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Monday, December 10, 2007

Fair Tax Musings

I know it's been weeks since I wrote a real post. No good excuses. Just lazy, I guess. But ninophile posts on the Fair Tax proposal, with some valid concerns about transitioning to the fair tax, at a minimum. Which actually got me thinking . . . that and the Huckabee "surge." Huckabee is an advocate of a plan similar to that in the Boortz book--replace the Internal Revenue Code with a 23% sales tax.

I may be one of the most "objective" people in the world on this point, as my spouse and I get almost, exactly zero tax deductions or tax credits. No kids, no mortgage, I'm too cheap to make charitable contributions, and so on. I guess we pay DC taxes, and so we deduct those. But we pay pretty much a flat tax right now--not always, but for a few years. It does mean that our taxes are simpler than they used to be--don't ever live in two different states, as a couple, and then sell a house and move in the same year . . . but that's more a federalism problem than a IRS problem.

So I don't benefit from the complexities of the tax code. No carve-outs or tax credits for folks like me. (Why not? Oh, yeah, no lobbyists.)

Ninophile makes the excellent point that there's no principled argument against simplifying the tax code. I.e., all else equal, no one can argue that complexity per se is a virtue. And complexity comes with steep costs. So economically, there's probably a great case for this, too.

Here's my thought on tax code simplification. I think that, historically, we started out with something very close to a flat tax on incomes (incomes above a certain point, that is). I'm sure that that was simple. But then someone came up with a great idea--some income was spent in a socially valuable way, and that should be shielded from tax liability. It could have been capital gains ("double taxation"!) or something else (home mortgage interest deduction, charitable contributions). Once that argument worked once, it worked again, and again, and again, and so on, until we had . . . the present Internal Revenue Code.

So a fair, flatter tax on incomes--maybe we should say wages, because I guess it excludes investment income (?)--might take us back to a simpler system . . . for a short time. But the deductions will make their way back, slowly, but surely.

How to (effectively) stop Congress from complexifying a simplified system?

I'm not sure there's a good answer for this. Because, in general, both parties want to shield certain forms of income from taxation. Both parties want to encourage some kind of behaviors, and tax others. This is a bipartisan problem (or virtue).

So, even if we start with the (reasonable) assumption that a simplified tax system would be better, it would be a short time before the system became more complex (the last time we had major tax reform in the U.S. was 1986, just over 20 years ago). And then the same issues would crop up.

So, given the likelihood that tax simplification would cause some major disruptions, and lead us to incur major transition costs, it's hard for me to conclude that a major overhaul of the sort involved in a 23% sales tax is a good idea. That's setting aside the actual level of the sales tax needed, or the issue of rebates for low-income folks. So this one looks like a non-starter to me. Which is not to say that the present situation is "optimal."


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