Having failed to strip health insurance from tens of millions of low-income Americans, the Republican Congress has moved on to their next project of radically reducing the taxes paid by a sliver of high-income Americans. If you follow this debate over the course of the next few months, you’ll hear a lot about the distributional consequences of their plan. The top tax rate will be lowered, the bottom tax rate will be raised, and they’ll briefly talk about eliminating some deductions until the lobbyists arrive and “convince” them otherwise.
I think our tax code needs to be radically simplified, but I don’t have any interest in lowering rates, reducing the number of tax brackets, “broadening the base,” or any of the other talking points Republicans will use during this debate.
I think our tax code needs to be radically simplified because its complexity imposes a psychic tax on every American, plus a financial levy on people who find themselves paying tax preparation firms because they’re unable to navigate the tax code’s complexity on their own.
Eliminate itemized deductions
Itemized deductions have one small problem and one big problem.
The small problem is they’ve only claimed by high-income taxpayers, who pay enough in mortgage interest, state and local taxes, and charitable contributions in order to be eligible to claim them.
The big problem is that the ability to deduct these and other items means even middle-income taxpayers are forced to think about them, gather receipts, store documents, and fret about being audited for each itemized expense.
This is the psychic toll of itemized deductions people treat as so natural they forget they’re paying it.
Equalize treatment of labor and capital income
The preferential treatment of qualified dividends and long-term capital gains have one small problem and one big problem.
The small problem is that the ownership of capital is held disproportionately by the extremely wealthy, who do not need preferential tax treatment for their capital income.
The big problem is that the preferential treatment of capital income induces the owners of capital to go to preposterous lengths to secure preferential treatment of their income.
For example, the co-called “carried interest loophole” doesn’t have anything to do with carried interest. It should properly be called the “capital gains loophole,” since it’s exclusively a function of the preferential treatment of capital gains. If capital income were treated the same as labor income, there would be no carried interest loophole.
Don’t create an additional parallel income tax system for passthrough income
The single worst idea in the Republican “tax reform” plan is to create a third, parallel system of income taxation for passthrough income, the kind of income earned by sole proprietorships and S corporations. Today, your passthrough income is combined with your other earned income and taxed according to the tax tables found in the IRS Form 1040 instructions.
That means under their proposal a person who has earned income, capital income, and passthrough income will have to calculate three different components of their income tax. Already today people have to calculate their earned income, short term capital gains (taxed at ordinary income tax rates), and long term capital gains (taxed at preferential rates).
Under the Republican “tax reform” proposal, they’ll also have to calculate an additional income tax based on their passthrough income.
I truly do not care what you do with the money
Eliminating itemized deductions and taxing capital income at the same rate as labor income would raise a phenomenal amount of money. My weak preference is for the federal government simply to keep the increased revenue and increase the budgetary headroom available to deal with the coming economic calamities.
Alternately, you could cut marginal income tax rates. How and where to cut marginal income tax rates would surely be a lively source of debate on Capitol Hill.
Or you could chop up the increased revenue and turn it into a guaranteed basic income for all Americans.
The point is that it doesn’t matter what you do with the money, because simplifying the tax code is an unalloyed good.
The small problem with the Republican tax plan is that it’s designed to funnel enormous amounts of money towards the wealthiest Americans.
The big problem with the Republican tax plan is that it doesn’t do a thing to simplify the tax code.
SumOfAll says
Why bother with income tax. We should be consumption based tax system
El Ingeniero says
Consumption taxes tend to make people want to spend less, right? If so, would that be good or bad for economic growth?
SumOfAll says
more importantly people shouldnt be penalized for earned income. And those who have large sums of money will still spend so they will continue to generate revenue for the State.
xgerman says
It’s well established that poor people will pay more in a consumption based tax system as a percentage of their income since they spend all their money on food and such whereas rich people save more — so this would need to be combined with some tax rebate… making it complex again.
SumOfAll says
So everyone should pay something (everyone needs to have skin in the game to realize how bad taxes are) but you can exempt things such as grocery store food from the comsumption tax to keep low income earners to a smaller footprint. They key is to tax comsuption not earned income.
Helmholtz says
One of SumOfAll’s less bizarro ideas. Let’s not mess with categorizations. How about a flat 30% VAT on everything, a flat 2% or whatever land tax, and a flat $10,000 or whatever “refundable tax credit” to every adult? I’d say that’s a beautiful tax system.
SumOfAll says
Thanks??!!?? Taxing consumption is the way to go
Matt says
That’s a terribly regressive taxation scheme. It takes a far greater %age from the poor than it does the rich. No good reason to get rid of the income tax in general.
Lew says
From what I have read, the middle class don’t want a tax cut. the 40% of the population who are the working poor don’t pay taxes already. And the ones who will benefit the most are the top 5%. Of course so they can trickle down to the rest of us their savings. A simplified tax plan is actually something he who will not be named ran on to get elected. Congress does not have the guts to go against the lobbies who all want their deductions and tax credits.
Odojoe says
The Fair Tax is the best sytem, it eliminates the IRS!
Erik V says
We should tax neither earned income, consumption, financial capital, nor property improvements.
We should only tax economic rent – that which has a perfectly inelastic supply – i.e. land and derivatives of land such as minerals, fossil fuels, etc.
