I suppose, Labour has reduced the Capital Gains Tax rate from 40% to 18% - seems an inferior idea to me, since out highest Income Tax rate is 40%.
"That, however, is the price of living in a free society."
My contempt for this is unexpressible.
I don't feel sorry for you, you stupid, stupid little girl.
You deserve whatever they lay on you.
Where's the discussion of whether consumption taxes are better for the economy?
http://gregmankiw.blogspot.com/2006/06/consumption-vs-income-taxation.html
This is probably necessary, so that people don't shelter gains in a corporation, and then pay the tax once "it hits a real person." In some sense, a limitless traditional IRA is like a simple corporation with the stated goal.
See the President's Advisory Panel on Federal Tax Reform for more:
http://www.taxreformpanel.gov/final-report/
Will we eventually disprove the following statement?
Ours is the worst system, except for all the other ones.
Do androids dream of electric sheep? -> Do libertarians dream of dictating "better" policy?
Agree completely. Love the plan.
I too would be willing to pay a slightly greater amount, in exchange for a significant decrease in complexity. Of course, as liberalrob points out, I already have that option available to me - I hire a tax preparer. I'm a little surprised that Megan doesn't do the same.
But that doesn't fix all the distortion and bad incentives Megan mentioned. Aside from the fact that corporate tax has been shown to be regressive, removing the incentive for corps to do all their crazy tax dodging loophole behaviors would be a big improvement.
As I've said before, I'll believe in the sincerity of people making noise about the federal government monitoring international phone calls as soon as they protest over the much more serious privacy implications of the government collecting such massive amounts of information from hundreds of millions of people every year. And no, not all of the private information has to do with tax credits -- regardless of any credits, you have to declare your name, address, SSN, family members, place of employment, income from all sources whatsoever (including alimony, interest, investments, and a zillion other things). I consider all of that information a heckuva lot more private than any phone call that I might happen to make to an international terrorist (zero again this year).
Oh, but SB, don't you know they're reading your library records?
Oh right, that too . . . I'm supposed to be agitated that under the Patriot Act there's maybe a one in a billion chance that if I were somehow caught up in a terrorist investigation, the FBI might look at whether I checked out library books on bomb-making. Meanwhile, every year I have to spend several hours of my time sending all of this private information to the government on pain of a serious fine and up to a year in prison (26 U.S.C. 7203).
@A-ro: You may be right, but I'd still like to see numbers.
The one thing I like about the FICA tax is that it ensures that everyone pays at least something to run the government. With this proposal that goes away.
I think there'd have to be some tweaking to ensure that corporate profits don't just lie around as retained earnings indefinitely, and to squelch the expense account dodge.
Y'all are maybe missing the main cause of the complications in the tax codes.
Way back just after Carter left office, I read a series of articles on his problems with Congress. Along the way, the articles gave a history of the processes that have lubricated activity in Congress over the decades. I don't remember the whole sequence, but it included the "water projects / dam building" era, the "highway projects" era, etc. (The authors claimed that much of Carter's difficulties with Congress at the start of his term was due to politically ill-advised attempts to limit and manipulate the flow of water-projects money.)
Anyway, long story short, the article ended by claiming that these historical money sinks had mostly been replaced by exchanges of tax-code favors. A side effect of this trend in congressional negotiating lubricants is the continuously increasing complexity of the tax code.
Et voila: here we are.
1) Adopt this plan
2) Remove appropriation authority from the US Gov't
3) Provide tax payers with a tax-distribution option on tax return forms that allows us to allocate our next-year's income taxes to specific segments of the federal budget
4) Watch Congress cry when their pet soical projects dry up from a lack of funding
5) Profit ???
I am self employed and end up paying 42% of my income to state and federal taxes. I don't give a rat's ass how foolish a deduction sounds to you, I am not giving up one of them.
Address the spending, starting with the bloated military, and maybe then you won't sounds like another blowhard (of which we have a true surplus).
Woo-hoo! Especially points 3-5. Ideally point 3 would come with some clear limits on corporate personhood.
I also agree that we should look at progressive limitless traditional IRAs. They would be easy to implement and would essentially work like a progressive consumption tax.
