On Taxes

An AJC story this morning summarized the positions of the candidates for Saxby Chambliss's Senate seat on the federal government's debt.

The statements of Chambliss and Jim Martin reflect what have been the stances of the Republican and Democratic candidates for president this election cycle. Chambliss's position can be summarized as "Cut spending, but don't ask me for specifics." Martin's counter, paraphrased: "Bush is awful, stop giving tax breaks to oil companies, and get out of Iraq."

The only interesting response came from the libertarian candidate, Allen Buckley, who suggested making over the income tax by (a) raising standard exemptions to the poverty line, (b) taxing the first $25,000 of income above the exemption amount at 20 percent, (c) taxing income above that amount by a rate set annually to guarantee that the budget would be balanced, and (c) offering only four deductions: mortgage interest, charitable contributions, and two deductions related to health care.

Without researching the thoughts of experts who know about the probable effects of such a system, this proposal seems appealing, for a few reasons (I do not consider myself a libertarian, but Buckley's idea, to my mind, concerns how the government should fund itself, not how much of a role the government should play in society, though the two are not unrelated.)

First, through the exemptions and the taxing of the first $25,000 of non-exempt income at 20 percent, such a tax structure is progressive, at least to some extent. To many on the right progressivity has become a dirty word, synonymous with "redistribution" or "class warfare". It is therefore a little surprising to see it as part of this proposal.

(Conservatives do make another point when arguing against Obama's tax plan, which is that the federal income tax proposal is already quite progressive (in fact, about one-third of taxpayers pay no federal income tax). Obama counters, in impressively forthright fashion, that those taxpayers do pay federal payroll taxes and state and local sales, property, and income taxes. These taxes are either flat or progressive to only a very limited degree, and sales taxes in particular operate in an regressive way. This to me is an argument for reforming state and local taxation, since using the federal tax system to counter state and local regressivity is, well, blunt- an overlay spread across thousands of localities with different tax structures- and arguably not an appropriate goal of the federal government. In addition, the more the tax burden for the federal government is shifted to wealthier taxpayers- the more people, that is, who pay little or nothing to fund it, the harder it may ultimately become to restrain spending.

All this being said, I do believe that the tax system as a whole should be progressive and at least one study has found that the overall tax burden for most people, regardless of income, is around 40%. So we basically have a national flat tax. I therefore accept Obama's and the Democrats' general position that making the federal system more progressive than might otherwise be preferable, in the absence of flat or regressive state and local tax systems, may be the best we can do, at least for now, in an imperfect world.)

I doubt that the libertarian proposal is as progressive as the current income tax structure, so perhaps it would be preferable to modify the proposal in that direction.

The idea of a top tax rate that floats in order to guarantee revenues sufficient to balance the budget is interesting, since that could lead to real political pressure on Washington to confront difficult realities. Perhaps the biggest objection is that it might make it hard for people to budget their finances for a given year.

But the biggest appeal of the libertarian proposal is its simplicity. This point has of course been made ad nauseam, but it's truer than ever that federal taxes are just too complicated, and neither major presidential candidate has a plan for making them less so. Maybe I can't claim to be reasonably intelligent, but I don't think even reasonably intelligent people have an easy time figuring out all the deductions and credits that are available, whether they qualify for them, etc. It is laudable to be sensitive to the needs of people in different circumstances and, to some degree, to tailor the tax code to address those needs, but at a certain point the system becomes so complicated and intimidating, I suspect, that many of the people intended to benefit simply don't take advantage. Hiring a tax professional or using software is a solution for some of these people, but that is ultimately inefficient and not available for everyone. An excessively complicated system, particularly in the realm of business taxes, benefits those who can best afford good advice and, by increasing the possibilities to modify their actions to reduce tax liability, distorts behavior more than a simpler one.

Comparing the libertarian proposal to reform the tax system and balance the budget reveals how timid are the proposals of the Democratic and Republican candidates for national office this year. Much of the debate about whether it is appropriate to "spread the wealth", for example, concerns an increase in the marginal tax rate for people making over $250,000 of 4.6 percent, while McCain's boldest notions are to lower the corporate income tax by 10 percent, when 70 percent of businesses don't pay any income tax to begin with, and to lower the capital gains tax in an economy rife with capital losses. This timidity is predictable, of course, and even understandable. But when it comes to the candidates' claims to be transformative, maverick-y, agents of change, warriors, etc., these proposals don't provide much support.