While wandering through my bookmarks I ran across an interesting list of tax reforms. Despite the fact that the author is an expert on tax policy and I'm just some putz with a blog, I'm going to disagree with her a bit.
First up is a list of personal income tax reforms, with which I mostly agree.
- I've never understood why the tax code isn't just fixed. Instead, Congress wastes time and political capital on the AMT every few years - and rich people still have lower effective tax rates than the middle class. If the AMT must be kept, then it should set to start at the 95% percentile of taxpayers and be indexed for inflation.
- More progressivity would be good, but I think rates should stay under 50%. The Clinton-era income tax rates worked pretty well, and would work well again if loopholes are eliminated and all types of income are treated equally. The primary goal should be to push up effective tax rates.
- I agree the capital gains exemption for non-rollover sales of principle residences should be eliminated for people under 65. The basis of a non-rollover sale should be the original purchase price indexed to CPI + 2%. The percentage on top of CPI exists to allow owners to exclude a portion of any remodeling or improvements.
- The mortgage interest deduction should be eliminated entirely and the standard deduction raised.
- I disagree that all types of income should be subject to FICA taxes. Social Security will be solvent forever if the wage cap is just eliminated. Medicare taxes would no longer be applicable if the country moves to a national single-payer system.
- Yes, treat all income the same, and require full reporting of non-wage income
- Yes, restore the estate tax and fix the tax code to prevent avoidance.
Next up is a list of corporate income tax reforms. This where we have different outlooks. A while back I threw out the idea of bagging the corporate income tax and instituting a value-added tax. I've modified that view to adding a VAT on top of a much simplified corporate "income" tax at a lower (15-25%) rate. (I use the scare quotes around income because a CIT is really a corporate profits tax.) Therefor I think adjustments to the current system are moot, nor am I all that convinced they won't be circumvented by companies or undercut by successful lobbying in a few years time.
I originally saw several reasons for moving to a VAT. 1) The current corporate income tax is just a complete mess, with all kinds of loopholes, credits, allowances, and other such complications that make it very uneven in its distribution. Because of its complexity and the resulting opportunities to be gamed, it distorts the microeconomics of companies, incentivizing them to invest in accountants and lawyers instead of their product or service offerings. For the same reasons, the current CIT produces much less revenue than it did a few decades ago. 2) Cross-border transfer pricing is often abused and a VAT would capture most of that kind of legal evasion. 3) America needs to more-or-less permanently reduce its consumption and alter its balance of trade. A VAT would apply pressure towards both ends. 4) At some point a lot of tax revenue will have to be raised in order to pay off the debt and to pay for a national healthcare system, and a VAT is an efficient way to do it.
I still think those reasons are quite valid, but I've revived the corporate profits tax because it is necessary to capture revenue from companies operating in the US (and thus benefiting from its protection and requiring services from its government) before the profits are sent offshore, either to foreigners or Americans rich enough to make using a tax haven worthwhile. I'd also like to see "double taxation" addressed, even though the issue has been pushed for dishonest reasons. Upward redistribution is the true goal of activists on this issue, not fairness. But by including a voucher for taxes paid along with the dividends, people who file tax returns in America could claim credits for the taxes paid by the issuing corporations. This would eliminate "double taxation" for American citizens and residents, but not allow rich people to escape paying income taxes on their earnings.
An issue that is often raised during a discussion about a VAT (or any other consumption tax) is regressivity. A VAT is regressive, but raising that point alone without a discussion of about all the other taxes a resident of a country might pay (not to mention government services said resident might receive) is rather disingenuous. Which is to say, any increases regressivity can be offset without much difficulty.