Bruce Bartlett: How to really simplify the tax code

[SnakeBoy]

Hm... will the board conservatives here champion Graetz's plan because it would cut out a great deal of government involvement (IRS)? Or will they decry it, because everyone should have to pay "their fair share"? I'm pretty sure I can guess...

I'm opposed to a VAT or national sales tax in any form so I guess I'll decry it.

[Winehole23]

in any form?

why wouldn't getting rid of special preferences and ridiculous complexity in the tax code be worth it, in your view?

[Winehole23]

or otherwise, is there some simpler system that meets similar ends without offending your sensibilities?

[SnakeBoy]

in any form?

why wouldn't getting rid of special preferences and ridiculous complexity in the tax code be worth it, in your view?

It would be worth it but we don't need to eliminate the income tax to do that. A national sales tax would be the most regressive form of taxation, is an unreliable source of revenue, and the most difficult to enforce.

or otherwise, is there some simpler system that meets similar ends without offending your sensibilities?

I favor a flat progressive income tax. Just pulling numbers out of the air I'd say the rate should go from about 6% to 25%. No personal exemptions, child credits, mortgage deductions etc. This would make the tax code strictly a form of revenue collection and eliminate using it as an ineffective welfare/social engineering program as it currently is. It would also require our politicians to actually do their jobs and create effective welfare/social programs.

Short term capital gains would be taxed as ordinary income. Long term gains would taxed from 20% down to 5% depending the length of time with >5 yrs tax at the 5% rate. Earnings from dividend payments would be taxed at or near zero.

I'm sure other forms of taxation need to be revamped as well but I don't know enough about them to support any particular changes. Bottom line is I think the tax code should be simpler but a simple tax code just isn't going to work in an economy as large & diverse as ours. And using the tax code for purposes other than revenue collection is the reason our tax code is so screwed up.

[Drachen]

I don't really have a problem with any of that except I am curious, why do the dividends get taxed at a lower rate?

[SnakeBoy]

To encourage long term investing which aids companies in making good long term business decisions rather than just trying to make the next quarter.

I'd also throw in no tax on earned interest on savings for those who don't want to risk there money in the market. Edit That's a non issue unless the Fed changes it's course but that's another topic.

[FuzzyLumpkins]

I don't really have a problem with any of that except I am curious, why do the dividends get taxed at a lower rate?

My grandfather who made a lot of money in the 60s and 70s off the stock market told me that his key to successful investment was looking for good dividend ratios. Its real tangible output from the stock.

He pulled out of the market completely in the 1990s.

There are no more good dividend rations the best you are going to find is 25:1. You have companies like Apple who have conned people into thinking that zero dividends are 'cutting edge.'

What you have left are volatile stocks with no substance beyond consumer confidence and when that bubble bursts there is nothing to stop the free fall.

This time there will probably not be a trillion dollar bailout to save teh banks who do most of the stock inflation.

I am guessing that the idea is to encourage people to find importance in dividends once again and quit the overspeculation that continues to be rampant. Its just not stable.

[SnakeBoy]

^ said it better than me.

[Drachen]

Ok, fair enough, but isn't that just engineering through the tax code again (just not the social/welfare that you railed against).

While I like the explanations, I think it just keeps the doors open to get back to this exact spot.

As was said before we should "require our politicians to actually do their jobs and create effective" ______________

[coyotes_geek]

It would be worth it but we don't need to eliminate the income tax to do that. A national sales tax would be the most regressive form of taxation, is an unreliable source of revenue, and the most difficult to enforce.

Not sure about Graetz's plan, but under Boortz's Fair Tax there is a mechanism to deal with the regressive issue. A "prebate" I believe it is called. Basically the govt would figure the tax that would be paid on the $poverty level and send everyone a check (monthly???) for that amount. Everyone ends up paying the same tax at the register, regardless of income, but those near the poverty line end up getting reimbursed all or most of what they paid. Whether that adequately addresses the regressive nature or not is certainly fair discussion, but it's at least a good faith effort at addressing the problem.

That being said.......

