|
|
Tax Evasion
Early this year, a few newly-powerful Republicans expressed interest in a "flat tax" to replace the current progressive income tax. Since then, tax reform fever has spread throughout Congress, infecting both parties, and several serious people have advanced tax reform as the principal issue for 1996.
Hold on to your wallet. OrÉ maybe not. Since revenue neutral tax reform just reshuffles who pays the same total dollars, you might be a winner this time around.
Given that we are short $300 billion in annual revenue (or long on spending, depending on your point of view), it is remarkable for Congress to choose tax reshuffling as the top national priority. On the other hand, it's typical for Congress to evade tough decisions by substituting the peripheral for the essential.
Beyond misplaced priority, this tax reform discussion has two other terminal flaws: flat taxes aren't simple and can't be made fair, and grand reform of taxes is an opportunity for disaster.
The main argument for the flat tax is simplicity. "File your tax return on a postcard" is the standard, know-nothing line. A flat tax would be simple for wage-earners, but all the information on a 1040EZ would fit on a postcard right now.
However, even under a flat tax, business income and expenses would still have to be defined. Most of the 10,000 pages of tax code has to do with identifying what you can and cannot subtract from income before paying taxes -- and not "shelters" either. Flat tax or not, the list will live on: home offices, employee benefits, software R&D amortization, bad debts, vehicles, depreciation, travel, merchandise, retirement contributions, commissionsÉ.
There will never be a simple way to distinguish between gross revenue and net taxable income. It's frustrating, but nobody should expect a simple tax code in an eight trillion dollar economy.
Flat tax unfairness is transparent, no matter what exemption hocus pocus the pusher has in mind. A family making $250,000 ought to pay a higher percentage tax rate on the excess over $40,000 than a family making $80,000, and none of the current or past proposals solves the problem.
The disaster potential of grand reform is illustrated by the "USA Tax" offered by two otherwise capable legislators, and a look back at the 1986 grand reform.
Senators Domenici and Nunn have talked themselves into a deal where all saving and investment would be untaxed, and unsaved income above $40,000 would be taxed at 40% (!). Corporations would pay an 11% flat tax on gross revenue, deducting only purchases of goods, services, and investments, while wages, interest, and dividends would be non-deductible (?). Though I expect that these numbers test out for aggregate tax collection, their impact on individuals and individual businesses would cause an inconceivable disruption of the national economy.
In 1986, a similar grand plan reduced the top income tax rate from 50% to 28%, and installed only one other, 15% bracket for lower incomes. The money to pay for this "reform" came from the retroactive disallowance of all the old tax shelters.
Aside from personal catastrophes from "recapture" and "phantom income," the end of all the shelters added over $100 billion to the cost of the S&L bailout. It did not occur to the reformers that most commercial real estate had been developed by "tax advantaged" partnerships (created in the prior grand reform in 1981, and justly found abusive). If the tax advantages were removed, also removed was roughly 15% of the value of commercial real estate in general. At the time, S&Ls and their insurers were the largest single holders of commercial property.
The land of unintended consequence is painful terrain.
Though "supply side" tax cuts have been discredited, there is legitimate opportunity for tax reform: extreme taxation of income does harm to the creation of wealth. Creating wealth, in amounts large or small, is essential to national health, despite the suspicions of those who feel that producing wealth is a scrofulous pastime. Income taxes should be replaced in part with consumption taxes.
It's worth testing a small national sales tax coupled with a progressive rebate to lower income brackets. We could try more incentives to save. We should raise taxes on fossil fuels in some way to raise prices to world levels, if only for supply and environmental reasons. We could experiment with small value added taxes, and other "consumed income" ideas.
The trick to these or any other tax reforms is doing them a little at a time. Done in increments, it's possible to evaluate the unintended consequences as they appear, then reinforce the happy surprises and abandon the bad.
Meanwhile, the simplicity promisers and grand planners should be hooted back to productive work: don't let them dodge the deficit.
|
