November 24, 2002
From the desk of Jane Galt
The Jane Galt Tax Plan
Fritz Schrank asks how we should simplify taxes. Well, here's the Jane Galt version, guaranteed to please no one but its author:
1) Get rid of all our poverty programs, except those aimed at the disabled, and temporary unemployment assistance, and institute the negative income tax. That is to say, the system should be continuously progressive, from a steep negative rate of up to 100% on very low earners, gradually declining until it zeroes out around $28,000 a year, and then rising gradually until it maxes out around 35% on the top brackets.
2) Eliminate FICA and pay for Social Security and Medicare out of general revenue. It's time to stop pretending it's a pension system, when there are no assets in the "trust fund"
3) Eliminate the corporate income tax
4) Eliminate the special treatment for capital gains. All income should be taxed at the same level, regardless of its source.
5) Eliminate all deductions. Period, end of statement. No mortgate, student, child, etc. All causes are equally worthy in the eyes of the person who possesses the deduction; it is a waste of our time as a nation to sit around arguing about who deserves what.
6) Just say no to the Value Added Tax. In theory, it's a good tax. In practice, because it is extremely hard to tell what proportion of the price of anything represents the tax, it removes the good and natural pressure upon tax rates.
7) Get rid of the estate tax, and tax the capital gains on whatever is sold.
So why these particular features?
Well, the negative income tax does two things: encourages work by removing the disincentives created by potential loss of benefits; and means that the entire country, poorest to richest, faces a marginal tax increase if they want more spending: the poor have to give back some of their rebate, while the rich have to pay higher rates. For many on the left, that may of course be a bug, not a feature, as it forces the electorate to think much harder about whether or not they want new spending.
The arguments between conservatives and liberals often go like this:
C: The rich pay all the taxes
L: That's not true -- what about FICA?
Both have points. But the central issue that the conservatives are trying to get at is that the majority of the electorate does not face a marginal tax increase when they agitate for new spending. FICA may indeed be regressive, but its rates are unaffected by the level of spending in government. So a majority is prone to agitate for higher taxes, because they will not be paying those taxes.
I don't think it's a healthy situation for the electorate when a large majority is voting for spending that costs them nothing. To the minds of someone who pays no income tax, there's no cost/benefit analysis to be made; they're getting stuff for free. Even something of trivial benefit to them is thus better than not raising taxes. So we end up spending money on a lot of crap, because most of the voters don't care -- it's not their money.
On the other hand, liberals have a point about fairness. It isn't fair to say that some guy who brings home $20K should pay the same quarter of his income as Warren Buffett. The decrease in Joe Schmoe's standard of living represented by that 25% is much greater than the decrease in Warren Buffett's SOL from taking a quarter of his loot.
A negative income tax increases fairness, removes perverse incentives from the current benefit system, and makes sure that everyone has to think about whether they really want that new spending they're voting for -- enough to give up some of their cash.
Killing FICA increases fairness while removing some of the obstacles to reform by eliminating the fiction of an insurance program.
Eliminating the corporate income tax while equalizing treatment between capital gains does a number of things. It mitigates the current bias towards (tax deductible) debt financing. It ends all the ridiculous distortionary crap that corporations do to get around taxes. It ends the bias towards retained earnings that helped produce such interesting results in the stock market. It takes away a large chunk of the ability of the rich to avoid taxes by deferring their income in capital gains. It ends the tax preference for stock options that helped make the start of the new millenium so lively. Under this plan, income is income is income, no matter where it comes from. Thus we can stop the multi-billion dollar industry in shifting income from tax-disadvantaged to tax-advantaged forms.
If you just end the corporate tax without changing capital gains, you keep much of the distortion and shelter for the rich. If you eliminate special capital gains treatment without eliminating the corporate tax, you bias the economy away from investment, because now income is taxed at a high level twice -- once when its made by the company, and a second time when its distributed to the company's owners. This way, we tax it once, when it hits a real person.
We eliminate deductions for two reasons. First of all, they're distortionary. If it makes economic sense for adults to go to school, they will go to school. Giving a tax credit for it just encourages marginal activity that wouldn't pay for itself without a subsidy. Try thinking of it not as a tax credit, but as you giving someone else money to follow their dream of learning Old Church Slavonic, and you see what I mean.
Second of all, deductions are the way that the rich make sure that they pay a lot less taxes than the upper middle class. There is a reason that Barbra Streisand thinks that income taxes should be raised; she isn't going to pay much more tax. Most of her money is in assets, earning more money. It's the guy who owns the gas station down the street who's going to get it in the teeth. If we want to tax the rich, let's tax them, not give umpteen zillion deductions so they have the same marginal rate as your average bike messenger.
That's fine, I hear you say, but why all the deductions? Why not just the bad ones?
Because, as we've found since Reagan's simplification, there's no such thing as just one deduction. If you want the mortgage tax credit, you're going to need to give someone else the land-use abatement, and then there's the guy with his Urban Empowerment Zone Qualified Small Business, and next thing you know, we haven't gotten anywhere. The only way to get a clean code is to get rid of all of them. This won't be fun for many people. Housing prices will drop, for starters. On the other hand, so will tax rates. And come on -- why should an apartment renter be paying more taxes so you can frolic in the greenery?
Why get rid of the estate tax? Because the revenues raised are trivial, and people spend an enormous amount of time and money structuring their estates to get around them. Again, a disproportionate share of the tax is paid not by the super rich, but by the poor schmucks with one or two big assets they can't structure to get around the tax. On the other hand, when it's sold the inheritors should pay all the capital gains -- if you get rid of the estate tax, you should get rid of the stepped-up basis as well.
So that's Jane's plan. As you can see, it would be efficient, fair, and has absolutely no chance of ever getting passed unless they make me Dictator for the Decade.
Sigh. I could solve so many problems, if only people would let me tell them what to do. But no, they insist on mucking it up by deciding for themselves.
Posted by Jane Galt at November 24, 2002 02:45 PM
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that's actually a sweet plan.. assuming that employer share of fica goes away as well...
i was indignant about the 35%, and while I believe that it's at least 10% too high, it would allow for adjustment...
it does seem though that if you got rid of most programs, and of all deductions, 35% would bring in a hell of a lot of money, more than you'd need to fund the -100% rate at the low end (though depends on where you're numbers are exactly)
couple points: need to avoid giving the -100% tax to kids of non-poor. There are so many situations (especially among students) where kids are on poverty level earnings and aren't being claimed as dependents, but are from very well off families and are getting large amount of direct cash subsidies. Gov't should only spend money on those who really really really need it! Don't give rich people subsidies (I'm mainly speaking from personal experience... it seems really dumb to give someone who's household income is north of 400k benefits qimed at working poor... but I qualify and i hate having the government have any more money.. so i take it... but its really f-ing stupid!)
as for cap gains... don't think they should be taxed... bias towards company formation seems beneficial... this is mainly based on the 35% rate... at 15-20 it doesn't matter... but 35% turns into near 50 when the states are done, which is a major disincentive...
you didn't explicitly kill the AMT , although it would be implicit in eleimination of deductions. Stake the beast, as its sole benefit is schadenfreud, as it doesn't raise much, if any, net revs, especially after externalities...
Not too bad. When they started to talk about recognizing same sex marriage, i said eliminate all non-taxed benefits and marry your dog for all i care.
What are you trying to do, put me out of business? Other than the fact I am a tax accountant and have a vested interest in the current system, I like your suggestions. As I've said in the past, to be fair, a tax system must be complex -- but not nearly as complex as our current system. Your program would go a long way to removing the perverse incentives of the present system.
Two quick thoughts: First. Under your system, who will pay the tax, individuals or families? To be fair, our current system uses different tax rates for individuals than it does for married couples. We also exempt a small portion of income from tax based on the size of the family unit. Would your system maintain such distinctions?
Second. Babs does not have a lower marginal rate than many in the middle class. (She is not a client, but many of my clients are as wealthy as she. They all pay at the highest marginal rate. Most of the deductions you talked about are phased out for those making a lot of money.) I suspect she advocates higher taxes because she as no idea how hard others work for their money. Oh, she may put in a hard day att the studio, but then she collects a few bucks off of every CD sold -- even if it was recorded 20 years ago. When its so easy to make money, I suspect it distorts your world view. (I'd love to be able to base this opinion on personal experience, but, alas, cannot.)
When you eliminate FICA, remember to include a provision giving worker in the country a 7.65% raise the same day. That will help get the support a plan like this will need.
Can I ask a question? I'm kind of playing out of my league here, but I'm a student, so all y'all can think of yourselves as my teachers.
The question is this: wouldn't a negative income tax regime experience the same disincentive problem as any other progressive plan? That's to say, at each 'grade' along the scale, wouldn't their be a disincentive to increase productivity/income, given the resultant rise in taxable income?
I imagine this was addressed in the original post, but I can't seem to think my way through it, and I'd appreciate any comments to clear up my confusion.
Also, I don't like the elimination of the corporate tax. Remember that running a corporation with lots of assets is more valuable than the money itself expecially for wealthy owners of private corporations. Instead, provide that dividends paid on taxed profits are passed through tax free. The net result is the same and no tax shelter for the rich privately held companies is created as a side effect.
But if ahything like this were ever possible, I wouldn't quibble. Everyone should get behind it because it would be much better for everyone, even the apparent losers. The economy suffers from something like a trillion dollars a year of deadweight losses from the tax code we have today and this would get 90% of it back.
And you studied economics? You're perpetuating nearly all that's wrong in our present system. Why tax income when we ought to be taxing wealth? They're two entirely different things. The real tragedy of our current "graduated tax" system is that it's designed to prevent anyone from BECOMING wealthy.
As an example: A guy who wins the lottery for 1MM vs a guy with 1MM in CD's. Why should the lucky loser pay half his net worth in taxes while the CD guy pays next to nothing?
In the fifties, you could raise a family of four on $100 a week (you didn't have two cars, tv's, microwaves, et al -- but bear with me). You can't do it today on $1000, and the difference is taxes (FICA, Medicare, FIT, and state levies).
OBTW, you're also wrong about capital gains. You'd want to have the poor shnook pay twice for inflation?
Dave, try this.
Tax Rates Income Threshold
So if you work for minimum wage full time six months a year and part time the other six months you earn about US$6000 and you get back US$4200 raising your total to a comfortable US$10 400. That's lots more than you get today.
If you earn US$27 000 then you pay a total of US$0 because the US$4200 you get back at US$6000 a year exaclty equals the US$4200 you owe from US$6000 to US$27 000 (US$21 000 x 20% = US$4200). Earn more than US$2700 and you are a net payer, less and you get money back. That is not the same as a tax refund today, since you simply won't have anything taken out of your paycheck at all until you earn over US$27 000. That's lots less than you pay today.
If you earn US$200 000, you probably pay a little more than today, but the reason for that is elimination of the regressive FICA tax that hits the poor hardest. In fact, with the FICA system, the poor pay almost as much as a percentage of income as the rich and the middle class pays about 30% more than the very rich.
So this is really a middle class tax cut. Remember that the rates are calculated without deductions, and after we all get a 7.65% raise from FICA eliminations. I think my rates are revenue neutral if rebates are limited to the true working poor, but I'd like to hear analysis of that.
I think maybe some people who don't do corporate tax planning are missing the point on capital gains. Today corporate profits are triple taxed. You pay 35% for corporate income tax. Then you pay 10% to 37% for individual income tax on the same money. Then you pay 20% capital gains tax when you sell on the increase in value of the company, which is equal to the increase in expected future income stream from the company. That is three taxes which ultimately fall on the same income. The total rate is usually well over 60%.
And the distortive effects these taxes create when we try to avoid them build a web of complicated transactions. The corporate accounting chicanery was largely a result of stockholders giving accountants leeway to scheme in order to avoid triple taxes.
With the Jane Galt plan we get the complete elimination of one of the taxes (the corporate income tax) and a possible much smaller increase in one other (capital gains). The net result will be better corporate governance and less taxation of corporate profits. I would strongly prefer eliminating the dividend tax (the individual income tax on corporate profits) because it would favor US citizens and companies and reduce accounting chicanery more effectively and close more loopholes and be simpler, but Jane's method is much better than what we have today.
