Monday, June 24, 2013

Tax Reform Proposal, or: The Closest Shave in Fiscal History

A break from the endless droning of monetary economics. Lately I've been enraptured by the subject of tax reform. For years we've been told by Democrats that we need to raise tax rates on the wealthy (over $250,000 by their estimates) and by Republicans that we need to lower rates on everyone (especially people who earn their living from investment income; less so for that vulgar income stream known as wages). I've never been entirely sure about how I feel about this, until now: I hate taxes, and think even a top marginal rate of 39% is a little absurd. And don't get me started on how high corporate rates are. On the other hand I hardly like the imagery of slashing tax rates on the opulent and benefits for the indigent. But lately I've concocted a reconciliation for the two.

It starts with an idea that no one likes and only a few brave politicians ever suggest, but I'll take it a step further: eliminate all Federal tax expenditures. To a man. Dead in the water. Take away all the goodies, and piss off everyone in America. I'd eliminate the tax deduction for employer-funded health insurance, charitable contributions, accelerated depreciation, tax deductions for dependents, mortgage interest deduction, and deductions on corporate bond interest and Treasury interest, to name a few. I'd also remove the lower rate paid on realized capital gains. Income is income, and it's all game, no exemptions.

And then I'd slash all the rates. By how much I'm not sure, because it depends on how much can be raised by eliminating these tax expenditures. I've heard that we "spend" about $1.2 trillion on these types of deductions, so that implies we could collect about 37.5% less in direct taxes. That's intense. Even if we reduced everyone's taxes by 37.5%, that's dramatic. Now imagine if we lower rates on everyone, but by 50% on the lowest income earners and only 24% on the highest earners. That's a budget neutral tax cut both parties could get behind.

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