I've wondered what would happen if we implemented a limitless IRA in which the tax rate was determined not by income or the amount consumed but by the value of the assets in the IRA. It would arguably be more fair, as the marginal utility of the dollar is more a function of wealth than income. On the other hand it might be hard to implement, and it might lead to some interesting behavior regarding savings and consumption.
How anyone could claim to be a "libertarian" while opposing the estate tax is beyond me. Please go back and read your Ayn Rand.
And until we're ready to get rid of limited liability and the laws allowing corporations to "live" forever, they had damn well better pay income taxes.
I enthusiastically support this plan.
Most of those "complications" you are whining about are tax credits meant to give back some money you would otherwise have had to pay.
In other words they're attempts at social engineering; offering deductions for "good" actions is equivalent to imposing higher taxes for not taking those actions. Get rid of them and the overall rate can decrease and stay revenue-neutral, and we'll get rid of lots of wasteful rent seeking.
eliminate all entitlements? so what do the poor do, go hang? or do you think your "negative income tax" will redistribute enough money to them to survive?
Well, yeah. If they're surviving now on entitlements, it stands to reason that they'd survive when given the equivalent in cash. One of the major benefits would be to eliminate the perversity of
over 100% effective marginal tax rates that the working poor can face.
Every libertarian fiber in my body has been quivering with indignation
Might want to try some Metamucil, that quivering you feel is actually a deficiency of fiber. It explains the runny mess in the blue box, too (the one with the cargo-cultish "Jane Galt" tag over it).
tps12,
Can you explain to me how the estate tax is "libertarian"? And how Rand relates to the question?
Megan:
If the VAT rate is X%, don't you know that the tax proportion of the price of anything is X%, distributed along the chain of previous owners? If you're worried that people will forget that the price they're paying includes taxes, require that receipts explicitly state the amount of tax paid, as well as the total.
Almost any tax can collect enough money if the rate is high enough and the tax base is big enough. This plan is no exception. It would not bankrupt the government unless the rate was too low.
WJ writes:
As a tax professional celebrating the end of his tenth season in the business, I'd just like to say I'd be delighted to give up my job and find work in another field in exchange for major tax reform. I know I speak for the majority of my colleagues, too.
Whenever people suggest this to me, I have to ask: If there were some way to magically cut crime in half, would police officers object? If there were some way to magically improve children's health by 100%, would pediatricians object? So why do you think tax accountants would object to serious tax reform? Those of us who face the tax system every day know better than anyone how bone-headed and offensive it is. Familiarity puts us more at ease with it and certainly makes us less intimidated, but it doesn't make it our friend. In our minds, stupid tax law is the enemy. It is the evil beast that we slay every year. If, somehow, one year it didn't return, we would rejoice in victory.
I'm not sure why WJ thinks we'd have trouble finding other employment. To be good at taxes requires a facility for number-crunching and the ability to make sense of government regulations and forms. There are plenty of other places where that's useful. Most of the knowledge is specific, but the skill set is widely applicable.
As for standard of living, my annual gross pay is about $45,000. I'm not complaining; it's enough for me, and it's better than what I was doing before, but it's hardly a "fortune". Doing taxes is just another run-of-the-mill skilled white-collar job (except that it's far more seasonal).
These exemptions were put in the tax code to achieve a series of public goals without having to spend for them. The alternative is to cut the exemptions out of the tax code and actually spend public money to do things like subsidize kids to go to college (rather than giving their parents a special tax deduction), etc.
No wonder Jefferson's All Seeing Eye called the Park Police and had their visible hand of gummint remove you people from his gaze at the memorial. He most certainly finds you as offensive to his eye today as he would have over 200 years ago, and I doubt he would have been the only one. You people are incapable of embarassing yourselves, not unlike Rand but you are intent on making the rest of us embarassed because of you. If there is an invisible hand, I hope it sweeps this airhead from the marketplace of bad ideas and sooner rather than later. BTW, only an idiot and a Randroid cultist would ever imagine that Jefferson would eliminate corporate taxes. I'm not even going to cite sources for that. We will "lay the axe" to you just like Jefferson did. Make no mistake about it.