And, on the capital gains tax and inflation, remember a capital gains tax gives powerful big investors a reason to oppose inflation. Very often central banks are persuaded to cause inflation by large corporate exporters whose businesses will benefit so the tax neutralizes an evil influence on our government somewhat. Make the rich fear inflation and maybe politicians won't bring it back.
The Jane Galt tax plan:
1) Yes. Eliminating the punitive effective tax rate now imposed on people trying to get out of poverty -- through the loss of means-tested benefits -- would be the best thing we could do. Including housing benefits, the "tax" rate exceeds 100% at points. Every means tested-benefit for the poor conversely acts as a tax on those trying get out of poverty -- and incentives count.
This would also eliminate a vast counter-productive bureaucracy that consumes funds that never reach their intended beneficiaries. (And the bureaucrats vote, so don't expect Democratic politicians to support this.)
The trouble is that from the analyses I've seen, a negative tax rate of no more than 50% (otherwise it becomes punitive itself) would result in a negative tax going substantially into positive, now tax-paying, income levels.
2) Yes. This means fundamentally re-working Social Security of course. Simplest is the Milton Friedman plan: SS benefits earned to date are grandfathered and all paid from taxes, as they would be anyhow, only more progressively from general revenue. From now forward everyone gets private SS savings accounts that will pay larger benefits from smaller contributions than our current SS system would. And the myth of the "high transition cost" of SS privatization is debunked.
4) Yes -- but index for inflation.
(Footnote to history: Early in the history of the income tax system the US Supreme Court followed the advice of economists in ruling three times that capital gains are not income at all, for tax purposes or otherwise. Then Congress changed the tax code to define them as being such (as it can define a fish to be a fowl for tax purposes). Of course, economists do not consider asset appreciation to be "income", e.g. capital gains are not counted in income in the national accounts compiled by the BEA)
5 & 6) Yes.
7) Problem here: applying capital gain tax to inherited assets has been tried twice and proved an unworkable fiasco. Nobody ever has the needed records. An alternative is to eliminate today's estate tax (rates up to 50%) and impose capital gain tax (top 28%) on an estate's assets instead (over an exempt amount) whether they are sold or not. Then mark the assets' basis up to the taxed value for purposes of determining any future gain or loss.
So that's pretty much seven for seven. But don't anyone hold your breath.
Above, "capital gain tax (top 28%)" should be 20%, of course, except for your antiques, old master paintings, rare stamps and coins and other collectibles, which get 28%.
Since 1932, average federal spending as a percentage of GDP has hovered around 21% (including the period of 1941-1945). What's wrong with charging individuals a 13% flat income tax with two deductions (one for mortgage or rent and the other for education) combined with a 13% VAT for businesses? Together, the two would account for more than enough to cover federal spending.
btw, Here's an interesting site on taxation by the Heritage Foundation: www.taxation.org
While I understand the issue of multiple taxation on dividends, eliminating the corporate tax wouldn't fly in any realm not headed by Queen Galt. Similarily, Brian's suggestion that no tax be paid on dividend income probably wouldn't pass the fairness test for the general populace, economics aside.
What's wrong with making all dividend payments tax-deductible on the part of the corporation? Probably something, or it would have been mentioned already, but personally I was surprised when I learned they weren't deductible. They seem like an expense in the same way employee salaries are expenses. Apparently, dividend payments to employee-held 401k plans are deductible (well, that's what this
editorial I found said), which encourages companies to urge their employees to invest solely in company stock, which lead to a lot of fun for Enron employees. Making them all tax deductible would be an easier way to fix that problem than proposed laws restricting the levels of investment. Isn't that just like politicians, creating one problem through laws and wanting to fix it with more.
Dragoon - Employee salaries are deductible whether or not a portion is put into a 401(k) plan. This is true whether the 401(k) plan invests in employer stock , a mutual fund, or a money market account. Allowing employees to purchase stock through their 401(k) plan may help a company's cash flow, but it doesn't help the company's tax situation.
Indexing for inflation is necessary to prevent the government from raising taxes by stealth. Remember the 70s? [shudder]
35% seems rather fierce, especially if you count capital gains. Remember, that you will get nailed every time you sell your house, unless you are going to keep that special exemption.
Depending on where you set each percentage, I see Myself paying quite a bit more. I lose the mortgage and state tax deduction, have capital gains (what about losses?) taxed at a higher rate, and I am in a higher marginal bracket. Then I will have to pay a huge fine if I sell My house and buy another.
>>>Brian's suggestion that no tax be paid on dividend income probably wouldn't pass the fairness test for the general populace, economics aside.
Dividends already are tax-free for the owners of a majority of the corporations in the US -- the S corporations, which now outnumber regular corporations. S corporations are all private, none are publicly traded on the stock exchange, but some are quite large indeed.
S corporations also are not subject to income taxation at the corporate level -- their income is taxed directly to their shareholders, on their personal tax returns. And the same is true of partnerships and the rapidly growing number of Limited Liability Companies -- they pay no income tax at the business entity level. Some of those are very large, national businesses.
So for the solid majority of business entities in the US right now there is no corporate- or entity-level income tax, and Jane Galt Reform #3 is already true. Large public corporations now are sorta the victims of discrimination on this. ;-)
"In the fifties, you could raise a family of four on $100 a week (you didn't have two cars, tv's, microwaves, et al -- but bear with me). You can't do it today on $1000, and the difference is taxes (FICA, Medicare, FIT, and state levies)"
Ummm.. yeah. Plus all that inflation 'n stuff...
Would capital losses be deductible against ordinary income? If no distinction at all were made between capital gains income and ordinary income, then someone earning a salary of $100,000 in a year when he had a loss of $100,000 in his stock portfolio (and those losses were realized) would owe no income tax at all. In fact, he would be entitled to receive money from the Treasury under your negative income tax plan.
Historically, one of the reasons capital gains were distinguished from ordinary income was that some obviously wealthy individuals were not liable for income tax because of their losses in the crash of '29. In response, the law was changed to limit the deduction of capital losses against ordinary income, and the lower tax rate on cap gains was part of the deal.
Over on http://arnoldkling.com/gqe/ I endorse your tax plan, but I think we need to do something to encourage young people to get off of Social Security. I propose giving people a tax exemption for savings in exchange for accepting a higher retirement age.
Remember when you figure the new numbers,
First, that you and your wife get a 7.65% raise the day the tax plan is passed, if you earn less than US$85 000 in salary, or a progressively smaller raise if you earn more.
Second, in addition to your raise your FICA tax is cut which adds back 7.65% to your salary. That's a 15.3% tax cut already to set off your deductions and higher rate.
Third, no more paying accountants or filling out long, complicated forms.
Fourth, index the brackets for sure, but don't index capital gains. People should scream at the government when inflation rears its ugly head. The fed can create and reduce inflation any time it wants and there are powerful forces pushing to inflate. It's good if ordinary and rich investors and their political power are strongly against it.
I would actually add one special feature -- if you roll your home gains over into another primary residence, the price of the new residence is deducted from your capital gains. Otherwise, people would be homeless.
Re: $100/wk in the fifties vs. $1000/wk today.
The CPI actually has not risen ten-fold in the last fifty years. (Although you could make a good argument that the dollar price of gold has).
The difference really is the tax bite. If you look at what was taxed and at what rates in the fifties vs. today, your mind will be boggled.
The better agrument against my comparison is that today our aims are higher -- we expect to have more toys to play with. (It was a really big deal when Dad brought home an electric washing machine in '52 -- the kind with the powered wringer above the tub).
But back to my central point: If we were to tax wealth instead of income -- at say 5% of your gross worth, Babs would be paying some 2.5MM/yr. Billy Gates would pay some 2.5MMM. If you have a 1MM house, you'd pay 50M. And we'd all be incented to earn our brains out.
And it would be much, much fairer. The little old lady on a pension would pay an amount proportionate to the use she makes of our civil society to protect her assets from marauders. Yeah, she might have to sell something to keep up her lifestyle. But why she get a free ride while a young college graduate with a wife and two kids struggles to keep food on the table.
With a graduated income tax (as applied), the goals of accumulating wealth and making a comfortable living are mutually exclusive.
OBTW, I really think the Republicans are missing a trick by not exposing the hypocrisy of the Dem's arguments that the Reps want to give huge "givebacks" to the rich. It ain't the rich who pay the taxes. It's the poor shnucks who are trying to become rich. The Dem's really want a permanent underclass, dependent on them for handouts. The joke is, if you have great wealth, you don't need to EARN a lot. And, if you structure the tax system to penalize the high earners, you help keep the wealth club even more exclusive.
"I would actually add one special feature -- if you roll your home gains over into another primary residence, the price of the new residence is deducted from your capital gains. Otherwise, people would be homeless."
That's a special deduction, which we're trying to get rid of.
How about a deduction in every case where someone sells an asset and buys another one. If you sell stock A and put all the money into stock B, you don't get taxed on any capital gain at that time, for instance. Or if you sell your house, buy some stock, and move into an apartment.
"couple points: need to avoid giving the -100% tax to kids of non-poor. "
Up to what age? I don't like the idea of defining "kids" as anything over the age of 18.
"There are so many situations (especially among students) where kids are on poverty level earnings and aren't being claimed as dependents, but are from very well off families and are getting large amount of direct cash subsidies."
Then tax the "kids" for those cash subsidies. Also, remember that we aren't giving their parents any deductions for subsidizing their adult children wrt college tuition or anything else.
While we're at it, any tuition payments by parents also becomes taxable income for the "kid".
"From now forward everyone gets private SS savings accounts that will pay larger benefits from smaller contributions than our current SS system would."
Why not just stop collecting the money and let everyone get their money. Then they can invest it any way they damn well please. Any special account where the government sets the rules on what can be invested in is an invitation for bureaucrats to blackmail/bribe public corporations.
I agree with you except for two things: First, Carryover basis on inherited property is wrong and unmanageble. The Capital Gains Tax is a screw tax... Most "capital" goods become "non-deductable personal losses" if you lose money. Sell your 1987 car for $400 and you cannot recognize a Capital Loss for the personal property. You are presumed to have "consumed" the extra value of the car by driving it around in style. Fair enough. It would be as if you had adjusted your basis to offset the return of your investment in the form of consumption. For simplicity's sake, the personal loss is disallowed. Sell that same car for a gain and the "personal" property is transmogrified into "capital" property. How can you tell? What is the test? You made a profit! You gain on the car is fully taxed.
Further screw... say you day-trade yourself poor and end 2002 with [$200,000] net capital loss. You will be able to deduct [$3,000] of it for this or any year. Sure you will get a carryover. If you are too broke, or give up capital trading it will take you 67 years to write off that loss. On the other hand, if you sting the market and wind up 2002 with a gain of $200,000, you must reconize the whole gain this year and write a check next APR 15 for $40,000 in capital gains tax.
Such a deal! The step-up in basis at death is seen as a mitigation of estate tax when I believe it less-than-levels the lifetime capital gains tax. Never mind that a decedent dying with a capital loss carryover sees it vanish at death [unless it goes to a surviving spouse]. A decedent's capital losses do not carry-over to his Estate.
Carry-over Basis in property acquired from a decedent became law in 1976 and was repealed retroactively in 1980. Why? Intense lobbying? You betcha! It is an administrative nightmare for two huge reasons: It is administrative hell to determine and locate [and value] a dead man's property once he has kicked. Second, many LIVE people are unsure what they own and clueless as to what they paid for it.
Discovering what a dead man may have paid for something is - more often than not - imponderable. Carryover Basis is right out. To simplify things, I think your suggestions would be great if only Capital Gains were totally excluded from Gross Income.
That 7.65% raise still doesn't cancel out the effects of removing itemized deductions. I'm just over the SS cap-point and I pay about 20% of my gross income in Federal income tax. So far, this doesn't have my vote.
But maybe I failed to interpret what you said properly.
Another odd bit is you'd have to have people filing weekly or biweekly in order for the negative income tax to be workable. Got any proposals to get around that?
