Once again Washington politicians are singing a familiar refrain, "tax reform." Some of them, joined by media personalities, even suggest that it's something that the Congress and the president might even agree on.
Really? Does anyone believe that this congress would support the president on anything more controversial than a motherhood resolution? And does anyone believe that any "reforms" suggested by this Congress would benefit the typical American taxpayer?
This time around, it's not just Republicans vs. Democrats. The Republicans are engaged in a vicious internecine war among themselves. The old saw used to be that "Democrats fall in love, and Republicans fall in line." No longer - the Republicans seem intent on tearing themselves apart in the race of one faction to see who can move furthest to the right, and a shrinking number of more temperate souls attempting to retain some measure of sanity.
Here are a few ancient bromides that these worthies in Washington are beating their gums about.
Tax simplicity - whatta farce. The most disingenuous of these proposed nostrums is that eliminating the seven current marginal tax rates, in favor of a single rate for all income levels, would simplify the system. This is total nonsense. Multiple marginal rates have absolutely nothing to do with the complexity of the tax code.
A reasonably numerate sixth-grader can be taught in about 20 minutes or less how to compute taxes using multiple marginal rates, that is, once given the rates and, of course, the figure on income. And that's the point; complexity of the tax code has nothing to do with multiple marginal rates. It has to do with the complex rules for computing taxable income.
So let's assume that congressional Republicans and Democrats, and the president, can agree that the tax code is unnecessarily complex, convoluted, and complicated, and maybe even irrational, and that it should be "simplified."
This brings us to reducing or eliminating various adjustments, deductions, and tax credits, often referred to as "loopholes," depending on one's point of view. It is there that all agreement ends. One group's "loophole" is another group's reward for socially beneficial behavior, or incentive for "doing something good."
How did those various deductions get there in the first place? It was either through popular demand or, in many cases, vigorous lobbying effort by interest groups. A very popular deduction that benefits many ordinary citizens is the deduction for home mortgage interest. Any move to eliminate this deduction to which homeowners have come to depend would provoke outrage. And the real estate lobby would go to bat to retain it as it is an obvious incentive for home ownership.
There are many deductions, or "loopholes," depending on one's point of view, that are obscure and not relevant to the average taxpayer. However, to the extent they benefit a various interest group, every effort will be made to retain them.
Congressional proponents of "tax reform" like to throw out a bone to their constituents - "We'll lower your rates on income taxes." And how would that lost revenue be made up? "Well, we'll just eliminate those "loopholes."
It won't happen, for the above reasons. And let's say for purposes of debate that Congress did manage to close a few of those "loopholes" in return for lower the tax rates. I'll give you a year or, at most, one congressional session, and those loopholes would be back in there. After all, lobbyists on Washington's K Street are expected to do more than enjoy their dinners of steak and lobster and fine wine.
In the event of lower tax rates, that would leave a shortfall of government revenue and either curtailment of popular expenditures, a larger government deficit, or another government shutdown with unwillingness to pay its bills - or some combination of the above. Maybe that's the objective of some politicians, but it's no responsible way to govern.
The corporate income tax is another controversial item. It is said to encourage corporations to move off-shore, and discourage them from remitting profits earned outside the country back to the U.S. Many economists would go along with eliminating the corporate income tax if personal income tax rates on high income recipients, such as the multi-million dollar salaried CEOs, were raised. But this is not likely to happen, which brings us back to the question of increasing marginal rates on higher incomes.
Proponents of a proportional or, in common parlance, flat rate, assert that this is most "fair." "Fair" is in the eye of the beholder. Some of us would argue that it is "fair" for high income people who reap the greatest financial rewards from the system to not only pay more in tax dollars, but to pay at least a modestly higher proportion of their income to cover costs of running and defending the nation. If the wealthy work hard for those high incomes, so too do those working hard for their lower incomes.
To be consistent, those passionate supporters of a "flat tax" should exhibit the same passion for a "flat rate" on the payroll tax. Currently, it is proportional or "flat" with a 6.2 percent, matched by employer, on the first $118,500 of income. After that, the rate is zero. This makes for a regressive tax; high income recipients pay a smaller proportion of their income in tax than lower income recipients. A person making $118,500 pays $7,347 or 6.2 percent of income in payroll taxes. A person making $1,000,000 pays the same $7,347 in payroll taxes which is only .73 percent of income.
So, if tax reformers want a flat tax, let's start with the payroll tax.
Perhaps readers of this column trust this Congress and the president to come up with tax reform that benefits the typical working family.
But given the makeup and behavior of this Congress, I would just as soon as they leave it alone.