I favor a flat progressive income tax. Just pulling numbers out of the air I'd say the rate should go from about 6% to 25%. No personal exemptions, child credits, mortgage deductions etc. This would make the tax code strictly a form of revenue collection and eliminate using it as an ineffective welfare/social engineering program as it currently is. It would also require our politicians to actually do their jobs and create effective welfare/social programs.

Short term capital gains would be taxed as ordinary income. Long term gains would taxed from 20% down to 5% depending the length of time with >5 yrs tax at the 5% rate. Earnings from dividend payments would be taxed at or near zero.

I'm sure other forms of taxation need to be revamped as well but I don't know enough about them to support any particular changes. Bottom line is I think the tax code should be simpler but a simple tax code just isn't going to work in an economy as large & diverse as ours. And using the tax code for purposes other than revenue collection is the reason our tax code is so screwed up.

......I tend to agree with you that a revamped income tax would be the way to go. I'd take the simplification even further though. If it were up to me, I'd just lump all income together, deduct off the poverty line, multiply by a tax rate and be done with it.

(income - poverty) x (rate) = tax

Maybe add a bracket or two, but otherwise keep it as simple as possible. Income is income, no deductions outside of giving everyone a break up to the poverty line.

[SnakeBoy]

Ok, fair enough, but isn't that just engineering through the tax code again (just not the social/welfare that you railed against).

While I like the explanations, I think it just keeps the doors open to get back to this exact spot.

As was said before we should "require our politicians to actually do their jobs and create effective" ______________

I don't view it as any type of social engineering. I guess having a tax code that promotes a more robust & stable economy could be called a type of engineering.

I'm not railing against social/welfare programs, they are necessary, but doing it through the tax code doesn't result in much benefit. Instead of just telling someone you're poor don't pay taxes it would be of greater benefit to tell tell you still pay taxes like every other american and then offer them any number of assistance programs designed to help them rise out of poverty.

[Drachen]

I don't view it as any type of social engineering. I guess having a tax code that promotes a more robust & stable economy could be called a type of engineering.

I'm not railing against social/welfare programs, they are necessary, but doing it through the tax code doesn't result in much benefit. Instead of just telling someone you're poor don't pay taxes it would be of greater benefit to tell tell you still pay taxes like every other american and then offer them any number of assistance programs designed to help them rise out of poverty.

You achieve your goal by having lower long term gains taxes. If you incentivize dividends then you create a bubble in the large cap sector and starve small growing businesses. Basically, the farm team gets depleted.

[SnakeBoy]

I doubt that would happen but the tax rate could be adjusted if it did.

[boutons_deux]

"you still pay taxes like every other american"

everybody pays REGRESSIVE sales taxes, property taxes (renters through the landlord), SS/medicare, etc, etc.

It's a just another HUGE CONSERVATIVE LIE that "poor people don't pay taxes".

"any number of assistance programs designed to help them rise out of poverty"

Repugs have been/are cutting all such programs that make poverty less punishing (food stamps, housing allowances) and/or offer advancement (Pell grants), while proposing to double the interest of govt education loans. WHILE cutting the taxes on the 1% and UCA.

I can't find it now, but I posted a study for Texas that showed what percentage of total income by quintile was paid in all taxes. The bottom quintile paid a higher percentage than top quintile.

But you guys still want to shift more taxes onto lower quintiles.

[Drachen]

I doubt that would happen but the tax rate could be adjusted if it did.

It's simple investment analysis. You have a growth company, startup, whatever (basically a company that needs its cash to fund its projects).

On the other side you have a company that is established within their industry.

Let's say that for a variety of factors each company represents the same risk to your investment dollar. You would require a lower rate of return to pay you for your risk on the established dividend paying company than you would on the startup/growth company meaning that investment dollars would flow more freely to the former than the latter.

In an effort to stem this tide perhaps the growth company prematurely starts paying dividends. That is money taken away from innovation/research, etc.

[SnakeBoy]

It's simple investment analysis. You have a growth company, startup, whatever (basically a company that needs its cash to fund its projects).

On the other side you have a company that is established within their industry.

