Swamppundit

You start with a single tax bracket that includes everyone from the student with a part-time minimum wage job to Bill Gates and everyone in-between. Everyone pays the same percentage of their income in taxes regardless of whether they are rich or poor, regardless of whether the income comes from toil or non-toil, wages or capital gains, or dividends, or inheritance. There are no deductions, credits, or exemptions – not for charity, or home mortgages, or even children. There is not even a personal exemption for the taxpayer herself.

Assuming you wish to raise the same amount of money from income taxes as we do now, I estimate the tax rate would end up being around 13%. (Could I be wildly wrong about the 13%? Wrong: yes; wildly wrong: doubtful.)

I could stop here and declare victory, but I want to press on. I want to add progressivity, and I want to help the poor since under this ultimately simple and fair system the poor end up paying more than they do now.

We do this by having the government make tax-free cash payments to every adult citizen. (The details about how to do this will be the subject of a later welfare essay.) The dollar amount of this payment would be the same for everyone. Choosing the right amount will be tricky, I admit. Obviously, the higher the amount, the higher the percentage of tax would have to be. If payments of zero dollars result in a 13% tax rate, payments of $200 every two weeks will result in a percentage much higher than 13%. The debate over the amount of the payments would be a most interesting one.

Take a pencil and a piece of paper and play with the numbers. By giving everyone the same amount of cash, and taking from everyone the same percentage of income, you get a wonderfully progressive tax system. The very poor would get more than they paid. The working poor might break even. The middle class would pay more than they received, but the net percentage (factoring in the payments) would be far less than the gross percentage, and the difference between gross and net would slowly shrink as the amount of income grew.

An income tax this progressive, simple, and fair, yields indirect benefits. First, it is good for democracy and good for government to have every citizen with income, even the poor, pay taxes to help support the government. Every citizen should have a financial stake in good, efficient, cost-effective government. Every citizen should appreciate that a rise in taxes for some also means a rise in taxes for themselves. A single tax rate increases the beneficial feeling that we are all it this together. There is tremendous value in having a young waitress look a doctor in the eye and know that the government is treating them both exactly the same. Second, as confidence grows that everyone is truly paying their fair share, the level of voluntary compliance with tax laws should increase. There is a vast amount of unreported income in our economy that would be added to the tax rolls if members of the “cash economy” could be persuaded to fully report their income. Third, the marketplace is free to function as it should with millions of better decisions being made because they are not being influenced by tax considerations.

Exceptions to the No-Exceptions Tax Plan

As perfect as my ultra simple and fair income tax plan is, even I wish to tinker with its perfect simplicity in two respects.

The first is related to retirements. Setting aside some money for retirement is not simply Good Behavior; failing to do so is affirmatively Bad Behavior. Therefore, I would encourage the good behavior of retirement savings and thereby punish the behavior of not saving for retirement. To prevent the rich from overly benefiting from this exception, a cap would appropriate. Within the cap, money placed in a qualified IRA or deferred compensation account (i.e. an account that can’t be touched until age 60) would not be counted as income. To further encourage retirement savings, I would lower the tax rate (by say, 10 percentage points) for money withdrawn from the account during retirement.

The second exception involves the super rich – not the upper middle class, or the well off, or even the moderately rich.

At a certain point, it can no longer be argued that a person truly “earns” or “deserves” such a high income. At a certain point, even the person making the super-high income has to acknowledge that the money is as much a blessing or luck (deserved or otherwise) as it is income due to hard work. The good luck might be possession of a special talent or aptitude, or being in the right place at the right time, or both. Let’s face it, at a certain point, it is embarrassing to make so much money. When that point is reached, a higher marginal income tax rate is warranted.

Let me be clear: this extra tax on the super rich is not about the super rich paying their fair share of the burden of paying for the government. This extra tax is about having them pay more than their fair share. Why? Because I suspect my single bracket plan will produce a tax rate that many would find too low for the super rich. Call it class envy or class warfare if you wish, but at income above a certain level, to not tax such income at a higher than average tax rate is insensitive, unwise, and bad policy.

