I have to agree with Howard Gleckman of the Tax Policy Center on this one. And I’ve noticed this tension among politicians for a while. On the one hand they want to say that they favor a “simpler” tax code, and they like to talk about how many thousands of pages the tax code is and how byzantine it is to understand, etc. At the same time they boast about all the goodies they give out to this or that business or individual using the tax code, which of course only makes it more complex. Gleckman spells this out with respect to the State of the Union.
Here’s just a partial list of the targeted tax breaks Obama promoted: Tax credits for clean energy and college tuition, as well as tax cuts for small business that create jobs, domestic manufacturers, high-tech manufacturers, and companies that close overseas plants and move production back to the U.S.
At the same time, he’d require individuals making more than $1 million to pay an effective income tax rate of at least 30 percent, in part by eliminating their ability to take many deductions. And, he’d use the tax code to punish companies that do business overseas, creating a new minimum levy that is supposed to assure that all multinationals pay some U.S. tax.
Obama’s embrace of the tax code as a vehicle to pick winners and losers sounded more than a little discordant in a speech whose theme was “everyone gets a fair shot and plays by the same set of rules.” Not so much in a tax code where you get special rules for the government’s favored activities.
I don’t think the answer is merely lowering the tax rate on corporations and broadening the base by cutting out all the special deals, as Gleckman seems to believe. There needs to be a balance between a “simple” tax code and using it as a powerful lever to encourage things you, as a society, like and to discourage things you don’t like. There’s nothing inherently wrong with that. But you can’t have it both ways. You cannot support “tax reform” defined as a simpler tax code and then talk about all these tax credits and handouts.
In fact, that’s the danger of doing tax reform at all. Because the simplification will never stay that simple. Tax credits are the currency of politics these days. They will always get added on to the tax code. Politicians like it that way. It’s an easy way for them to advantage a particular group without “spending money” on a government program for them. Except these tax expenditures spend tons of money, more than the government spends on discretionary programs, actually. So I don’t see much of a way out here.
The best move, as I’ve been saying for years, is to do nothing at the end of the year, let all the Bush tax cuts expire, move forward with the Clinton-era tax code, and go from there with some other program of middle-class tax reductions to make the code more progressive if that’s your bent.




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You’d think smart populist Democrats would take the tax issue away from the GOP by proposing to eliminate the current tax code.
Replace it with the progressive income rates, tax ALL income (inheritance is income, capital gains is income, stock options are income). Deductions for health care, housing, kids, retirement, education, charity. Businesses have progressive income tax also.
The resulting tax rates would be very low. The tax revenues would be higher as a lot of untaxed income would be taxed.
Allow for modifications going forward (maybe we do want to give tax breaks to green jobs in alternative energy and energy efficiency industries) but the process is transparent and majority rule.
Basically “Sunset” the current tax code.
Eh? Pols, one & all, love love love a “complex” tax code, which vitually no one can decipher, including very smart & highly educated tax accountants.
Simple, really: provides ample room for all those loopholes to enable mega-corporations (posing as “small businesses”), super rich & the 1% to avoid as much taxation as is possible (that is, when they’re not already “sheltering” their vast gigabillion$$ off-shore somewhere now that Switzerland has become declasse ‘n all).
I won’t hold my breath waiting for the tax code to ever become simplified. Simply will not happen.
Commie!
Great ideas; makes sense. Hence: that dog won’t hunt. Will never happen.
One really sticky issue in simplifying the tax code is determining what is corporate income. Every industry wants to calculate it differently. A second is the religious deduction, which is justified on the grounds of charitable work but most religious donations wind up as places of worship or clergy salaries. A third is donations for education and the arts which differentially lower taxes for the wealthy and allow them to claim charitable giving that does not necessarily benefit society–inflation of professor salaries, vanity chairs and buildings, and more and more lavish sports facilities. And mortgage interest deductions drive housing bubbles.
Another issue is that individuals don’t get to deduct costs dollar-for-dollar and corporations do. So wage income is more like corporate revenues than like corporate net income.
If you call the IRS and ask a question they give a disclaimer before giving an answer that basically says we don’t guarantee the answer is correct and you can’t use it as a defense in an audit that you relied on the answer. But if I have $250 million in unearned income I sleep soundly.
At least Obama is throwing out some ideas that would reduce income inequality. They have no chance of passing Congress this year (what does have a chance of passing are the “entitlement reforms” he also spoke about), but he is putting the Dem platform out for voters, which is good for Dem candidates to run on.
