Sunday, October 26, 2008

A modest tax proposal

We have heard enough about what the candidate's tax plans are.  We know the current system is complex, and distorts economic decisions, and on some levels - unfair.  

Ideally, I think the 16th Amendment should be repealed.  Washington should not have been given the ability to tax income because it gives too much money, and thus too much power to meddle in our lives.    Ideally, a 10% VAT, excise taxes, and modest duties should cover the duties that are the prescribed powers of the federal government per the constitution.   But let's just admit that is not happening any time soon.  Sorry fair taxers, we're stuck with the income tax for a while.

So what principles do we want for an income tax system.  I would propose the following:
  1. That it raise sufficient revenue to cover necessary government expenditures (sorry - this would probably mean a realistic downsizing of the Washington - i.e. no more department of education.
  2. Not distort economic decisions - it should try all types of income the same - a person making $100K/year only as salaries should pay the same amount of tax as someone who makes $100,000/year on dividends.
  3. Everyone should pay a de minimis tax.   I do not believe that people should not have to pay tax if their income falls below a certain level - citizens should all bear a minimum burden for the government they want so that they do not become detached from the costs of running it.   
  4. Not be burdensome on those of modest means.
  5. Simple to administer (this is tricky, you will still need a ton of volumes to define things, even a simple income tax needs to determine a lot of things).
So this is kind of what I came up with.
  1. Income tax with one bracket of 20%.
  2. All income taxed at same rate - interest, dividends, capital gains, wages...
  3. Capital gains is determined with a CPI adjustment in order not to be taxed on inflationary changes in prices.  
  4. Capital losses are 100% deductible immediately.
  5. Only itemized deduction is charitable contributions - but with no income limitation.  No more deduction for state and local taxes (subsidizing those living in high tax states) and mortgage interest (no more distorting the housing market and putting renters at disadvantage).
  6. Standard deduction of $10,000/filer and $5,000 per dependent.  Married filing joint with two children have $30,000 deduction.
  7. Minimum tax is $250 - regardless of income.
  8. Contributions to tax deferred retirement accounts deductible - no limitations.  However, early withdrawals subject to 15% penalty.

1 comment:

Hershblogger said...

It would be interesting to calculate what the cost saving would be for administration and compliance for a consumption tax compared to your proposal.

I'm not certain the changes you suggest are actually any more politically feasible, and the benefit might make enough difference to actually get to a consumption tax.

I'd like to see payroll deduction eliminated, too. Maybe the remnants of the GOP can think it over in the 4 years they appear to be about to spend in the wilderness. It would be a good core platform proposal, if a clear explanation can be put together in no more than 5 ads lasting no longer than 30 to 60 seconds each.

Admittedly, this assumes a proposal like yours is taken seriously to kick off an open minded debate.

You do touch the third rail here, mortgage deductions. If we could get past that maybe the switch CB made to examining all alternatives.

Your plan has much to recommend it.