David: I don't think you'd have to file that often, it would probably end up working something like a reverse of witholdings now. You get your paycheck and are credited with x% of it as the negative income tax, which can be picked up or mailed to you. If things don't reconcile at the end of the year (you changed jobs and moved to a new bracket, for example), then you owe the difference.
Re wealth tax:
Why should the goverment care what I do with my money? If we both have the same income, but you live frugally and build up a nice nest egg while I blow mine on booze and cars is it really reasonable that you should pay far more taxes than I do? Do we really want a tax system that discourages saving?
Besides, most wealth doesn't just magically appear. Presumably it was income to someone at sometime and was taxed then.
Plus in the case of someone like Bill Gates who has the majority of his wealth tied up in stock, a tax like this could mean he's forced to sell stock to pay the tax bill. I don't know what the economic impact of Bill Gates dumping large blocks of Microsoft stock would be, but I doubt it would be pleasant. And in the case of a small business owner without liquid shares the impact could be like a smaller version of the estate tax every year with the owner forced to dismantle the business to pay the tax.
On another note, Jim Glass' suggestion that the estate tax be replaced with a capital gains tax applied to a person's asset on death is basically the system in place in Canada. There is a deemed disposition of all assets on death, with a few exceptions such as the passing of farm land from parent to child.
I've mentioend this objection before and never gotten a real response. Wouldn't eliminating the mortgage deduction lead to:
1. A substantial increase (in the thousands of dollars neighborhood) in income tax burden on homeonwers, skewed towards new homeonwers--those least able to afford the increased payments are those given the largest bills.
2. A plummet in the value of all homes since the cost of buying them has now risen by several hundred dollars per month.
3. Hence, in addition to costing homowners several thousand dollars a year in increased payments, you've also given them a one time bill of around 20% of their home's value. If there wasn't a housing bubble already, this would almost certainly create one, probably slamming the economy into a depression since consumer spending has largely been fueled by increased home values and refinancing.
5. As a result of all the above factors, you'd also see a huge increase in bankrupticies since said homeowners have not budgeted for increased taxes.
While it's nice if you were starting from scratch, I think removing the home mortgage deduction would cause huge dislocations and would be a gigantic penalty (probably around a full year's salary) to most middle class homeowners. This strikes me as a loser morally, economically, and politically.
I have no training in economics, so it's possible I've gotten something wrong, but these results seem pretty straightforward to me.
It would result in a drop in housing prices. The new homeowners would budget for housing the same way they do now, so prices would fall precipitously, as I mentioned in the post. There was a big windfall to homeowners when the tax was passed, one that has gotten progressively larger as the income tax rates rose; now society is taking it back. On the one hand, it's unfair to people who currently have a big mortgage. On the other hand, the tax deduction is pretty unfair to renters, who tend to be younger and poorer than owners.
You also have to look at what the recent wave of refinancings have done -- provided a spate of tax-deductible spending for homeowners, which simultaneously increases the volatility of the economy, and disadvantages renters.
There is absolutely no way to design a good tax system that doesn't cause a lot of pain to people who benefit from the current setup. In the long run, everyone will be better off, because the tax code is just enormously wasteful. Think of the time and money you spend preparing your taxes, the foregone growth from useless activity designed to reduce tax burdens. . . basically, I guess I'm asking people with deductions to lean into the strike zone and take one for the team. Just like y'all are currently asking me -- young, single, with no dependants and no mortgage -- to subsidize you.
Oops--missed the mention of it in the post. I agree that the existing system is inefficient, but the problem is people have made decisions based on the exisitng rules, and changing the rules on them in the middle of the game would have severe effects. I might be over-reacting, but I think simply repealing the mortgage deduction in one fell swoop would bankrupt a fair percentage of homeowners. (My financial situation is a lot better than most recent homebuyers, I think, and I'm not sure I could avoid bankruptcy.)
To steal your analogy, the problem with leaning in and taking one for the team is that nobody's wearing a helmet and the beanball will end their careers.
Thinking about it a little more, there might be ways to remove the deduction without causing as much pain. First of all, you'd absolutely have to grandfather in existing mortgages. This would still lock people in to current loans, but it's better than nothing. Then there's the problem of home depreciation. For this, I'm not sure how capital gains taxes work, but at the very least this loss should be deductible, and maybe you could design a one-time program to make up some of the difference for people.
As for the fairness of the system, yeah, it's unfair at any given moment to young renters, but at some point, most homeowners were young renters, so they've paid their dues. The current people being victimized by the system will eventually (for the most part) get theirs back later. SO that argument I find less convincing than the efficinecy argument.
As for efficiency, I agree in principle but still would like to see some numbers. Just how big are these inefficiencies and how does their cost compare with the transition costs from the current system? Given future cost discounting, you might very well conclude that a large current cost would be greater than the benefit from changing the existing tax regime.
Being a bit left of center politically, and familiar with the POV of this site, I was pleasantly surprised with how close I am to agreeing with the "Galt tax plan." Just a few comments.
Regarding the first point, I think the principle is a good one, but I'd structure it a bit differently. First, I would not get rid of medicaid, though I do think medicaid needs some reform, partially to minimize the disincentive of losing benefits after reaching a certain income level. Perhaps increase the income cut-off for medicaid, but add a "premium" that the recipient must pay, starting at zero for persons with no income, rising as income rises. You would unfortunately still have a disincentive as income increases, but less so than presently, when you just lose the whole benefit at some point.
Secondly, I'm a bit reluctant to ENTIRELY dismantale other poverty programs. What I'd probably favor would be a bit of a hybrid system, which would dramatically restructure (to reduce the disincentives in the current sytem; e.g., phase out benefits gradually as income increase) & simplify (to reduce red tape/ administrative costs) current programs, all this at a lower aggregate benefit level, combined with some sort of negative income tax.
Yes, I know that my reservations reduce certain advantages of the plan; I think that cost is acceptable.
Other comments - from a liberal (or even center) position, the problem with most "tax simplification" plans is that they are not revenue neutral, and that they are, when combined with FICA, less progressive than the current system. This plan certainly seems to avoid both those problems. With regard to revenue neutrality, I haven't crunched the numbers, but eyeballing the plan, I'd guess its revenue neutral or close to it. With regard to progressivity, I'm not sure, but it looks like it would end up being MORE progressive than the current system.
Of course it will never happen.
I don't understand your taking "poverty" into account in your progressive scheme, while at the same time ignoring the costs of raising children.
There are fixed costs to raising children and variable costs that can be reduced, but not eliminated--buying day-old, rather than fresh bread, or only slightly-sour, rather than fresh milk.
If you are going to allow for fairness in your code by taxing progressively (higher tax for the individual who earns $18,000 vs. one who earns $28,000), what is the rationale, other than the aesthetic of simplicity, for treating the single person who earns $28,000 the same as the person who earns $28,000 with two small children to provide for? (It would be limited to those with small children--under age 7--because we all know that kids 8 and up can, and should, hold down steady work and be self-supporting.)
Politically I'm afraid your plan will fail at step one:
"Get rid of all our poverty programs, except those aimed at the disabled, and temporary unemployment assistance, and
institute the negative income tax."
Negative Income Tax (NIT) ideas were tested politically about thirty years ago under the rubric of the Nixon "Family Assistance Plan", which inspired the NIT based Seattle and Denver Income Maintenence Experiments.
The political objections, typically from the right, include:
NIT increases welfare dependence.
NIT erodes the work ethic.
NIT breaks up marriages as wives find they can live independent of a husband.
For some more recent mentions, see:
(text search for "SIME" or "DIME".
or just google for "income maintenance experiment" and "SIME" and "DIME".
I don't necessarily agree with the prevailing political view of NITs, but an enormous political lobby does.
"If you are going to allow for fairness in your code by taxing progressively (higher tax for the individual who earns $18,000 vs. one who earns $28,000), what is the rationale, other than the aesthetic of simplicity, for treating the single person who earns $28,000 the same as the person who earns $28,000 with two small children to provide for? "
Yes kids cost money. So do other things that people desire to spend money on. That doesn't mean that the money spent on them should be tax-deductible.
People should be left to decide what they wish to spend money on, or not spend money on, without the IRS throwing incentives at them. If you start down the road of saying that certain personal expenditures (NOT business expenditures, which properly should be deductible) should be deductible because they are "worthy" in some way, that logic will be applied to all sorts of different expenditures until you get the tax code we all know and love today.
1) Yes, children are expensive. But why should a childless person pay for your children?
2) I'm not talking about getting rid of Medicaid, although we'd have to see. I'm talking about getting rid of FICA taxes, not what is allegedly paid for with them.
3) It isn't just young people who rent. Older people rent too, and may never become homeowners. Why should they pay more taxes so you can have a yard?
This is exactly why we'll never get a decent tax code - talk about simplifying, and everyone jumps in to tell you why their deduction is special.
I agree we couldn't just eliminate the mortgage deduction in one swoop, but a grandfather is too drastic -- not only would it introduce severe rigidities, but you'd still have the problem of negative equity for people who have to move, which would be increased by the fact that grandfathering the mortgages would reduce downward price pressure. A ten-year sunset would allow people to work out their negative equity, possibly with a one time loss deduction for people who bought before the date of the tax so that people don't get bankrupted by a move.
It is certainly worth the effort to come up with a simpler plan, even though no plan will be perfect. I have a couple of problems with your plan, of course.
You seem to think we need to continue Social Security payments to people who rely on it. Fair enough. However,you are blithely unconcerned with the capital hit to homeowners with the elimination of the mortgage deduction. Given that home equity is the biggest net asset in the country, this is no minor point. If you want a massive recession, by all means destroy the balance sheets of a large percentage of families.
Also, renters may be paying more taxes than homeowners, but do you believe the housing market is so inefficient that the value of the mortgage deduction is not built in to home prices? That is just as ridiculous as saying that only homeowners pay property taxes, so renters are getting a free ride. The reality is, as you know, more complicated.
If you want to eliminate the deduction, go ahead. But treat it as a taking. Have the government compensate homeowners for the loss of equity. Granted, those are some pretty big checks.
There definitely is a similiarity to Social Security. The problem is just so big, it cannot be easily cleaned up without massive distortion.
There's my two cents. Feel free to rip it to shreds if you've the inclination.
RE: Sean's questions about a Wealth tax:
Q. Why should the goverment care what I do with my money?
A. It shouldn't. Nor should it care how you accumulated your wealth (barring ill gotten gains).
Q. Why should you pay ... [more] taxes than I ... [when] you live frugally and build ... a nest egg?
A. If we tax wealth, and I have more than you, than I should pay more tax. OBTW, we have a wealth tax now -- it's called property tax and is generally levied by counties and municipalities and school districts and such. In CT, we even pay tax on personal property -- not just real estate.
Q. Do we really want a tax system that discourages saving?
A. Our experience with property tax suggests this does not happen. People acquire and maintain expensive housing even though they pay a wealth tax on it.
Q. Presumably it [wealth] was income to someone at sometime and was taxed then?
A. Not necessarily, and no. For example, Bill Gates's wealth has never been taxed -- he has unrealized capital gains. And any income earned after this regime were adopted wouldn't be taxed at all.
Q. Wouldn't people be forced to liquidate assets to pay their wealth tax?
A. Perhaps. This can happen with any kind of tax scheme. But our experience with the real property wealth tax shows us that it can and does work well. In the case of estate taxes -- it's the tax rates that are far too high, forcing liquidations.
I was with you on at least most of this plan right down to the last comment, where you respond to a perfectly reasonable comment with this: "Yes, children are expensive. But why should a childless person pay for your children?"
1. There are fundamental differences between children and consumer goods. This sort of rhetoric tends to alienate folks with kids, even if we might otherwise agree with you.
2. If you're sticking with a progressive rate structure for your new tax system, you seem to care about ability to pay. But if you're considering ability to pay, shouldn't you be looking not only at the amount of income but also how many people it's supporting? Again, whether or not a taxpayer has a kid to support is a different issue from whether the taxpayer has, say, a BMW to support.
Tax esquire, here.
