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.