You and I will no doubt differ tremendously as to where that certain point of income is. Mine is pretty high. I do not begrudge the highly skilled and highly trained professional making a lot more money than me. I would set these certain points of income at multiples of the median income. Every time the median income goes up, the points at which these higher tax rates kick in also goes up. At present, the median income level is around $35,000. Ten times that annual income is $350,000 a year. In my book, anyone making more than 10 times the median income ought to be a little humble about it. Such a person should humbly admit that other people, equally talented as he/she, work just as hard as he/she, and don’t earn that kind of money. They should humbly acknowledge that they have won life’s lottery and gratefully share some of the wealth. That is why I call my higher tax rates Humility Taxes. Under my plan, all income over 10 times the median income is taxed at a rate of 30%. All income over 50 times the median income ($1,750,000) is taxed at a rate of 35%, and all income over 100 times the median income ($3,500,000) is taxed at a rate of 40%. These rates may seem low to you, but remember, these marginal rates would be applied in a system that had zero deductions, credits, or exemptions, and which taxed capital gains and inheritances the same as regular income. Trust me, in a world without tax accountants, these rates are going to raise a lot more money from the super rich than the current system.

Making lots of money is not a crime. Furthermore, not all supply-side economic theories are bogus. It is possible to harm the overall economy by taxing the rich excessively. Therefore, I would strongly argue against any tax rate higher than 40% no matter how embarrassing it is to have someone making that much money. Remember, States and localities are also going to take their bite.

The only thing standing between the taxpayers of this country and a postcard-sized 1040 form is the political will to make it happen. It is time for all the people who want a super simple tax system to count noses; realize they are a majority; and do something.

C E Sutton

Shakespeare was wrong. A tax smells sweeter, or nastier, based on its name.


The Death Tax.
There is a reason this country has had an Inheritance Tax longer than it has had an Income Tax. When the government needs money, it only makes sense to go after the large chunks of unearned money floating around before going after the small chunks of hard-earned money. This all made perfect sense until the phrase Death Tax was coined.
I once got a thing in the mail from my Republican Congressman. This is what he had to say about inheritance taxes.

End the Death Tax Once and for All
No American - no matter what their income - should be forced to pay 55% of their savings, their business, or their farm in taxes when they die.

There is a subtle point apparently missed by Republicans – no one pays any taxes when they die. They are dead. They don’t do, or pay, anything. They no longer have savings, or businesses, or farms. They have no income. They have no thoughts or concerns about money or taxes. The government has lost jurisdiction to be fair or unfair to the dead. So, let me assure the Republicans: No American - no matter what their income - will ever be forced to pay even one penny of their savings, their business, or their farm in taxes when they die. The issue is not whether Conrad Hilton had to pay taxes when he died, the issue is whether Paris Hilton has to pay taxes when she inherits.

I know this is a tangent, but I want to bring Baby Boomers into the discussion. I have very little good to say about Baby Boomers as a group. A more spoiled and selfish generation has yet to be born. For almost a hundred years the simple logic of taxing unearned inherited money before earned money has been crystal clear. Now, just as Boomers are starting to be on the receiving end of a lot of inheritances, suddenly that simple logic is twisted into a sound bite called the Death Tax. Get a grip, Boomers.
If the Estate Tax and the Inheritance Tax are names that need replacing, I would nominate another term. How about the Windfall Tax?

Double Taxation.
Money circulates. It moves from person-to-person, business-to-business, etc., etc, etc. There is nothing inherently wrong with taxing the same money every time it moves. I get a paycheck; I pay a tax. I buy something with my money. I pay a sales tax. The business takes my money, makes a profit, and pays a tax on that profit. That same business took part of my money and paid employees with it; and those employees paid a tax. I don’t see anything “double” or evil in any of this. In fact, it seems self-evidently natural and proper. Should that business take a part of my money and pay a dividend, there is no reason why a tax on that transfer of money should be called “double.”

Should I pass over to the land without taxation (Heaven, not the Grand Cayman Islands), my heirs will get my money. I see no reason why a tax on that transfer should be called “double” either. I truly love my heirs, but while I have toiled for my money, and while they have toiled for their money, they have not toiled for my money, and they have never paid any taxes on my money.


The Consumption Tax.
There is talk these days that best road to simplicity is a national sales tax, a VAT, or something called a Consumption Tax. The claimed benefit of such a tax would be to eliminate all the current deductions and credits. This would be a good thing. This would be a true thing if the proposal would apply the sales tax to charitable contributions, mortgage interest payments, and the purchase of stocks, bonds, mutual funds, certificates of deposits and other vehicles of saving money. In other words, each conceivable way a person can spend, invest, save, transfer, or park his/her money without invoking the new tax, is, in essence, creating a deduction. Another word for deduction is loophole.