First, Jane, let me make a statement against interest. Anything to simplify the insane federal, state, and local tax quagmire...and it will force me to get off my duff and find something better to do. I'll gladly find something else to do for a living. Just let me keep more of what I earn and get the gub'ment to stop wasting so much.
Second. Nowhere do I see a definition of "income". Any tax based on "income" had better define the term. This is no small matter. My house is worth more this year than last. Is that increase taxable? Even if it's growth was outpaced by inflation? Say my father dies, and his insurance policy leave me $100,000. Taxable?
Third...for all of those who don't like the idea of eliminating the corporate tax...WHEN ARE YOU ALL GOING TO REALIZE THAT CORPORATIONS DON'T PAY TAXES???
Oh, sure, they file tax returns, and cut checks to the government. But who truly bears the economic burden of the corporate tax? Certainly not corporations. Corporations are only fictional creatures of local law.
Suppose an incorporated hot dog vendor sells hot dogs for $1.00 apeice. One day, the vendor is told he must remit 4 cents sales tax to the state per hot dog. So, he changes his sign to read "Hot Dogs: $1.00, including tax."
If you purchase the hot dog, have you paid 96 cents for the hot dog plus 4 cents tax, or did you pay $1.00 for the hot dot and the vendor paid the tax? Assume that you paid no part of the tax. Does that imply that the full burden of the tax landed squarely on the vendor? Not necessarily. It may be that the vendor cut his pay to his employee. So, the employee suffered the tax. Or maybe the vendor threatened to switch mustard suppliers in order to cut costs, so his supplier agreed to price reduction. In this case, the vendor shouldered the tax.
Where is the true incidence of corporate tax? No matter how you approach the above hot dog example, we can say for sure that NO part of the corporate tax is borne by corporations. Corporatations do not bear taxes, only PEOPLE do.
Eliminate the corporate tax, and PEOPLE will reap the benefits.
I guess I'm still a little confused as to who exactly will be considered a taxable entity. Let's say my home contains two adults; one working. Is my wife then considered a separate entity? Or do we both equate to one? Let's say we can file either separately or together; do we pay the same tax either way?
Also I'm a little confused by the notional tax table provided by Brian:
Tax Rates Income Threshold
30% $27 000
35% $100 000
What does this mean? If I make nothing, what does the government give me? The example Brian outlined didn't follow at all from the table, as far as I'm concerned. If I make zero, what is my refund 100% of?
I think this is yet another problem with the topic of taxation. Someone comes up with a brilliant scheme of reforming the tax code to make it:
( )render some social welfare programs obsolete
[check all that apply]
Only, someone like me (granted, not the sharpest tack in the box where it comes to finances, but I do and have always done our taxes) can't sit down and figure the exact consequence of the proposal to my bottom line. What have I missed here?
I still don't understand the basis for your combining the assumption that a progressive income tax is "fair" with the assumption that whether a given income supports one or five people is completely irrelevant to the issue of "fairness."
Although I am sympathetic to your argument that single people should not subsidize my children, your inability to draw a moral distinction between children and consumer goods (or charitable contributions, many of which are merely consumer goods in another form) is surprising.
Your offhand dismissal that "All causes are equally worthy in the eyes of the person who possesses the deduction" is in the same league as the statement about the 9/11 highjackers that "one man's terrorist is another man's freedome fighter." All causes are not equally worthy, and you yourself believe that individuals should not be taxed until the reach a minimum income threshold.
If you agree that the government can and should make the moral judgment that a person who earns $5,000 should pay less in taxes, (in both nominal and percentage of income terms) than someone making $28,000, on what basis, do you avoid making the moral judgment that the cost of caring for children should be taken into consideration as well?
There are fundamental differences between children and consumer goods. This sort of rhetoric tends to alienate folks with kids, even if we might otherwise agree with you."
I've got kids, and I don't feel particularly alienated by my own comment. I realize that kids aren't exactly like other consumer goods. However, like other consumer goods, they cost money, and people get to choose whether or not to pay for them. I don't see a good reason for the tax code to influence that choice one way or the other.
"Again, whether or not a taxpayer has a kid to support is a different issue from whether the taxpayer has, say, a BMW to support."
It's not like the kid or the BMW just showed up on his doorstep.
"Not necessarily, and no. For example, Bill Gates's wealth has never been taxed -- he has unrealized capital gains."
That and $5 will buy him a latte. He may "have" unrealized capital gains, but they don't do him any good until he sells the asset in question and realizes his capital gain.
I still don't understand the basis for your combining the assumption that a progressive income tax is "fair" with the assumption that whether a given income supports one or five people is completely irrelevant to the issue of "fairness."
Although I am sympathetic to your argument that single people should not subsidize my children, your inability to draw a moral distinction between children and consumer goods (or charitable contributions, many of which are merely consumer goods in another form) is surprising.
Your offhand dismissal that "All causes are equally worthy in the eyes of the person who possesses the deduction" is in the same league as the statement about the 9/11 highjackers that "one man's terrorist is another man's freedome fighter." All causes are not equally worthy, and you yourself believe that individuals should not be taxed until the reach a minimum income threshold.
If you agree that the government can and should make the moral judgment that a person who earns $5,000 should pay less in taxes, (in both nominal and percentage of income terms) than someone making $28,000, on what basis do reject the moral judgment that the cost of caring for children should be taken into consideration as well?
(My comment does not even take into consideration negative externalities, including the dangers of population decline, if the children are ghosts under the tax code.)
Not to sidetrack the discussion, but I did a little research.
According to the BLS's handy-dandy little CPI calculator, $100 in 1950 has the same buying power as $752.28 today. So, not exactly 10 times, but 7.5.
And as for taxes, this site (http://www.taxplanet.com/library/oldtaxrates/oldtaxrates.html) claims the bottom tax bracket in the 50's golden age ranged between 20 and 22.2 percent. SS taxes were slightly less (11.4 combined vs. 15), and medicare didn't exist obviously, but pverall it seems like the 50s were a pretty high tax era. (Especially if you were rich: 92 frickkin' percent!!!)
Re Kenneth's comments:
My comments were in response to Megan's 2:14 p.m. comment, not yours. Maybe that's why you didn't feel alienated. ;-)
On the kids vs. goods question, I think Thom's post just above is right on point. Yes, kids are a choice, but they're also little human beings who need to be fed, clothed, etc., and a taxpayer who has them around has less ability to pay taxes than a taxpayer who doesn't. If you're setting up a tax system in which x amount of income puts you in the y% tax bracket, it's relevant to consider how many people are sharing that income, and to take that sharing into account in determining the taxpayer's taxable income. Thus, a reasonable personal exemption for the taxpayer and his or her dependents is serving the same purpose--measuring, in very rough terms, ability to pay--as deductions that relate to income measurement (e.g., the business expense deduction). Such deductions are fundamentally different in concept than deductions intended to encourage certain types of activity (e.g., the mortgage interest deduction), even if they sometimes get a little difficult to distinguish at the margins.
Having said that, I'll also say what I should have said before: great post, Megan! If you could figure out a reasonable transition plan that would get from where we are to the Galt Plan without too much pain and disruption, we'd have a much better system.
One question for Megan, though: what would you do with business income from proprietorships, S corps., and partnerships? Eliminating the corporate income tax would get rid of a whole lot of tax-motivated BS among big businesses, but you've still got to measure and tax income generated by smaller businesses somehow. Would you continue the current system of taxing the net income of the business on the owners' returns, or do you have a simplification plan for us, too?
Someone may have already mentioned this, but I'm not going to read ALL the comments to find out. Why not just a flat rate of 15-20% with everybody getting a large deduction (e.g. $15K/person, $30K for a 2 income household)? Its indirectly progressive, and simple as hell, but more importantly its keeps a lower marginal rate, which increases the incentives for people to earn more, and thus bring more value to the economy as a whole. Middle classers pay very little taxes, the rich pay out the tail, but really, everybody gets taxed under the same system, and ultimately its fair. Companies currently get taxed based on their net income, which is earnings after expenses. Do the same thing for families, and use the large deduction as a proxy for expenses. Anything you make over what is absolutely required to live, you pay taxes on.
I don't think anybody can imagine the boon to the economy that eliminating the corporate income tax would be. Even now its only responsible for something like 14% of federal income because companies are so good at getting around it. But think of all the wasted value because of those efforts to avoid it. Think of the instant 20% jump in the stock market and what that would do for incomes as a whole, especially for retirees. Think of all the new jobs as previously marginal projects suddenly become profitable for companies, allowing them to create new products and requiring them to hire people. There would mostly likely be some deflationary results, but it would be good deflation, as in prices coming down from competitive pressures simply because not as much is needed to cover companies' costs. Corporate profits would still increase. I believe that ultimately, the gubment would end up making more money, not less.
Jane, Kenneth, and others who think "individuals should not subsidize another's choice to have children" - Where to start?
First, unlike a BMW, children cannot be unloaded when the tax laws change. So, eliminating the personal exemption for dependents (without some grandfathering) would be grossly unfair.
Second, by this logic individuals without children should not be taxed to support public schools, parks, universities, or any other public good that they do not directly benefit from. In theory (and in practice) families are the best place to raise future workers and fellow citizens. We all benefit from healthy families just as we all benefit from an educated populace. The very small (current) tax benefit granted families with children does very little toward offsetting the costs incurred by such families in raising their children -- costs that benefit all of us just as surely as we all benefit from (good) public schools whether or not we send any children to such schools.
Unlike prior eras, having children does NOTHING to enhance the economic circumstances of parents. Its ALL a net financial loss. Yet, our society would be tremendously hurt if we quit having children. Surly, this effort is worthy of a small subsidy.
Third, it is a basic matter of sound tax policy that the tax is borne by those who have the ability to pay. (This assumes a tax for general revenues, not a fee for a particular governmental service.) A family of 5 with a gross income of $50,000 has less ability to pay than does a single person with the same income. Only a very randy Randian would suggest both economic units should bear the same tax burden.
Perhaps a consumption tax? The more money one spends in a year, the more one pays to the goverment. The rich tend to save their money, as that's usually part of the reason they're rich. It would increase savings and wealth formation.
yeah.. after reading the comments.. and going over the numbers again, jane the taxes are way too high, as you're assuming straight line tax revenues (or at leasat it appears that way)
15-20 would be good... no corp or capital..
as for wealth taxes... that's so completely insane.. sounds like pat's pitchfork brigade is on the loose again... the bill gates argument had little use, so let's try little old ladies... you're a little old lady, with some property that's evaluated at $10M (no mention of mortgages and such.. do debts count as deductions?) so you owe 500k.. problem is, you don't have that kind of cash.. you'd need to sell the asset... but say there's no market? say you're trying to sell, but can't find a buyer for anything close to what you need to fund continued existence...
also, given current interest rates and achievable rates of return, what happens when people are spending their capital to pay taxes.. this seems to be very class warfare and it is idiotic.. punishing people who have planned... what happens if you can't move the asset for more than 10% of its assessed value? you have to sell, use half of proceed for taxes, then use the rest to fund future existence... so say you are still in a 3% interest environment.. you bring in 0.15% of initial value, but you owe 0.25%..
if you started with 1,000,000, you'd assume a 3% income given current conditions, or 30,000 you'd owe 50,000 and spend say 20,000 on living... so you're spending you're capital at a rate of 40,000 per year initially... or rather -4%... so you'd be out of cash very rapidly... but if you had to sell your asset for the cash.. and got 100k... you'd be out of cash in less than 2 years... this is not a good idea!!!!!
this is immoral, and might be constitutionally dubious (amendment covers income taxes... not sure about capital taxes)
You are talking about personal income tax, right? Not a gross receipts tax?
Tell us how you would handle Schedule C. I, for one, am self-employed (sole proprietor, not a corporation). I live on the margin between what I charge my customers and what I spend to produce what I sell them. How would you handle deductions for business expenses?