The Founders' Vision and the Estate Tax
JAMES G. WILSON
Cleveland State University College of Law
Abstract:
This article relies upon the views of leading members of the Founding generation to support the proposition that contemporary proposals to eliminate estate and gift taxes are unconstitutional. First of all, the Framers did not limit their analysis of "constitutionality" to Supreme Court opinions. They believed that elected politicians and the body politic also resolved important constitutional disputes. The public's refusal to support the Republican Party's effort to impeach President Clinton is a recent example of a major constitutional controversy's being resolved outside the courtroom. More particularly, the Founders frequently employed the Aristotelean definition of "constitution" as the actual distribution of wealth and power (not just the formal distribution of public power). Many Americans of that era were wary of luxury and concentrated wealth.
The taxation power was a major part of their analysis. The leading members of that generation agreed with Adam Smith that proportional taxation was permissible, even desirable. Thomas Jefferson thought the silent tool of progressive taxation would stabilize the republic by preventing the wealthy from becoming a tyrannical aristocracy. Jefferson and Madison led the movement to eliminate primogeniture and entail, because those two doctrines of wealth transfer at death kept property in too few hands. Madison, however, foresaw that these reforms, combined with widespread education and protection from religious persecution,would not maintain a "happy mediocrity." Commerce and manufacturing were creating new forms of wealth that would not be affected by Jefferson's agrarian policies. Once the frontier disappeared, the poor would flock to corrupt cities where they would be manipulated by wealthy demagogues.
Overall, this intellectual history supports the constitutional argument that we should not abolish estate and gift taxes because huge wealth transfers create many "haughty hiers" who will have the undesirable, dangerous traits of decadence and overweening ambition that accompany any hereditary aristocracy. Quite simply, the allocation of money and influence, a process invariably influenced by tax policy, is the most important constitutional issue of our time. While some may argue that conceptions of constitutionality should be limited to Supreme Court jurisprudence, this article replies that constitutionalizing these issues puts them in a richer historical context and dramatizes how central they are to the well-being of the republic.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=239887
Jefferson and the Aristocracy
How Cicero’s Writing Influenced Jefferson’s View of Hereditary Power
© James Hogan
Feb 10, 2008
Influenced by the writing of the Roman Senator Cicero, Thomas Jefferson introduced bills to repeal the laws of primogeniture and entails in the Virginia legislature.
Historians attribute the majority of the ideological roots of America’s founders to European Enlightenment thought as well as English opposition party writings. However, in at least one place, it is difficult to connect the founders’ ideals and modern European thought – Thomas Jefferson’s strong statements regarding the dangers of a hereditary American aristocracy. The idea of noble birth rite and hereditary power were firmly entrenched in 17th and 18th century European thought and to advocate against them would have been controversial if not outright dangerous. Jefferson however, experiences no reticence in condemning the institution and introduced laws aimed at destroying it. Stating in an 1813 letter to John Adams, “These laws, drawn by myself, laid the axe to the root of Pseudoaristocracy.”
Jefferson: What I saw at the Forum
Jefferson, as with the other founders, had studied the history of Rome almost from the time he started his earliest education. The fact that the American government today looks much like the mixed constitution state (executive, senate and a representative lower house) of republican Rome should not be surprising given the founders ardent study of it.
But still, the Roman republic fell and was replaced by a dictatorship. The cause of this democratic failure would certainly need to be addressed so as to prevent it from happening in the United States. When Jefferson looked for answers, he found Cicero. Marcus Tullius Cicero was one of Rome’s most influential politicians in the late republic and its most prolific writer.
Jefferson’s interrogation of Cicero was revealing. Although Cicero does put some of the blame for the fall of the republic on Julius Caesar, he delivers the brunt to the aristocratical Senate. Men of birth and wealth, possessing a sense of entitlement, corrupted by greed, allowed themselves to be bribed into complicity with a dictator. Cicero repeated this theme in his letters, speeches and in his late philosophical works.
Not in this Republic
Well, if a corrupted aristocracy helped bring down the Roman Republic, it was not something Jefferson wanted in his new republic. After signing the Declaration of Independence, Jefferson returned to Virginia where he had been elected to the state legislature. In one of his first acts there he introduced a bill to end the laws of primogeniture and entails. Primogeniture – Latin for first born – required that all of a man’s wealth be passed to his eldest son upon his death. Entails stipulated that this requirement applied to the land in perpetuity. Over time this practice ensured the slow accumulation of great wealth by a few the families who had lived in the state the longest. These families formed what was a called a ‘Patrician Order” by Jefferson. And where the King picked his advisors to administer the colony. This system established the conditions favorable for the formation of a permanent aristocracy in Virginia.