Our tax code is custom made for wealthy people. Earned income vs. investment income is the crux of the issue. Consider a bright middle class kid whose family scrimps and saves all their after tax income to give the kid a good education. Then the kid goes on to benefit society, maybe a doctor, teacher, scientist, etc. The investment made by his familie in his education is taxed at earned income rates: fed income, state tax, local tax, payroll tax. The kid pays 40-50% when all is totalled up, for benefitting society.
Then, take a rich kid who drinks his way through school, his family realizes he’s a loser, so they buy him some Brazilian government bonds paying 10% interest, maybe with money that’s never been taxed in a trust or an offshore account, and he leads the idle rich lifestyle of tennis, golf and vacationing year round. His income is taxed at 15%.
So I guess our system favors loafers over people who benefit society.
Kind of crazy, but pretty standard procedure for a banana republic.
DD,
A very level handed post – up to the last paragraph. And I don’t really have a problem with that, except, why is the Clinton Tax Plan “correct”? Rates, deductions, tax breaks, etc. have changed almost every year since 1913. Unless you know of some specifics, the Clinton taxes were no better or worse than those after or before, just different.
Neat little Elizabeth Warren-Jon Stewart interaction on politicians, tax codes and corporations (scroll down for video).
It seems to me whatever scenario isn’t just plain vanilla will be gamed.
Tax the estate, then tax each beneficiary as ordinary income as well?
Maybe so. Your heart’s in the right place, I think. Yet somehow they’ll find ways to effectively transfer the wealth, or enjoyment of it, without having to pay. It’s already a cottage industry.
Also any deductions are actually subsidies which will raise necessary rates on everyone else. Examined broadly, deductions could be seen as a form of exploitation (or at least promoting such). Maybe deductions should all be stamped out.
Then just go with a progressive income tax with no deductions for anything and as many brackets as they want. What could be more transparent than that?
I suspect Dayen is an Obama operative and promoter, but he tries to hide it. This article is a good example.
In any case, with Obama, if it seems too good to be true, it is. It does not matter what Obama SAYS when Obama is in campaign mode. Base on three years’ experience we have had with Obama, we know that what Obama actively pushes for is often the OPPOSITE to what he SAYS, as far as on the key points most important to his constituents (ie. Wall Street, Big corporation, etc.).
Based on Obama’s record, and despite Obama’s pronouncements to the contrary, I think we can predict that Obama is promoting a wholesale revamping of the tax code because (drum roll)—Obama wants to implement the regressive flat tax in the U.S. for the first time in history and thereby cut the taxes for the rich further.
At the end, after all the Congressional maneuverings, Obama will say the Republicans in Congress or the Blue Dogs or whatever prevented him from pushing through most of these progressive tax reforms he mentioned in his state of the union. And, Obama will say he needs to give the Republicans a flat tax across the board in return for a (relatively neglible) tax benefit, such as giving companies tax breaks for moving some factories back to US. That will be Obama’s “tax reform.” Mark our words, Obama is a true neoliberal!
That has been Obama’s model for action these three years on the most important items, one of the reasons why many people who pay attention think that he is dishonest and reprehensible.
So, prediction: Obama will aggressively push for and institute the FLAT TAX if he is re-elected (much as he aggressively pushed for the extension of the Bush tax cuts, unnecessary exclusion of the public option, reduction of contributions to social security by 30%, sold out small farmers on the farm bill, etc. etc.) I believe there are many other things he will do, eg. seriously curtail Internet freedoms, if re-elected.
What I want to know is how Willard managed to pay less than 15%.
I thought the AMT was put into place back in the sixties expressly for the purpose of ensuring incomes over a certain level were taxed at a higher rate even if they have a bunch of deductions.
Because the AMT was not initially indexed for inflation it was subjecting more taxpayers to the AMT. Now every year congress has to reauthorize the an AMT fix or even more people will have to pay it.
So how did Willard manage to avoid the AMT?
BEWARE .Insist on a complete flat tax or nothing .The owners’ lobbyists will reimpose their tax-evasion welfare and the citizenry will never recoup their fi-fi deductions.Do you actually believe the royalists will lose their two-martini lunch on the welfare cheap ?
A flat tax?
Isn’t that shy of a millimeter to the left of the far right’s “head tax?”