As my Irish gradfatehr woudl say, 'If I were going there, I wouldn't be starting from here'. The UK has alrgely removed the mortgage tax deduction over the last 15 years, by a series of crafty moves - first a cap, then a cap per property rather than per purchaser. The deduction was limited to the lowest rate of income tax, and then special new low rated bands were introduced. Somehing like that might work here, but those of us who have made rational decisions on the basis of the current tax code aren't going to vote for you to destroy our capital that way. Alos, given that most municipalites have a proeprty tax based on capital value, you'd be eliminating a big chunk of their revenue too.
As for children, why not give them the full income allowance that adults get, and allow pooling in families? In fact, allowing pooling in self-defined families (declared in advance of each tax year) could be a good simplifying feature, and allow people to share such arrangements.
>> How would you handle deductions for business expenses?
They must be allowed because they are not "deductions" against taxable income, like the mortgage interest deduction, but are essential to computing income itself.
E.g., the courts have ruled that drug dealers are entitled to deduct "cost of goods sold" when computing their illegal income from drug sales that is subject to penalty, because without it you can't compute the amount of their illegal income, since "income" consists of receipts minus expenses incurred to obtain the receipts.
Thus, a huge amount of complexity jumps back into the tax code, because probably the bulk of the complexity in the code deals with rules for determining the amount and timing of income -- not just with businesses, but with real estate (e.g depreciation rules) and other investments.
This is if one is basing a tax on "income", of course. OTOH, one could impose a tax on "gross receipts" or such (with other problems arising).
>> ...it seems like the 50s were a pretty high tax era.
Today's total tax burden on the median family is double what it was in the 1950s -- about 40% versus under 20%.
The federal tax burden today, perhaps surprisingly, is only about as high as it was in the 1950s. But state and local taxes have gone up tremendously since then, accounting for the increase. Data at http://www.taxfoundation.org/prmedianfamily.html
BTW, this is a potential big problem with the Jane Galt tax plan. If the states continue their current tax codes, little will be simplified because people will still have to go through all the stuff they do now to figure taxes as they do now at the state level even if they don't have to at the federal level. Somehow all the states have to be brought along.
But I guess after we get the Jane Galt tax plan adopted at the federal level, we can worry about the states then.
I would eliminate sole proprietorships. It costs $200 to incorporate, and with the corporate income tax gone, there's no reason not to. When the money comes out of your corporation in the form of income from interest, compensation, or capital gains, (obviously, including things like rent for any house the corporation owns, or we'd all incorporate), then you declare it.
These debates over the details of Jane's plan are very ammusing. Doesn't anybody realize that if the few people on this board can't come to a consensus on what is a "FAIR" income tax, the goverment never will. Which means, even if we implemented Jane's tax plan tomorrow, people would start working to change it the very next day. And the tax plan would start growing more and more complex until a few years down the line, we are back to the ridiculous tax plan we have today.
Income taxes will always have this potential complexity built into it, which is what makes them such bad taxes. Those of you out there saying the solution is a flat rate income tax, need to realize this. Your flat tax won't stay flat for very long, once the politicians and the lobbyist get a hold of it.
Taxes on wealth are even worse. Do you really plan on taxing unrealized capital gains on people's homes? If so, then 90% of the people in this country won't be able to afford the homes they live in now. The days of 30 year mortgages and 5%-20% downpayments will be over. (The effects on the stock markets would be even more severe.)
Sales taxes are the only taxes that have any hope of staying relatively simple. Yes, they aren't perfect. They don't redistribute wealth which is what half this country seems to think taxes are for. But they do reward saving, they do encourage investment and they do limit the ability of the goverment to social engineer through taxes.
15-20 would be good... no corp or capital..>>
This illustrates one of the reasons tax simplification is unlikely to happen. Proponents (mainly on the right) present plans that are far from revenue neutral. 15-20%, without corporate or capital gains tax, no FICA, would not be even close to revenue neutral. Especially if the 15-20% did not apply to the first few thousand dollars of income (which would be necessary to retain some progressivity).
Now I realize that for some people the lack of revenue neutrality is a feature, not a bug. However, even if one believes that federal taxation is too high (which I do not believe), there are two problems. One is practical - politically it is a harder sell, since you have to convince people of the merits of your tax simplification plan AND a tax cut at the same time. Many liberals and moderates might sign onto the right kind of tax simplification plan, but not if it also amounts to a huge tax cut.
The other problem is that such a plan is a bit dishonest. Instead of selling a tax cut on its own merits, proponents disguise it as tax simplification.
One more comment - eliminating BOTH corporate taxes and capital gains taxes, aside from being politically impossible, has huge fairness problems (why exempt a certain kind of income, i.e., capital gains? The current argument n favor of doing so, as I understand it, is that such income is taxed twice. Eliminate corporate taxes and that problem goes away).
I also suspect that eliminating both taxes would increase, rather than decrease, distortions in economic activity, as there would be a huge incentive to stucture your income as a capital gain rather than as wages. However, on this point I'll defer to the experts on the board.
Jane never mentioned taxation of unrealized capital gains, as far as I can tell. This was a side issue that was quickly killed. Aside from that, there's no overt objective to get this idea made into law, so that's another strawman. I think most of the discussion re "fairness" is an attempt to clarify and expand the idea, not disagreement per se.
Sales taxes will wind up being regressive unless you place different tax burdens on basic foodstuffs and survival necessities than you do for, say, a new Jag. And will you tax sale of stocks and bonds? If you tax stock and bond sales, then you're in effect taxing every transaction, regardless of whether that transaction yielded net income.
Things get complicated when you start picking them apart. I don't think you've come up with anything more bulletproof than Jane did.
the idea would be to only tax the sale of new items. Therefore the initial public offering of stock would be taxed but not any other future sale.
Whether the sales transaction yields income is irrelevant if it is a true sales tax.
All types of taxes have their faults. I prefer a sales tax because it is the least obtrusive in terms of goverment involvement in our lives. They don't need to know our income or our net worth. Plus the tax is theoretically voluntary. Don't want to be taxed - don't buy the product.
More on taxing wealth:
Libertarian Uber Alles writes: wealth taxes...completely insane ... a little old lady, with some property that's evaluated at $10M so you owe 500k.. problem is, you don't have that kind of cash.. you'd need to sell the asset... but say there's no market?
Remember, we face this issue every day with property tax law. The solution's easy -- don't force sales. Instead, accrue an arrearage and interest until the asset turns over. Don't you agree that the amount you pay in tax should be proportional to the benefit you receive? Without the State, the little old lady would be overrun by vandals. With our graduated income tax, our little old lady pays NO tax while the poor guy with a 100M net worth who makes a 1MM bonus will pay the same 500M you're complaining about on behalf of the little old lady who's two orders of magnitude richer than he! (OBTW - I'm using M is a symbol for 1,000, not 1,000,000).
Bart Pair writes: Taxes on welath are even worse. Do you really plan on taxing unrealized capital gains on people's homes? If so, then 90% of the people in this country won't be able to afford the homes they live in now. The days of 30 year mortgages and 5%-20% downpayments will be over. (The effects on the stock markets would be even more severe.)
As stated previously, we already have wealth taxes. They're called property taxes. Connecticut (and other jurisdictions) even tax "personal property", including cars and boats. All of these taxes are based (sometimes too loosely) on the fair market value of these assets -- obviously including any unrealized capital gains. I haven't read any reports of 90% of our countrymen being unable to afford their homes.And it's not like these taxes are insubstantial. In the suburban (NY) counties around NYC, you can be required to pay $25M annually on a $1MM home.
Thanks to Jim Glass for his research on comparative taxation rates, the fabulous fifties vs. now. Today's total tax burden on the median family is double what it was in the 1950s -- about 40% versus under 20%.
A few words on different forms of taxation that have been proposed in this discussion:
If we assume the goals are 1) fundamental fairness, 2) simplicity, 3) helpfulness to our economy 4) revenue neutrallity, and 5) minimal disruption to society,
Any income tax fails 1,2,3&5. As witness to the present discussion, you'll never get agreement on fairness and simplicity. And an income tax (and I include payroll and medicare taxes) is a disincentive to work and to employ workers -- and will not force tax accountants and lawyers to find honest work. There's a fundamental disconnect in the public debate over taxes. High income doesn't mean great wealth. Our current system is designed to prevent anyone who is not wealthy from becoming so. If you already have everything, how much to you need to earn to preserve it all?
Sales and use taxes (and VAT) cover 2 and likely can be structured to cover 4 and 5. But they're really regressive. You don't need to buy as much if you already have everything. And they're a disincentive to consume, which is harmful to our economy. Fuel taxes are an exception (there are others), to the extent they serve as a use tax for road building and maintenance. They can also do a much better job of helping us reduce our fuel consumption than can the morons in Washington who would like to design cars for Detroit (CAFE standards).
Wealth taxes, however ARE fundamentally fair. The more you have, the more you should pay. They're really simple. They're really helpful to the economy because you can't stop and rest when you've got your pile -- you've got to work to keep it. They can be made revenue neutral. And they can be phased in gruadually to minimize disruptions.
You can make a case to exempt total assets less than, say 100M -- which would make things even simpler (but raise the rates slightly for the more wealthy).
>>I would eliminate sole proprietorships ... with the corporate income tax gone, there's no reason not to....
Legal reasons. A corporation is a separate legal entity, which (that?) leads to a whole lot of legal issues.
A proprietorship isn't a separate legal entity, it's just you. Much simpler, legally. Especially for small businesses. (I mean, if one had to incorporate every vegetable stand, with a board of directors and all ...)
BTW, would you eliminate partnerships too?
>> When the money comes out of your corporation in the form of income from interest, compensation, or capital gains, (obviously, including things like rent for any house the corporation owns, or we'd all incorporate), then you declare it.
Assuming you mean "into" instead of "out of your corporation" you've just described an S corporation, which basically is taxed as a proprietorship if it has only one shareholder -- its income is taxed on its owner's personal tax return disregarding the corporation, so there is no corporate level income tax.
OTOH, if you really mean income is to be taxed only as it comes "out of" the corporation, but not when it goes "into" the corporation, then absent a corporate income tax that would create a very spiffy tax shelter.
In fact, even with today's corporate income tax the IRS gets rather upset when corporate owners do too much of that. See: "accumulated earnings penalty tax".
Norman, a wealth tax is anything but simple, because you have to value everyone's assets every year (or however often the tax is imposed). Do you really want to fill out a form listing the fair market value of everything you own, every year? If you think valuation is simple, try looking at all of the estate planning strategies and disputes involving valuation issues.
More on wealth tax:
For Milton Wright, who worries that wealth taxation would be overly complex: You're kidding, right? Complex compared to today's income tax systems?
We have wealth taxes now: property tax and estate tax. Yes, estate tax is complex, but not because of valuations. The problems are due to inheritance laws and tax rules. We have IRA's and Keough's and spousal rules and insurance rules and what not.
Burdonsome? Asset management firms mark to market every day.
Now, to be fair, for sure there would be disputes over fair market value. But we have that today -- and not just for estates. Nearly every state exacts a business personal property tax and every business is obliged to survery and assess their assets. Overly burdensome?
OBTW, if we taxed wealth, we'd eliminate estate taxation -- there would be no need. And tens of thousands of estate planners and accountants would have to find honest work.
Think about it. Your annual tax form could be a 3 by 5 index card.
No, I am not kidding. Yes, valuation is easy for assets such as publicly-traded stocks and bonds, but that's where the easy part ends. Real estate is significantly harder; I tolerate the rough justice achieved by my local real property tax office, but that's largely because the tax is small in relation to the cost of fighting over it. And what about furniture, clothing, and other household goods? Do you really want the government reviewing the value of all of your personal possessions.
Re the estate tax, you're simply wrong about valuation isssues creating complexity. Family partnerships and various sorts of trust arrangements are all about depressing the fair market value of an asset for tax purposes by carving it up into pieces that are worth less than the original asset. And even very plain-vanilla properties can be hard to value. If you don't believe me, go read estate tax cases for a while to see just how simple your wealth tax really isn't.
Milton, you really are kidding. As you state, you deal with wealth tax all the time. You pay property tax and you either accept or fight the assessor's assessment. But you think this is complex and burdensome? Try reading the current set of IRS rules and regulations (not to mention the states). Your property tax bill fits in a small envelope.