Every proposal I’ve seen appears to create a loophole for money that is “saved.” In the abstract, this sounds good, except when you think of who saves the most money. The people who save the most money are the people whose monthly income greatly exceeds their monthly bills (i.e., the rich).

Excuse me while I state the obvious. Taxes are a necessary evil. Someone has got to pay them. The more others pay, the less I have to pay. The subject of Taxes is too important to be influenced by catch phrases.

I suspect the fellow who coined the term “consumption tax” might be the same guy who termed inheritance taxes “the death tax,” and who claims a tax on dividends is “double taxation.” As an economist, this fellow is not so bright, but as a marketer of tax policies that favor the rich, the man is a genius.

C E Sutton

We hold these truths to be self-evident…
When Thomas Jefferson wrote those words, the truths that followed may have been self-evident to our founding fathers, but they were apparently not self-evident to the rest of the world since there was no location in the rest of the world where belief in such truths governed the affairs of government. Notwithstanding the minority status of such truths, Jefferson eloquently declined to defend, explain, or argue the truth of these “truths.” They were self-evident. Either you “got it” and no explanation was necessary, or you didn’t “get it,” and probably no argument would be persuasive.

While I will spend a paragraph or two explaining my “truths,” I hold little hope of changing any minds by persuasion. Instead, I hope the act of articulating these truths will spark the act of recognition in the reader.

Self-evident Truth #1: Simplicity is a virtue. Simpler is better, and simplest is best.
There are only two candidates for the world’s simplest income tax code. Candidate A: Every man and woman over the age of 18 pays X number of dollars in taxes each year. X being a specific number such as $10, 487.18. The tax writers would simply divide the amount of money needed to be raised by the number of adults in the country and the resulting number would be X. Candidate B: Every man, woman and child pays X% of their income in taxes each year. The tax writers would simply divide the amount of money needed each year by the estimated total income for the country and the resulting percentage would be X%.

If it is not self-evident to the reader that Candidate A is a non-starter, then think again. (Think of Bill Gates and yourself paying the same dollar amount in taxes.) This leaves Candidate B. Either Candidate B is the best possible tax code or Self-Evident Truth # 1 is not really true.

Self-Evident Truth # 2: The best way to evaluate an income tax system is to ask if it requires each citizen to contribute their fair share of the burden of paying for the government.
Question: do you think you paid your fair share of the burden of paying for the government last year? Do you think your next door neighbor paid her fair share? How confident are you of your answers to these two questions?

It is probably correct and proper that income tax returns are considered among our most private of papers. But is it correct and proper that we have no idea if those around us are paying their fair share?

If you were to try and figure out if your neighbor was paying her fair share, what information would you like to know from her tax return? Would you like to know how many kids she had, what was the size of her mortgage payments, how much of her income came from dividends or capital gains, how much she gave to charity, and how much money she put into a special retirement account or college tuition account for her kids? Are those the questions you would ask? Or, would you ask only two questions: what was her total income, and what did she pay in taxes?

My intuition tells me that you would only ask the two questions. Then you would do the math to give you a percentage. Then you do the same math from your own tax return. If your neighbor’s percentage was higher than yours, then you would conclude she is paying her fair share. If her percentage was lower, you would conclude she was not.
If intuition is another word for self-evident truth, then it appears Candidate B is self-evidently the fairest possible income tax plan.


Self-evident Truth #3: One’s ability to pay taxes is not affected by what one does with money after the taxes are paid.
Some might argue that a deduction like the charitable deduction is based on the notion that if a taxpayer gave away 10% of his income, his ability to pay taxes was reduced 10%. Or, some might say that the more a taxpayer pays on his mortgage, the less able the taxpayer is to pay taxes.
This argument can be restated as follows: it is not fair to require Taxpayer Ted to pay his fair share of taxes because he gives a lot to charity. It is, of course, fair to require Ted to pay his fair share of taxes no matter what Ted chooses to do with his money after he has paid his taxes.