- John Waelti's column appears every Friday in the Times. He can be reached at jjwaelti1@tds.net.
Really? Does anyone believe that this congress would support the president on anything more controversial than a motherhood resolution? And does anyone believe that any "reforms" suggested by this Congress would benefit the typical American taxpayer?
This time around, it's not just Republicans vs. Democrats. The Republicans are engaged in a vicious internecine war among themselves. The old saw used to be that "Democrats fall in love, and Republicans fall in line." No longer - the Republicans seem intent on tearing themselves apart in the race of one faction to see who can move furthest to the right, and a shrinking number of more temperate souls attempting to retain some measure of sanity.
Here are a few ancient bromides that these worthies in Washington are beating their gums about.
Tax simplicity - whatta farce. The most disingenuous of these proposed nostrums is that eliminating the seven current marginal tax rates, in favor of a single rate for all income levels, would simplify the system. This is total nonsense. Multiple marginal rates have absolutely nothing to do with the complexity of the tax code.
A reasonably numerate sixth-grader can be taught in about 20 minutes or less how to compute taxes using multiple marginal rates, that is, once given the rates and, of course, the figure on income. And that's the point; complexity of the tax code has nothing to do with multiple marginal rates. It has to do with the complex rules for computing taxable income.
So let's assume that congressional Republicans and Democrats, and the president, can agree that the tax code is unnecessarily complex, convoluted, and complicated, and maybe even irrational, and that it should be "simplified."
This brings us to reducing or eliminating various adjustments, deductions, and tax credits, often referred to as "loopholes," depending on one's point of view. It is there that all agreement ends. One group's "loophole" is another group's reward for socially beneficial behavior, or incentive for "doing something good."
How did those various deductions get there in the first place? It was either through popular demand or, in many cases, vigorous lobbying effort by interest groups. A very popular deduction that benefits many ordinary citizens is the deduction for home mortgage interest. Any move to eliminate this deduction to which homeowners have come to depend would provoke outrage. And the real estate lobby would go to bat to retain it as it is an obvious incentive for home ownership.
There are many deductions, or "loopholes," depending on one's point of view, that are obscure and not relevant to the average taxpayer. However, to the extent they benefit a various interest group, every effort will be made to retain them.
Congressional proponents of "tax reform" like to throw out a bone to their constituents - "We'll lower your rates on income taxes." And how would that lost revenue be made up? "Well, we'll just eliminate those "loopholes."
It won't happen, for the above reasons. And let's say for purposes of debate that Congress did manage to close a few of those "loopholes" in return for lower the tax rates. I'll give you a year or, at most, one congressional session, and those loopholes would be back in there. After all, lobbyists on Washington's K Street are expected to do more than enjoy their dinners of steak and lobster and fine wine.
In the event of lower tax rates, that would leave a shortfall of government revenue and either curtailment of popular expenditures, a larger government deficit, or another government shutdown with unwillingness to pay its bills - or some combination of the above. Maybe that's the objective of some politicians, but it's no responsible way to govern.
The corporate income tax is another controversial item. It is said to encourage corporations to move off-shore, and discourage them from remitting profits earned outside the country back to the U.S. Many economists would go along with eliminating the corporate income tax if personal income tax rates on high income recipients, such as the multi-million dollar salaried CEOs, were raised. But this is not likely to happen, which brings us back to the question of increasing marginal rates on higher incomes.
Proponents of a proportional or, in common parlance, flat rate, assert that this is most "fair." "Fair" is in the eye of the beholder. Some of us would argue that it is "fair" for high income people who reap the greatest financial rewards from the system to not only pay more in tax dollars, but to pay at least a modestly higher proportion of their income to cover costs of running and defending the nation. If the wealthy work hard for those high incomes, so too do those working hard for their lower incomes.
To be consistent, those passionate supporters of a "flat tax" should exhibit the same passion for a "flat rate" on the payroll tax. Currently, it is proportional or "flat" with a 6.2 percent, matched by employer, on the first $118,500 of income. After that, the rate is zero. This makes for a regressive tax; high income recipients pay a smaller proportion of their income in tax than lower income recipients. A person making $118,500 pays $7,347 or 6.2 percent of income in payroll taxes. A person making $1,000,000 pays the same $7,347 in payroll taxes which is only .73 percent of income.
So, if tax reformers want a flat tax, let's start with the payroll tax.
Perhaps readers of this column trust this Congress and the president to come up with tax reform that benefits the typical working family.
But given the makeup and behavior of this Congress, I would just as soon as they leave it alone.
- John Waelti's column appears every Friday in the Times. He can be reached at jjwaelti1@tds.net.