And as stated, even small businesses pay wealth taxes on their business personal property. It may be a pain in the butt, but it doesn't take a lot of time or an advanced degree to get it right. And yeah, the government has a right to audit. So what? (As stated, there would be a threshold before taxes would even apply). If I were enacting it I'd likely exempt personal assets worth less than $1,000 individually and 25,000 collectively. Think you could live with that?
Re: your comments about the machinations people go through to reduce estate taxes. If we taxed wealth instead of income, we'd eliminate inheritance tax (we would be taxing the estate throughout the decedent's life). As stated, estate planners would have to find honest work.
Milton, I'd like you to answer some of my questions.
What's fair about taxing income when it lets Bill Gates sit on $50MMM in unrealized capital gains without paying any tax? Were it not for our civil society his palatial estate in sunny Seatle (just kidding -- but it's alliterative) would have been pillaged countless times. Shouldn't he pay more because he has more and has more to lose?
What's fair about a retiree with a net worth of 10MM paying no tax while a struggling young entrepreneur with no net worth and earning 100M pays 50 to 60M in federal, state, and payroll taxes?
How does an income tax benefit society? Does it promote growth? Does it level inequities? Or does it do the opposite?
A wealth tax is only simple in the "nice idea" phase. Flesh it out a bit and see how complicated it becomes.
Do you tax someone at the same rate whose entire wealth is the basis for retirement income, and has no ability to replace those assets lost through taxation?
Let's say I have inherited a rather nice chunk of property here in Orlando. All I have is the property; I have no other assets. This property has been in my family for decades and has been protected from huge increases in property tax by a grandfather clause. Now, it's worth a pile. A very large pile. And since the property has changed hands through probate, the county tax appraiser can now assign to it a much larger basis. Unfortunately, since we're in a minor market slump, I cannot just turn over the property for anywhere near its basis. In fact, I have to take a serious loss. But I still have to pay taxes on its value.
It only took me a few seconds to think of these (although a bit longer to type them).
As an aside, here in Orlando we pay anywhere between 17 and 22 mils (maybe more in places) in property tax. Although we don't have a state income tax, this winds up being better than a 5% state income tax on those who are landowners, because state income taxes are diminished by itemization.
Norman, you might think valuation is easy, but consider this:
When you bought your last home and glanced at the appraisal, was the appraisal value pretty much what you paid for your house? In my experience, it always is. If this is so, the appraisal is merely a testimony that you're not WAY overpaying (or underpaying) for the house. Know what the margin of error is on appraisals? Neither do I.
When I bought the house I currently live in, the appraisal value for tax purposes was about $65k less than what we paid for it. This works out well for the homeowner; it would work out not so well for the taxation authority.
Finally, how would you levy taxes on wealth in accounts outside the United States? It would be very difficult, I submit.
There's an alternative to the flat tax or the VAT that allows you to achieve several simultaneous objectives: (1) keep progressivity in the system; (2) keep public pressure to reduce tax rates; (3) avoid the disincentives to wealth-generation that accompany high marginal tax rates. To whit: tax consumed income.
Get rid of all deductions except charitable contributions and investment. Tax what's left at as steep a progressive schedule as you like. Give the poor a negative tax rate; give the rich a 70% tax rate. All you need to do to give yourself a tax cut is save/invest more and spend less. Earning more won't hike your taxes unless you consume what you earn; if you re-invest it, it doesn't get taxed. Therefore, there's no incentive against wealth-generation, no matter how steeply progressive you make the schedule. No more arguing about the estate tax; the money just gets passed down until it's spent, and then it's taxed. No more arguing about how to tax different kinds of income, either; all income is the same, and if you reinvest it you don't get taxed.
The best way to get rich is to work and save and invest. Our current tax system is biased in favor of consumption and debt. This enables people to attain a lifestyle that their earnings would not otherwise support, but it does not improve their ability to generate the wealth to sustain that lifestyle. Corporations have an incentive to borrow excessively (because they can deduct it) and pay low dividends (because they are taxed higher than capital gains). Individuals have an incentive to borrow excessively as well, and to overconsume selected kinds of assets (specifically housing, because of the mortgage deduction). A consumed-income tax would radically change the incentives towards building equity - wealth - rather than accumulating debt to finance consumption.
I will admit, of course, that one big can of worms would still be open: the definition of investment. Corporate perks would also get a lot of scrutiny; properly, they should be taxed as consumed income. So the tax lawyers won't completely be out of work. But it would be a lot simpler than the current system, and it would radically reshape our economic incentives towards wealth-generation.
I apologize if this was addressed somewhere in the last 30 comments; I stopped reading.
What's all this talk of "fairness"? What's "fair" about having a richer person pay the same (or greater) percentage of his income as tax when he receives less in state services?
Should my car cost more than my parents because I use it more?
More on Wealth taxation:
Noah Millman comments: A wealth tax is only simple in the "nice idea" phase. And asks: Do you tax someone at the same rate whose entire wealth is the basis for retirement income, and has no ability to replace those assets lost through taxation?
Equal wealth would be taxed equally. And yes, the devil is always in the details. Here's how I would structure it: I'd exempt personal assets -- up to 1M per item and 25M in aggregate, and I'd exempt all tax on wealth less than a threshold -- say 100M. (We'd have to see what the rate would have to be set at to achieve revenue neutrallity with today's income tax). And you wouldn't force a sale to pay the tax. You'd structure arrearage accounts so that the government would get paid, with interest, when the illiquid asset turns over.
All valuations of illiquid assets are arbitrary. You do the best you can. But we deal with this all time. Just as you and your local taxing authorities in Fl converge on a number for your property, so it goes for businesses listing their business personal property. It's certainly not perfect, but why do you insist it should be? The mechanisms work reasonably well and that's sufficient.
Contrast this with income taxes. How many taxpayers feel obliged to use "professional" help to fill out their forms. Were it not for tax software, could you or I do a creditable job on our own taxes and be reasonably confident we'd got it right?
The issue you raise about taxing wealth located outside of the US is long settled as well. Businesses deal with this every year (or quarter). The real problem is how to audit and verify. But we have that problem today.
But, I fully agree that the subsitution of a wealth tax in lieu of our current income tax is a "nice" idea that won't happen. There are too many parties with their fingers in the pie who would lose too much if we truly had a government, "for the people". Most of the campaign donations exacted by our Senators and Congressman are made in the hopes of wriggling some exemptions in our current tax code. And, it's just too easy to get employers to forcibly withold tax from employee paychecks. Payroll witholding makes our current system work. But, it doesn't make it fair.
Ah, at last I see the true beauty of Norman's plan: he's building in exemptions that will remove much of the population from the tax rolls (an awful lot of middle-class people, as well as a lot of even very well-paid younger people, will not have more than $100,000 in net assets). Of course, it may get a little tricky to raise enough revenue to fund the government, but at least it'll get that nasty ol' Bill Gates.
But I'm still a little confused about the idea that valuing illiquid assets is a simple process. "You do the best you can" is not a recipe for simplicity when you have two parties--taxpayer and government--with diametrically opposed conceptions of the "best" valuation. I don't know where Norman's writing from, but I haven't encountered a business personal property tax that required annual valuations of business assets. Where is this done, and how does it work?
More on Wealth tax:
Correction: previous post was an answer to David Perron , not Noah Millman
Milton Wright is concerned that too many people would be exempt from a wealth tax if the threshold were set too high. Fair enough. But the orignal target of our federal income tax was something like only two percent of the population.
I don't know what a reasonable threshold should be (I'm guessing at 100M). We'd have to see where the numbers break to achieve revenue neutrallity. But I most certainly am in favor of exempting folks with limited wealth and taxing only those who have the wealth. We need to give young people a chance to accumulate wealth. They'll provide their own incentive.
I certainly don't think Bill Gates is nasty. I applaud him. He succeeded in the face of all odds. The system is stacked against ANYONE accumulating wealth. Our system favors those who HAVE wealth. I just think he should pay more, because he has more -- and thus has more to lose. It is our society that protects his wealth. Those who have wealth should pay their share of society's costs. Think of it as kind of a use tax.
With regard to Milton's unfamiliarity with the necessity of evaluating business personal property on an annual basis -- I suggest he do a GOOGLE search on "business property tax". And he ought not to be confused about the relative simplicity of evaluating illiquid assets. It's an everyday occurance and is well understood in all taxing jurisdictions. It may be arbitrary. You may disagree. You have opportunity for redress. The system works.
>>> ... if we taxed wealth, we'd eliminate estate taxation -- there would be no need. And tens of thousands of estate planners and accountants would have to find honest work. Think about it. Your annual tax form could be a 3 by 5 index card....
The estate tax *is* a wealth tax, it sure isn't filed on an index card, and the valuation disputes involved sometimes drag on for years. Thankfully it's imposed only once per lifetime, and then only from people when have at least $1 million in assets and so are rich enough to be able to employ a herd of appraisers, CPAs, lawyers, etc. To make everyone owe this every year ... what a nightmare.
There's a rule of thumb in the tax biz: "to the extent it's possible to tax something, it's already taxed." This definitely applies to wealth. Real estate can't be hidden or moved and can be valued annually with crude accuracy -- so it's taxed annually. Securities can be valued, but also can flee the jurisdiction easily -- so they are taxed in some places like Florida, but only very lightly. But most wealth isn't traded and thus has no readily ascertainable market value: from those heirlooms in the attic to intangibles like patents, contract rights, contingent rights and so on, to private businesses. And many wealth items can flee or hide very easily. How are they supposed to be valued *every year*?
They can't be, so they aren't except once in a lifetime -- and then only when their value is sufficient to bear the cost. (And this ignores the question of "what is wealth"? Is one's education "wealth"? Economists call it "intellectual capital" and it sure produces a stream of income. Tax it?)
Then there's the little reporting problem. Suppose on those index card returns most people decide to self-report rather low numbers for items other than real estate and securities -- for all those non-traded items for which there is no ready market value, and/or about which the IRS won't know (one's wealth not being reported to it on W-2s and 1099s)? There aren't enough appraisers, tax auditors and lawyers in the world for the IRS to make such a system work.
Which is the simple reason why there is no general wealth tax.
For a tax return that could be filed on an index card think "consumption tax", although in practice that would be more complex too.
I'm going to get off the wealth tax tangent, because it's pretty obvious that Norman hasn't thought it through and doesn't want to. I know how the tax systems work in states in which I've paid business taxes, and they don't involve annual valuations of assets. I'm not willing to spend time on Google looking for support that Norman isn't willing to provide for his own arguments.
Can we revisit another issue from Megan's original post and later comment about eliminating sole proprietorships and putting all businesses into corporate form? It seems to me that the critical part of the idea is simply that the undistributed income of a business would not be taxed. I don't think you need to eliminate non-corporate forms of business to accomplish that, but it does seem to me that such a rule would strengthen a bias toward retained earnings. That would encourage savings and investment, but it would also seem to raise fairness and efficiency concerns.
I like the idea of eliminating the need to measure business income, but I guess I'm questioning how viable that really is. Might we be better off with a simplified system of income measurement and something like an S corp. tax regime (i.e., business income taxed to the shareholders as it's earned) for all business income?
More on wealth tax:
Jim Glass agrees that the estate tax is a wealth tax but asserts that its application demonstrates that asset valuations are contentious and can drag on for years. I agree. But, in the end, they're all resolved. Businesses in many jurisdictions are obliged to evaluate and pay tax on business personal property and real and intangible property, *EVERY YEAR*. And they do it. And the world doesn't come to an end.
With respect to jurisdictions' frustrations in trying to tax things that aren't nailed down, so what? Either people are honest or they're not. OBTW, the only people who report ALL of their income today are the people who recieve all of their income as salary.
The issue of taxing registered securites isn't hard at all. We've done away with bearer bonds and registrars track stock ownership. Not hard to match at all.
I leave it to divorce lawyers to try put a value on some poor bastard's education (his MD license is worth millions!, she says).
And I do like consumption taxes -- for certain purposes. Certainly, where a resource is scarce, like water. Why shouldn't we pay more for water when there's a shortage -- instead of the idiotic conservation rules the bureaucrats impose during "drought emergencies". We can't build more resevoirs -- no room. But we can sure charge more for water when it's in short supply than we do when the rivers have jumped their banks.