Self-evident Truth #4: All deductions, exemptions, and credits cannot be justified in terms of Fairness. If proper at all, they must be justified as appropriate government expenditures in furtherance of an appropriate public policy.
It is not self-evident that all deductions are bad. (Or at least it is too early in this essay to say so.) It is conceivable that a public policy could convince me a deduction was appropriate. But, the public policy would have to meet this test: Is it equally appropriate to replace the deduction with a cash payment of equal size to the taxpayer?

For instance, assume Bill Gates gave 100 million dollars to charity last year. Further assume Bill is in a 38% tax bracket. Would it be good public policy for the government to deny Bill a tax deduction but instead write Bill out a check for 38 million dollars? Keep in mind that the $38,000,000 check would come from your tax payments. What does your intuition tell you? If your intuition tells you the two scenarios are not the same, send your intuition to the nearest Econ 101 course. The two scenarios are identical.

Self-evident Truth #5: Any deduction, exemption, and/or credit justified as an incentive for good behavior is a bad idea.
The first reason is because the opposite of good behavior is not necessarily bad behavior. (Renting is not bad behavior. Not having children is not bad behavior. Not giving to charity, while not admirable, is not bad either.) If there was a practical way to impose an extra-income-tax on people engaging in truly bad behavior I think I would be in favor. Unfortunately, I know of no such way. Every tax break given for good behavior is, in essence, a tax increase on everyone who does not get the tax break. (If this is not self-evident to you, go enroll in Econ 101. Particularly attend the “Zero-Sum Game” lecture.) Does the home mortgage deduction sound like an equally good idea as a Renter’s surtax? Econ 101 would argue that they are the same thing.

The second reason why such incentives are a bad idea is that they violate the self-evident truth that the market is always right.

The third reason such incentives are a bad idea is that they are monstrously wasteful in that such incentives usually encourage behavior that millions of people are going to engage in anyway. It is self-evidently wasteful to subsidize 100% of home mortgages in order to bring about a 5% increase in home ownership. It is similarly wasteful to subsidize 100% of charitable deductions to achieve a 5% increase in the total amount of charitable deductions. (Yes, these 5% figures are pulled from the air. But, I would argue any percent less than 80% is wasteful and I would bet real money that the actual percentage, which is unknowable, is closer to 5% than 80%.)

The fourth reason such incentives are a bad idea is that they inevitably benefit the rich far more than the middle class, and they benefit the poor not at all. Unless such deductions are capped at the amount a typical middle-class family might be expected to claim, it is natural and inevitable all such deductions will tremendously benefit the rich more than others. But, this essay is not advocating such caps. While such caps are attractive from a class warfare point of view, they don’t address the wastefulness argument, the anti-market argument, the let’s-not-punish-those-who-did-nothing-bad argument, and they are counterproductive on the simplicity issue.

Self-evident Truth #6: The Rich are Different.
Republicans would like the discussion about upper class taxes to be about the tradeoff between the natural desire to lower taxes and the government’s need for the money. The Democrats would like to imply that every increase to their favorite government program can be fully funded solely by taxing the rich. Both sides avoid talking about taxes on the rich as a stand-alone subject, and by doing so, both sides are wrong.

Only two points need be made at this time. One: a flat tax that truly treated the rich exactly like everyone else would be overly generous to the rich. Two: the proper level of taxation on the rich should be determined independently of any budget considerations. After we determine how much the rich should pay in taxes, then we can discuss the necessary tradeoffs between levels of government spending and the tax rates on the rest of us.

Self-evident Truth #7: All other things being equal, the tax on someone who earns their income by toil should never be more than the tax on someone who receives income without toiling.
In other words, neither dividends, capital gains, nor inheritances should be taxed at a lower rate than wages. Note, however, that treating income by toil exactly the same as income from non-toil does not violate this self-evident truth.

Self-evident Truth #8: Self-evident Truths die in committee.
There is one last reason why simpler is better. A true commitment to simplicity ends a century-long scandal of government. A truly simple tax plan would not be amended year after year. Politicians learned long ago that nothing increases campaign contributions like the phrase “I think it is time to amend (reform) the tax code.” Those that have loopholes contribute to keep them. Those that don’t have loopholes contribute to get them. Politicians, wishing to be fair, see the solution as taking a contribution from everyone and giving everyone a loophole. This leads to one last, sad, self-evident truth: Politicians with no virtue see no virtue in tax simplicity.


C E Sutton