Wednesday, October 1, 2008

The perfect tax code

One of colleagues, who teaches AP US Government, has a class blog. (Sorry, you have to be a student in the class, or get special permission like I did, to participate). She has asked me to be the token right-wing Bible-thumper, as she and almost all the students are liberal (sigh). Anyway, I posted a thought or two today on how I would change the federal income tax, if I could. I have cut and pasted my thoughts below. I would welcome any feedback.

First of all, it would still be graduated and progressive. Either a flat tax or the so-called fair tax would be significantly less progressive than we have now. I have no problem with those who make more paying a higher percentage of their income than those who make less; but I would stipulate that there ought to be reasonable limits on how much anyone can pay.

What limits? I would stipulate that there is an alternative maximum tax of an effective 33% rate. (Note--marginal rates could be higher; at the current 35% top rate, a doctor earning 400k a year still doesn't hit an effective rate of a third). This is just a matter of fairness... even if it is economcially good sense, I think it smacks of theivery to confiscate more than a third of someone's income.

Moreover, I would have a minimum nominal tax. Under the current system, many, many families (mine used to be one) pay ZERO federal income tax. (in my case it was one teacher salary, a stay-at-home wife, tithing at church, a mortgage deduction, and three child tax net tax. Even though I lived in a brick house, had two cars, and sent the aforementioned kids to PG). I would set it to where everybody pays, say $600 a year minimum.$50 a month... less than most of the "poor" spend on cable TV, and a small price to pay for the benefits of US citizenship. Moreover, I would index that amount to future tax increases. So if spending/taxs go up 10%, the poor guy feels 5 bucks worth. The notion that we can spend whatever we want and someone else will pay for it is pernicious.

But what, you may ask, about the truly poor who get things like the Earned Income Child Credit? Still do such programs, but call them what they are: welfare. Put them on the "expenditures" side of the ledger, not as a negative on the "revenue" side. I don't care if a poor family takes in more from the government in welfare than they pay in taxes. I care that they (and we) think that somebody else pays the taxes. And I especially hate it when politicians promise "tax cuts" to people who don't pay anything. That's just buying votes with stolen money.

Finally, I would design the tax code around the concept of maximum federal revenue, subject to the above principles. If an increase in rates chokes off economic growth and creates less-than-maximum revenue, then it's a mathematically bad idea, regardless of how "fair" it makes us feel. But conversely, if a cut in rates does not throw off enough increased growth to make it a net positive, then supply-siders should be against it. I feel quite comfortable in saying that JFK cutting rates from 90% to 70% was sensible, as was Reagan's cut of 70% to 28%. I am less convinced that the Bush cuts from 39.6% to 35% were as necessary (but open to convincing on that point).

Spending, of course, is a totally different topic. But in the unlikely event that we generate enough revenue to cover all expenses and have leftovers (like we did during the tech boom of the 90s), I would say that excess revenue should go to debt reduction, not as a cut back to the taxpayers (provided, of course, that my other conditions are being met).