The question I'd ask you, Mr. Glass, is whether you think consumption taxes hinder or help economic activity and the creation of wealth. And are they fair? Wealthy people need less because they have more.
RE: Wealth Tax
As someone rightly pointed out, the wealth that Bill Gates has tied up in Microsoft shares is unrealized until they are sold. It's only "wealth" on paper. If he is required to pay taxes on the value of these shares, would he be eligible for a large cheque from the Government if the value of the shares declines in future years? What sort of tax issues would the dot-com bubble have created? Taxing unrealized gains is a pretty scary road to go down.
Help for Milton:
I can't let Milton off the hook. When a guy insists that he can't spend time on GOOGLE -- when you give him the search phrase -- and claims the guy he's arguing with won't support his own arguments, I'm obliged to educate him as to both facts and manners.
Milton, my Google search for "business personal property tax" (the exact match) on GOOGLE (instantly) returned 1510 items. It would be poor manners for me to list all of the URLS for everyone to read just because you're unfamiliar with these kinds of taxes despite your "vast" experience. So I'll just list the first ten.
And here's a nice and short description from Nevada, which has had this tax since 1864:
WHAT IS PERSONAL PROPERTY?
According to Nevada Revised Statutes, all property that is not defined or taxed as "real estate" or "real property" is considered to be "personal property." Taxable personal property includes manufactured homes, aircraft, and all property used in conjunction with a business. Business personal property is taxable whether it is owned, leased, rented, loaned, or otherwise made available to the business. The taxation of business personal property has been in effect since Nevada became a state in 1864. Nevada Revised Statutes, Chapter 360-361, provide for the taxation of all property, unless specifically exempted by law.
WHO MUST FILE A BUSINESS PERSONAL PROPERTY DECLARATION WITH THE ASSESSOR?
All businesses having assets within Clark County must complete and file an annual declaration which lists any personal property that is used in conjunction with the business as of the lien date, which is July 1st. The "Declaration" is normally filed during the month of July each year. If the "Declaration" is received by the business at any other time, it is due within fifteen days of receipt. New businesses should contact the Clark County Assessor at the same time the business license is acquired, or prior to opening the business. Please remember, the responsibility of keeping the Assessor informed of any changes in the business address, location or mailing change, is that of the taxpayer. To add a new business or change information regarding an existing business, a form is available below to download. Please complete this form and return it to our office.
You seem to have no problem whatever with large discrepancies in appraisal value. Given that these discrepancies translate directly into variation in the amount of tax paid, don't you think they are important? Do you think if the IRS took in 30% more or less in a given year than they did the year before, that might lead to certain problems? Granted, this probably wouldn't occur to the extent that I described. But what will happen is people will start screwing with the appraisal process, which is much more prone to error than the current process whereby income to individuals is reported to the IRS.
Paychecks are concrete. Wealth appraisals are not, to the extent that worth must be estimated rather than calculated.
According to Nevada Revised Statutes, all property that is not defined or taxed as "real estate" or "real property" is considered to be "personal property." Taxable personal property includes manufactured homes, aircraft, and all property used in conjunction with a business.
Ah, so my home is exempt. Thanks, Norm. Cool. So all I have to do is funnel most of my paycheck into principle and I've got it made. Then I can just progress up the housing food chain until I retire, at which time I do the same thing in reverse. I'm starting to gain appreciation for this idea.
The points about the practicality of collecting a wealth tax having been made by others, I won't beat on them except to note that fairness does not trump reality. If life was fair the good wouldn't die young and I wouldn't be losing my hair while others posting here aren't.
We can only do what we can do in reality, in tax policy as elsewhere. Now, as to...
>>>I'd exempt all tax on wealth less than a threshold -- say 100M. (We'd have to see what the rate would have to be set at to achieve revenue neutrallity with today's income tax)...
In 1998, the last year for which data is available, total household wealth was $28 trillion (as per the Fed's Survey of Consumer Finances). The federal budget being $2 trillion, if we are financing it entirely with wealth taxes this is a 7% rate on it all, everybody. The "wealth over $100 million" segment was too small to be reported, but the top 0.5% of the population by wealth -- with wealth over $5.7 million -- had total wealth of $7.4 trillion. A $2 trillion tax bill on them annually is a rate of 27% annually on all their wealth (not just the part over $5.7 million).
Being that the average investment return is under 6%, a 27% annual tax is going to deplete their wealth rather quickly and one is going to have to start moving tax impositions down the wealth scale to keep enough collections coming in. (Taxing only the tiny subgroup with wealth over $100m pretty obviously is a nonstarter.)
It is interesting to speculate about the results of imposing a 7% universal wealth tax (which is where we will be heading) on an economy where the average rate of return on investment is less than 7%.
That's assuming the tax could be universally collected on all assets equally, of course -- while in reality the mobile, intangible and/or concealable assets will be "*vroom*, outta here!" as soon as they face any significant annual tax, leaving the rest to pay a compensatingly higher rate.
First of all, no tax system anyone devises is going to be perfectly fair. I'm content that the one I'm proposing is fair enough -- not that it produces the same result that, say, God would if He were to stop running the universe and start running the IRS.
I know that not taxing income until it's distributed biases towards retained earnings, and that to some extent rich business owners are going to be let off the hook by getting their companies to own their assets. But not as much as you would think -- companies already do this to the extent that such items are arguable, and sometimes when they aren't (i.e. Adelphia.) And we've already got a bias towards retained earnings because of differential capital gains taxation.
No, you can't draw a bright line between corporate and personal assets, but it was ever thus. I think you can draw a pretty clear line. And anyway, why shouldn't small business owners be able to do with their companies what rich people do much more flagrantly with their charitable trusts and foundations? One of the highlights of working for a non-profit is watching the useless heirs of whoever founded it flounce in once a month to see how things are going and thus earn the large salaries they are paid for "consulting", serving as "chairman of the board", or in other words . . . having the right genes. This makes me less worried about the spectre of 7-11 owners everywhere letting the corporation refrigerate their soda for home use without declaring the compensation.
Sean E suggests that paper assets ought not to be included in a wealth tax because they have not been realized and might decline in value. (He further suggests that in the event of such a decline, the owner might be entitled to a rebate or refund in subsequent years).
I disagree. The evaluation of any asset is as of a date certain. All assets can appreciate or decline in value. Your house may well be worth less next year if we have a double-dip recession (My prediction -- won't happen!) So what? Would you expect your town or county to send you a check? Of course not.
What difference should it make how Mr. Gates' wealth is constituted? A wealth tax should tax equal wealth, equally.
More Wealth tax:
For David Perron: The methodology for appraising assets and the practice of taxing them works quite well and has for many years. It ain't perfect, but nothing is. And yes, it's a whole lot easier to get employers to withhold taxes from peoples' paychecks. And it's insidious and pernicious. The only people who actually report all of their income are the poor bastards who get all of their income reported on W2's.
And sorry, David, you'd have to pay tax on all of your wealth, including your house.
Jim Glass brings some numbers to the debate -- GOOD!
Mr. Glass suggests that the size of the taxable wealth pie as of 1978 was 28 trillion dollars and extrapolates the necessary rate for a wealth tax at around 7%. Excellent! Now we can get down to figuring out whether this idea is practical.
I appologize for not coming back with hard numbers -- I have to pick up my wife.
But I think that using only household wealth dramatically undervalues the pot. We need to look at Securities holdings, and all of the assets owned by businesses (and I'd include the non-profits -- but that's another battle). My sense is that the pie is more likely ten times larger, but again -- I haven't done my homework. Mr. Glass, my appologies -- I'll pick this up later.
>>> I know that not taxing income until it's distributed biases towards retained earnings, and that to some extent rich business owners are going to be let off the hook by getting their companies to own their assets.
If you are talking about making proprietorships be taxed as regular corporations, it's not rich business owners -- it's all business owners. You keep your income in your business's investment account and it grows forever tax-free. Then you borrow from or against it for your spending and rent money, and that's tax-free too. And you can always otherwise direct your company to utilize its tax-free funds in ways that benefit you, indirectly enough to avoid getting taxed. It's your super-duper tax shelter, forever, like the tax shelter operators dreamed of before the '86 reform act put most of 'em out of business. No IRA could match it.
If you don't want corporate level taxes and special tax shelter deductions, I don't see why you don't prefer proprietorships, partnerships and S corps *over* regular corps -- they seem to accomplish what you want, tax-wise.
Besides, most small business owners don't want to be stuck with a regular corporation, taxes aside -- which is why there are so many more proprietorships, partnerships, limited liability companies and S corps than regular corps out there. I'm libertarian enough to respect their wishes in this regard. A regular corp can be a real headache unless you have a specific need for one. Not many new businesses are organized as them these days.
>>> anyway, why shouldn't small business owners be able to do with their companies what rich people do much more flagrantly with their charitable trusts and foundations?
Oh, small business owners can be plenty flagrant -- part of my job is telling some of them to 'tone it down' every now and then. ;-)
The sole constraint on flagrancy for owners of small businesses is the amount of money they have to be flagrant with -- form of business organization has very little to do with it.
>>> The only people who actually report all of their income are the poor bastards who get all of their income reported on W2's.
That's right. That's why W2s and 1099s exist. Now think how much easier it'll be not to report wealth that isn't recorded anywhere, hasn't even been appraised, than to not report income.
>>>And sorry, David, you'd have to pay tax on all of your wealth...
Not if he doesn't report it, he doesn't. (Sure beats getting stuck with a W2!)
>>>Mr. Glass suggests that the size of the taxable wealth pie as of 1978 was 28 trillion dollars and extrapolates the necessary rate for a wealth tax at around 7%.
1998 (typo I assume).
>>> But I think that using only household wealth dramatically undervalues the pot. We need to look at Securities holdings, and all of the assets owned by businesses (and I'd include the non-profits -- but that's another battle). My sense is that the pie is more likely ten times larger...
Household wealth is *all* wealth owned by people -- including securities, businesses (and thus the assets owned by the businesses), the lot.
Of course, households own a lot more *assets* than that -- but you have to rememeber debts too. Houses have mortgages, business assets are financed, securities are bought on margin, etc. $28T was the net wealth of people in the nation.
More on Wealth Tax:
Ok, I'm back and I've done some homework so as to reply to Mr. Glass (who's done some very good research).
Mr. Glass asserts that the total wealth of these United States as of 1998 is some 28 trillion Dollars. So says the Fed -- but they say it of the holdings of households. But this is misleading at best, and actually off the mark.
Misleading, because the Fed's report is an estimate of NET holdings, not asset values. And, the report itself reveals an estimated 10 trillion additional dollars in unrealized capital gains.
Off the mark, because the Fed report is a survey, not an enumeration, and because households don't own all of our wealth. Mr. Glass, where are the holdings of the foundations (non-profits)? No one knows! What about trusts? And the FED report cannot really includes all business assets. At best it can reflect personal ownership in corporations, as stock. Do you really believe there's a 100% correlation between share price and asset value? Do you really believe the FED has captured all American assets in their survey? Do you really believe the FED has captured the holdings of organized crime in these statistics? (OK, good luck on taxing those assets, anyway). I NEVER answer surveys or pollsters myself (none of their damned business, I say), so why should I have any confidence in the answers others give to the FED.
Mind you, I don't know where to look to answer my own questions, but I've only spent about an hour on it (and I did read the FED and Census reports). And everyone seems to rely on the Fed's figures. Go figure.
As for Government revenues, Mr. Glass assumes that the entire 2.2 trillion dollar budget is funded by the income tax. From http://policy.house.gov/annreport/2000/report.pdf we see that even if we include corporation taxes (not all of which are income based), and individual taxes, and payroll taxes, and estate taxes -- we only need to replace about 1.7 trillon of it with our wealth tax. And I was postulating a tax rate of 5%, so we can see that we could get their easily.
Thus we have demonstrated that it is possible to replace our income based taxation system with one based on wealth and be revenue neutral.