Let's say that for a variety of factors each company represents the same risk to your investment dollar. You would require a lower rate of return to pay you for your risk on the established dividend paying company than you would on the startup/growth company meaning that investment dollars would flow more freely to the former than the latter.

In an effort to stem this tide perhaps the growth company prematurely starts paying dividends. That is money taken away from innovation/research, etc.

Well then the tax rate could be higher to keep that from happening if your right. I'm not interested in debating the fine details of a tax code I spent 90 seconds inventing. In fact your arguments are proof of my larger point that a simple tax structure a 5th grader could understand is probably not a good approach.

[Drachen]

Well then the tax rate could be higher to keep that from happening if your right. I'm not interested in debating the fine details of a tax code I spent 90 seconds inventing. In fact your arguments are proof of my larger point that a simple tax structure a 5th grader could understand is probably not a good approach.

Ok, sorry didn't mean to be confrontational. I don't have much of a problem with most of what you wrote, that was the only thing that stuck out to me as different from the rest, thus the question.

[spursncowboys]

not sure that I ever passed comment on the Boortz fair tax specifically or endorsed this plan, but both are worth discussing -- our system of taxation is pretty much insane.

completely agree

[Wild Cobra]

The only thing I don't like about the "Fair tax" is the prebate. I believe you simply do not tax necessities, and have do deductions, prebates, credits, etc. A prebate would keep the "generosity" of the government in the hands of congress for elections. that's just one problem I see with it.

[coyotes_geek]

The only thing I don't like about the "Fair tax" is the prebate. I believe you simply do not tax necessities, and have do deductions, prebates, credits, etc. A prebate would keep the "generosity" of the government in the hands of congress for elections. that's just one problem I see with it.

I'd rather just use the prebate and skip the circus that would result from the government trying to define what products are necessities and what products aren't.

[Wild Cobra]

I'd rather just use the prebate and skip the circus that would result from the government trying to define what products are necessities and what products aren't.

seems to me a pretty simple process.

Food... no tax.

X-Box... tax.

Toothbrush, toothpaste, deodorant, etc... no tax.

[Drachen]

seems to me a pretty simple process.

Food... no tax.

X-Box... tax.

Toothbrush, toothpaste, deodorant, etc... no tax.

See, and that is the reason why it wouldn't be a simple process. While I use it, I do not see deodorant as a necessity.

[Wild Cobra]

See, and that is the reason why it wouldn't be a simple process. While I use it, I do not see deodorant as a necessity.

There will be gray areas where people don't agree. So what. There are enough items clearly in one camp or another that it doesn't matter. Besides, everyone will pay or not pay the tax on these gray area items. If you want to dismiss any new ideas because they aren't perfect, then go back to Utopia and leave us alone.

[coyotes_geek]

Food... no tax.

Bottled water?
Gatorade?
Halloween candy?
Ice cream?
Cheerios?
Captain Crunch?
A #1 combo supersized with a large soda?
A $50 steak at a fancy restaurant?
A $5 cup of coffee from Starbucks?
A bag of Starbucks coffee beans bought from a grocery store?
An H.E.B. fully cooked brisket?
Nachos at a ball game?
Lobster from a grocery store?
Vitamins?

Toothbrush, toothpaste, deodorant, etc... no tax.

Cosmetics?
Perfume/Cologne?
A comb?
A hairdryer?
A trip to the barber/stylist?
Baby diapers?
Adult diapers?
Condoms/Birth Control?

Instead of asking the government to give a yes/no on an endless list of items, wouldn't it be easier to just tax everything and use a prebate?

[LnGrrrR]

no.

$100k is way too much. I would love paying thousands less each year, but I strongly believe it would create more people desiring a bigger government since less will be paying for the bigger government.

I will not budge from my argument that we need more tax payers. Not less.

Except people would be paying the same amount of taxes (assuming they didn't change their buying patterns) through the value-added tax proposed. So they'd still be paying.

And you'd think if you wanted more tax payers, you'd be for an easier path to citizenship for illegal immigrants, or at the least, a system that allowed more legal immigrants.