SumOfAll says
I dont believe you can generate enough tax revenue to support the unwashed masses with a tax like that
Erik V says
In fact, imposing an LVT on the NY metro area alone could probably replace all taxes at all levels of government. That’s what massive land price inflation gets you.
https://www.quora.com/If-the-U-S-were-to-replace-the-federal-income-tax-with-a-land-value-tax-what-would-the-rate-need-to-be-Would-this-rate-be-viable
Brady says
“Having failed to strip health insurance from tens of millions of low-income Americans, the Republican Congress has moved on to their next project of radically reducing the taxes paid by a sliver of high-income Americans.”
Pro-tip: if you want a general audience to actually read, much less consider, your opinion, don’t lose half your potential audience right at the start by beginning the piece with a blatant mischaracterization of what you are opposing using one side’s hackneyed talking points. Your credibility is shot from the start.
But you do you.
indyfinance says
Brady,
Thanks — that’s the plan!
—Indy
ed says
This article proved to me that many don’t understand who’s actually “poor” or the “working poor”. The working poor are those who work enough to not qualify for aid, but who really don’t earn enough to be considered a living wage. This article also proved to me that many assume things about other people (“…they don’t pay taxes anyhow…”) and generalize way too much. Wife and I are the working poor. We don’t have kids (we knew we couldn’t afford them so are responsible enough to make sure we don’t, therefore we are less of a burden on society). We also both work, but we also donate to charity because helping others less fortunate than us in this world is important to us. We also work for a charity and therefore don’t make as much as others. Yet, we continue because people need help. It’s not that difficult for us to have enough itemized deductions that we are better off filing that way than claiming the standard deduction. We are against any plan that removes the lowest bracket (the one we end up in due to not having a true living wage and due to our charity work). In the end, Congress won’t eliminate that bracket as it would hurt the working poor who do still pay taxes. We also have had to pay a lot in healthcare and that also adds to what we itemize. Obamacare failed us. We can’t afford the premiums and we’re in a state that allows grandfathered insurance plans that employers had to keep the pre-existing condition exclusion for 6 to 12 months when signing up. That would mean paying premiums for care that we must pay out of pocket. We already pay out of pocket and can’t afford the premiums, especially when those premiums won’t help us during the pre-existing condition exclusion period. Many states still have that due to grandfathered employer plans that the Democratic controlled Congress, at the time Obamacare was passed, allowed because they are in the back pockets of high-powered insurance lobbyists. Yet, when we’ve tried to apply for the Marketplace, the deductibles were so high we’d go bankrupt paying that and premiums. So, we’re stuck between a rock and a hard place, but as good citizens we continue to work even though doctors have told us we’d be better off going on disability and reaping aid from this messed up system. But, we weren’t raised that way. Meanwhile, we keep up with our mortgage and property taxes, as well as all the other taxes. We work about 5 months of the year just for the government taxes, before we begin to earn for ourselves. We are not alone, and that is why we now have the president that we have. Yes, taxes are too high. There are thousands of agencies that overlap each other and we all agree that the government is a money pit. Yet, Congress doesn’t have the guts to trim. So, at least they can do the next best thing and cut taxes for the working poor who some call the lower middle class. Yes, cut corporate taxes so those trillions of dollars will leave the European banks and fill up our own. Then, companies will want to stay here and that’s the first step to securing jobs that we now bleed. And that will lead to higher wages, charities like the one we work for will see more donations and we can help more folks around the world (because Americans used to be among the most charitable in the world). We believe in what we work for and yes, we chose this harder path. But, don’t make it harder by claiming we don’t pay taxes or that we don’t need tax relief. I don’t care about whether it’s simple or not to file taxes (we’ve filed our own for years and don’t need pros to do our taxes). Just bring tax relief and this country will see spending and that will raise tax revenue in a more organic manner.
indyfinance says
ed,
You’ve obviously got a lot going on here, so I will simply suggest that now that ACA open enrollment is here you log on to healthcare.gov and explore the plans available given your estimated 2018 income. In addition to premium subsidies (which have increased in many states for 2018 due to the president’s sabotage) you may be entitled to cost-sharing reductions for Silver plans, which may reduce or eliminate your deductible, co-pays, and out-of-pocket costs.
—Indy
Ed says
Already tried and it’s impossible to afford. First of all, when you are an employee of a company which offers insurance you cannot get subsidized plans with low deductibles through the marketplace. What is offered is subpar, bad insurance which is unaffordable. Even the hospital financial advisors from one of the top hospitals in the world said it was a joke and we’d be better off without it considering premiums and out of pocket for what actually gets covered. If we had kids or one of us quits we could get gov assistance. But, we are workers. So, the best thing to help the working poor is a tax cut or at the very least they should not eliminate the bottom tax bracket (10%). Any politician who votes for getting rid of that bottom bracket is committing political suicide in the Midwest at least. The higher standard deduction the plan calls for mainly benefit larger families or those who can’t or don’t want to itemize. Simplifying the return process is not the biggest problem the lower middle class or middle class is concerned with compared to actual tax cuts.. Most agree that the government and its many overlapping agencies can do a better job with less bloated expenses. It’s amazing how many more agencies have been created in the last decade in an effort to “create jobs”. It’s beyond out of control. Cut taxes for wage earners and this country will see better prosperity. Our hard earned dollars have been spread out across this earth, but not as efficiently as true charities can do. Thanks for taking the time to read my lengthy comments. I admit it was too long. BTW, I’m independent and don’t belong to any political group, but I always vote.