Inasmuch as Mr. Glass admits that the average return on investment is "under 6%", we wouldn't necessarily impoverish anyone with this scheme. Of course, if we eliminated income taxes the investment return rates would likely skyrocket.
Now, I have no expectation that I will see a wealth based tax replace our income tax. But I think it's important to discuss ideas like this one to expose the hypocrisy of the democrat's charges that tax cuts only benefit the rich. Progressive income taxes are don't tax the rich. Making a lot of money is very different from having great wealth. Our taxation system is designed to prevent anyone from BECOMING rich.
My final comment on this topic, going back to the beginning:
>>...the system should be continuously progressive, from a steep negative rate of up to 100% on very low earners, gradually declining until it zeroes out around $28,000 a year, and then rising gradually until it maxes out around 35% on the top brackets.... Eliminate FICA and pay for Social Security and Medicare out of general revenue. ... Eliminate the corporate income tax
The problem is that it's just not mathematically possible. Federal employment and corporate taxes total 90% of individual income taxes. So to collect that money through income taxes today would require almost doubling current tax rates with a top rate of about 67%.
Now if you also want to have a negative income tax that is eliminated gradually to income of $28k, which is today a tax-paying income level, with tax rates increasing from there gradually only to 35% ... well, it just doesn't fit.
So while I'm for the individual items in the Jane Galt tax plan in principle, seven-for-seven, in practice the plan cuts government tax revenue and thus the size of government by more than half , and that's reason #8 why I'm for it!
As an aside, thanks to all that are contributing to this thread. For some of you people, this is old hat, but I'm an engineer and so it's all new and sparkly (ok, that was a bit much) to me. I'm learning a lot.
Norman, you posted something to the effect that everything but real estate will be considered wealth, then turned right around and said my house would be taxable under your "tax the wealth" concept. I realize that the real estate issue was addressed by Nevada statute; it's clear your idea differs from that of Nevada in some detail or other.
But you left unanswered my question about who determines worth, and how that determination of worth can be more easily screwed with than, say, a statement of income. To reiterate, valuation is easy when it comes to cash, stocks and bonds. Valuation is much more dicey when it comes to inventory, real estate and used property. Or even the current value of an option.
And you lightly brushed off my questions about hiding large amounts of cash overseas. You claim that currently there's safeguards in place to address that, but I'm not sure what you're talking about when you say that. Can you go into that a bit further?
It seems like it's going to be much easier to avoid a wealth tax if you have the resources to move your wealth out of the country and hence outside of the government's ability to audit you or your company. It's going to make for a lot of cash or other off-the-books transactions, IMO.
Last you'll hear from me on the wealth tax debate - promise.
Norman, my example of Bill Gates and declining Microsoft shares probably wasn't the best one I could have used. What about Enron? Or, to use some Canadian examples, Nortel or Bre-X? These are cases where vast amounts of "wealth" were created and then vanished in a very short amount of time, leaving most investors no better off (actually quite a bit worse off for many of them). You may not have much sympathy for Bill Gates, but what about someone who just lost a large chunk of their life savings on a stock crash after paying a tax bill for money they never had?
We can actually view this now: a lot of people who had a lot of options got a crushing, multi-million dollar tax bill after the options had declined and vanished. Needless to say, the IRS did not allow them to deduct the capital losses against the capital gains. Last time I checked, this was an ongoing problem that hadn't been resolved, as many of the people involved were unlikely to ever get the money to pay, but tax bills are immune from bankruptcy.
>>> ... a lot of people who had a lot of options got a crushing, multi-million dollar tax bill after the options had declined and vanished. Needless to say, the IRS did not allow them to deduct the capital losses against the capital gains...many of the people involved were unlikely to ever get the money to pay, but tax bills are immune from bankruptcy.
Actually the IRS wouldn't have taxed these people at all, and they wouldn't be in this fix, if upon exercising their millions of dollars of options they had spent $100 on one hour with an accountant to plan to pay the taxes they owed on them.
This problem arose only with one type of option, Incentive Stock Options (ISOs) which are tax favored compared to "regular" options under normal rules. With a normal option one pays, say, $10 to buy a share worth $40, the $30 gain is taxed as ordinary income, one pays the tax on the $30 (maybe by selling a few shares), and then just owns the stock like any other stock. But with ISOs when you pay the $10 to get the shares worth $40 there is *no* normal income tax due on the gain. You don't owe any tax until you sell the shares, at whatever price, and then it is tax-favored long-term capital gain (assuming you held them for a year, etc.). So there's a double tax break: tax is deferred and the $30 gain is converted to low-tax capital gain.
The snag with ISOs is that the $30 gain on them *is* taxable at the date of exercise under the Alternative Minimum Tax, if one falls under the AMT, which anyone with millions of dollars of them will. But if one pays the tax on the shares then, as one should, it's still no problem. The value of the stock then becomes pure gain -- no way can you lose money on it.
The trap is that of one thinks "ISOs are tax free" and so doesn't pay the tax, and then the shares fall in value, one has only until year end to sell them to limit one's tax bill to one's actual gain on them -- and still have no problem. But after that, one owes the AMT on the full gain on the exercise date even if the shares fall to zero in value, so that there's no money at all to pay the tax.
Now the AMT admittedly is an opaque travesty of good tax policy. But I have very little sympathy for the people at Cisco and elsewhere who got driven into bankruptcy as a result of not paying the tax they owed on millions of dollars of gains when they owed it. *Every one* of them had the AMT rules explained to them in writing by their option plan administrator -- and paid no attention. Every one of them could have thought "I just got a million dollars. Do I owe any taxes on this? Maybe I should talk to somebody..." They could and should have avoided the whole problem. But they didn't.
They all brought it on themselves. Because they thought they had too much wealth to need to care about the rules. Boo hoo. Weep for somebody else.
I think the last on a wealth tax:
David Perron incorrectly assumed that I had exempted real estate in my proposal. I had not. The confusion arose from my answers to Milton Wright's questions (and his unfamiliarity) with the common tax treatment of business personal property -- admittedly a strange label. I cited Nevada's concise explaination to put to rest Mr. Wright's puerile refusal to look it up himself.
As to Mr. Perron's questions about valuations and enforecement, Hey -- nothing's easy, but everything is doable. If you look at the extent and manner of tax cheating that goes on today, I think it's fair to say that it would take some years before tax cheaters become as sophisticated at cheating the wealth tax as they are today with the IRS.
As for Sean E and Ms. Galt, what about Enron? Equal wealth should be taxed equally. It's fair to worry about losses only when you're taxing income. What I would do would be to structure arrearage accounts for illiquid assets (or those for which you can't pay the tax but aren't yet ready to liquidate). It would then become a question of fairness -- should the tax arrearage and interest be forgiven if the asset goes belly-up? Clearly it ought not be forgiven if the asset was your home and it burned to the ground (if you didn't insure it -- you're the shmuck!) This would be a lot better than we have it today where you're limited to a $3,000 offset of capital losses against ordinary income.
OBTW, I didn't mention in my response to Mr. Glass that his figures (and the FED's household wealth study) omit foreign owned assets based in these United States. Think of all that Japenese owned real estate.
Another additional benefit to the substitution of a wealth based tax in lieu of our current income tax. Imagine the fun if you were selected (by lottery) to walk into the IRS headquarters to lead all of the employees down to the parking lot. Government would get a LOT smaller.
Jane Galt incorrectly states bankruptcy law: "tax bills are immune from bankruptcy". Tax liabilities ARE discharable in bankruptcy, but tax liens are not. A chapter 7 discharge bars further enforcement of the debtor's liability on a claim, but not enforcement of a lien against the collateral. Johnson v. Home State Bank, 501 U.S. 78, 111 S.Ct. 2150 (1991) . If you have exempt assets to protect (like Fl or Tx homesteads), the trick is to file your petition before the IRS files a tax lien.
Norman, all I said was that what you're asserting to be the "common treatment" of business personal property is not the treatment in the states I'm familiar with (which is admittedly a small sample, but I see little indication from your posts that you have great expertise in state and local taxes across the country). What's frustrating about this debate is that you brush off any practical objection to your wealth tax with assertions that are contrary to the practical experience that I and others in these comments have described. I'm not claiming omnipotence, but neither am I convinced by a bunch of Google search results unconnected with any practical description of how your business personal property taxes function in practice and how such asset-based taxes could be scaled up to replace the entire revenue stream generated by federal income and FICA taxes.
This WILL be my last comment on wealth taxes, and I apologize for being goaded back into this topic.
>>> Jane Galt incorrectly states bankruptcy law: "tax bills are immune from bankruptcy". Tax liabilities ARE discharable in bankruptcy, but tax liens are not. A chapter 7 discharge bars further enforcement of the debtor's liability on a claim, but not enforcement of a lien against the collateral. ... the trick is to file your petition before the IRS files a tax lien.
Which ain't easy, 'cause you can't just waltz in and file Chapter 7 versus the IRS.
First, you must have filed your timely tax return at least three years before, or a late return two years before, your bankruptcy filing. No return filed years in advance, no discharge -- so the IRS knows about you. Second, there can't have been any fraud on the return, or no discharge.
Third, and most telling lien-wise, you can't file Chapter 7 until 240 days after the IRS actually sends a tax assessment to you. That means after they've ID'd you as a tax delinquent and have had a case actually running against you for at least eight months -- in which time they are supposed to, under their normal procedures, slap liens on everything you own.
So you can't pull the trick of running down to the courthouse before the IRS to file Chapter 7 before it files any liens against you. You have to hope somebody at the IRS falls asleep on the job. Which certainly has been known to happen. But that's up to it, not you.
An excellent discussion of a complex topic.
However, one thing about every single proposal bothers me intensely: I am still required to report the details of my economic activity to the state, so they can extract their pound of flesh. I hate that process more than the money I am losing. Regardless of the economic consequences, I would support any system that frees me from that "accountability" requirement over any that keeps me in thrall to the tax forms.
I am particularly pleased to note that no one in these postings has yet equated payment of taxes with "responsibility" or "maturity". I hold taxation to be a "barely endurable, yet necessary, evil" and am nauseated by those who try to morph it into a virtue.
"However, one thing about every single proposal bothers me intensely: I am still required to report the details of my economic activity to the state, so they can extract their pound of flesh. I hate that process more than the money I am losing. Regardless of the economic consequences, I would support any system that frees me from that "accountability" requirement over any that keeps me in thrall to the tax forms."
The only way that I can think of to accomplish that is to enact a truly flat tax: starting the day you reach adulthood, you pay the Feds $X (where X is the same for everyone) per year. Period. Regardless of your income or how you spend it. The government wouldn't even to know your income, your assets, or anything else about you except the fact that you exist so they can hit you up for the tax money.
If you couldn't afford it, you'd have to apply for an exemption and report all your income, assets, etc., much like the way you'd apply for welfare.
Of course the only way this could possibly work is to enact drastic spending cuts. Back to the kind of spending levels the Feds ran during the 19th Century. Not that that would necessarily be a bad thing :)
But this really flat tax probably wouldn't be especially popular...
I read your article on tax reform and many but not all of the comments. Here is my taxable two cents worth. First, I disagree with the progressive nature of your proposal. I favor a flat 10% tax rate for all income earners. Your hypothetical liberal may scream about the unfairness of it all. However, I think the key to the problem is the regressive nature of the payroll taxes on businesses and wage earners. Each party to the employment contract is paying 7.65% of wages into that black hole. Therein lies the beauty of your proposal to eliminate the payroll tax. Businesses would be required to increase the wages of the worker to 105% of previous earnings under the old tax system, thus saving 2.65% per worker and untold millions in paperwork reduction. The worker would add 5% toward his tax bill also saving 2.65% in the process. I don't know what the federal treasury takes in each year but 10% of the GNP must be a big number. No deductions and no paperwork will reap tremendous savings at the federal level as well. The one fly in the oinment is that many workers are not in the Social Security system. The simple solution: fold them into the plan or to apply contributions to their plans as tax credits. Anyone with the priviledge of voting should share the responsibility of funding his government. I am not addressing other aspects of your proposal but tax reform has greater relevance every day.