Jefferson was successful in getting his bill passed. And, while today it is a little noted event, to Jefferson it was an important act in his political life. In his autobiography he wrote:
"To annul this privilege, and instead of an aristocracy of wealth, of more harm and danger, than benefit, to society, to make an opening for the aristocracy of virtue and talent, which nature has wisely provided for the direction of the interests of society, & scattered with equal hand through all it's conditions, was deemed essential to a well ordered republic."
Cicero would have been proud.
Sources:
The Adams-Jefferson Letters: The Complete Correspondence between Thomas Jefferson and Abigail and John Adams. Edited by Lester J. Cappon. 2 vols. Chapel Hill: University of North Carolina Press for the Institute of Early American History and Culture, Williamsburg, Virginia, 1959.
Syme, Ronald. The Roman Revolution. New York: Oxford University Press, 2002.
MacKendrick, Paul. Karen Lee Singh coll. The Philosophical Books of Cicero. London: Gerald Duckworth and Co. Ltd., 1989.
The Works of Thomas Jefferson. Edited by Paul Leicester Ford. G.P. Putnam’s Sons, New York, 1904.
http://americanhistory.suite101.com/article.cfm/thomas_jefferson_and_aristocracy
"To annul this privilege, and instead of an aristocracy of wealth, of more harm and danger, than benefit, to society, to make an opening for the aristocracy of virtue and talent, which nature has wisely provided for the direction of the interests of society, & scattered with equal hand through all it's conditions, was deemed essential to a well ordered republic."
The Aristocracy of Virtue and Talent is absent from The Atlantic these days. It was once an excellent monthly but that was before most of you were born. It's crap now, but so is most of the media. What a shame.
Eliminating foreign earned income exclusion and foreign tax deduction would in fact have the effect of banning US citizens from living and working abroad, or at least in the countries that have considerable income taxes of their own. How do you propose to handle this, Megan?
(Most proponents of eliminating all deductions to whom I have posed this question said something along the lines "if they want to live abroad, let them pay double taxes", but I suspect that Megan might come up with something better.)
"We will 'lay the axe' to you just like Jefferson did. Make no mistake about it."
Bring it on, asshole. Get yourself up on your hind legs and get to work.
Pack a fucking lunch.
Like you said - "income is income is income, no matter where it comes from." So explain why some rich kid inheriting a billion dollars in Daddy's stocks (income) should get a free ride while some poor SOB working (income) at McDonalds has to pay taxes.
Of course one can criticize one aspect or another of this plan but, man, do I agree with it overall. I would be more than willing to accept the parts I do not like to get the whole package. I think this is a great country and I am happy to pay the taxes that are needed. But when I do my taxes I know I am paying far far more than my share because I am not wealthy enough to buy my own personalized tax code, which, really, is what the rich and the politically organized have done.
My first comment is to Billy Beck: Your most recent expletive comments are a violation of the posting service agreement with The Atlantic. You are an offense to reasonable individuals, and your language is indicative of your ignorance.
My second comment is as regards every other posting I've read thus far:
No one has come right out and said that THE REASON OUR TAX SYSTEM IS SO MESSED UP IS BECAUSE CONGRESS HAS DESIGNED IT THAT WAY ON PURPOSE, EVERY YEAR MAKING IT MORE PROFITABLE FOR THEM AND HARDER ON THE REST OF US. Reforming the code will do only temporary good at best. As long as Congress is involved it will always devolve.
You have to understand that YOUR MONEY and MY MONEY pay for EVERYTHING that any member of Congress decides is "necessary" for his/her constituents to continue to vote for him/her, as well as funding for whatever PERSONAL AGENDA he/she is espousing (including a lifesize bronze statue that one Congressman had erected of HIMSELF in his hometown!) at any given time. Our taxes pay for things that probably 99% of Americans have no clue of, some even in other countries, but most of them simply ridiculous and frivolous.
Just to name a small few: Our taxes pay for U.S. membership in the UN, an anti-American organization. Our taxes pay for illegal aliens to live in hotels, not jails, while waiting for court hearings that, you guessed it, our taxes pay for. Our taxes pay for bridges to nowhere. Our taxes pay for Mexican children to attend public schools in American border-towns and then to be bussed back home in Mexico(God bless them anyway!). Our taxes pay for Congress-persons' salaries and their subsequent nearly annual payraises, and they only have to be "at work" one day each year to collect their paychecks. (Our three illustrious presidential candidates do not have to go to the job we hired them for while they're campaigning, yet they will collect their paychecks like clockwork, and ask us to 'donate' to their campaign funds.) Our taxes pay for the IRS to assault us at random. Our taxes pay for welfare recipients to live rent-free, utility free, grocery-bill free, medical-bill free, in decent housing while they sit around and watch their plasma TVs, eat steaks, and collect our taxes. There's sooo much more. There's a lot of good that taxes do too, but there's soooo much more waste. I get to see it up close and personal every day.
Meanwhile I pay one third of my self-employment income to taxes and my family has to cut corners to pay for housing, transportation, food, and medical. Shameful! And yes, it took us 26 hours to figure our taxes, and at the end of it all the stupid, yet wonderful, tax software gave us 83 pages of the actual returns including the required supporting documents. I just don't get that! We only made a combined $36,000. I know that no Congress-person would be able to do their own taxes either. And I think you, Megan, are unconscienable to suggest getting rid of ALL deductions. The marriage and child deductions were helpful in reducing our tax burden, and we just don't make enough to pay any more by losing every little bit of help we can get.
The bottom line here, is that EVERYONE except the very poor (who gets to determine what that is and how?) should pay taxes. We do need to have some government and some social programs. Welfare should be limited, just like unemployment currently is, and its recipients should be required to actively pursue employment in the exact same manner as those collecting unemployment. Savings account, retirement account, IRA account, and 'health-savings'account interest should not be taxed at all, because those who are able to save regularly are actually doing us all a favor by reducing the burden on our social services. We should have very few actual deductions. And the wealthy can afford to pay more without seriously impacting their standard of living.
But the tax codes will never get simpler, easier, better, or more equitable because anyone who is responsible for creating them is going to protect THEIR interests... not ours, the average 'Joes'. Congressional self-discipline, cutting out all pork/non-necessity spending, and a truly balanced budget need to be in place before any kind of tax reform can be effective. God bless us, every one...we need all the help we can get!
A few points here:
1. Eliminate worldwide taxation of income and go with territorial taxation instead.........you know, like every other country in the world. This would stop the corporate offshore game and that money would be repatriated back here. Corporations would pay taxes in the countries where the money was earned.......every country in the world does this.
Also, it is morally disgusting to tax Americans on income they make while living overseas. I mean, what services are you getting from the US government if you live and work in Argentina and pay US income taxes. Because of this nonsense Americans are essentially priced out of the world labor market and American corporations are paying 35% income tax in a market that might only tax corporate income at 25%. How can you compete? You can't........
2. Abolish payroll taxes. These are expensive and they make us less competitive worldwide. It also forces business to essentially become government agents over and above income reporting. The author is right, this is all a big fiction to make us think Social Security and Medicare are real pension plans when in reality it is simply current taxpayers paying current beneficiaries.
3. Eliminate all deductions except charitable contributions. Everybody uses the mortgage interest deduction but it is in reality a big giveaway to the rich.
4. Either flatten the tax or make it more progressive. If you make it more progressive, what I mean is small business owners and others who might have a windfall once-in-a-lifetime year of, say, $500k in income are taxed at a murderous 35%......the same as someone making $5 million, $15 million or $25 million. What's the difference? Someone who makes $500k one year still has to work for a living. The guy who made $15 million doesn't.
The Left is obsessed with taxing the rich. How do they define the rich? Basically, they usually mean anyone making over $100k per year. I live in downtown Chicago. If you want to have a family you could starve on $100k per year.....and its worse in San Francisco and New York.
They don't really want to tax the rich because the rich help them with their endless campaigns. They want to tax the hell out of people climbing the income ladder.