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Reforming Reform

Tax reform is on the minds of many Republican candidates, and that’s a good thing. Donald Trump revealed a plan, suggesting he may be a serious candidate after all. This announcement came as his poll numbers were slipping, so we may have a hint what voters think about actual policies. Jeb Bush released his plan earlier this month with the distinction of being called “weird”.

The point is that we are talking about taxes and serious tax reform, which is good. No one should expect one plan to suddenly spring forward and cut through the elaborate mess we have. Then again, once the knife is out, you could carve a better tax code out of a banana. But what really is needed? What is “simplification” or “reform”? Let’s start at the beginning.

Tax reform starts at the very beginning - with "dough".

Tax reform starts at the very beginning – with “dough”.

Calls for tax simplification date back about as far as taxes themselves. Income tax has always been complicated for one very simple reason – it taxes income. What is income? Usually, we actually mean “profits” in the broadest sense, which is really income after expenses needed to realize that income, which has always been deductable. So right from the start we have a tremendous amount of confusion about what we’re actually talking about.

“Simplification” itself is a strange concept in practice as well. It generally means a net reduction in the number of rate brackets. This is a very silly thing to dwell on because it hardly matters to anyone at all. Hours are spent defining income and expenses to get profit and with the push of button any decent piece of tax software will tell you what you owe regardless of what “bracket” you are in.

Oh, it's not this bad.  It just feels like it.

Oh, it’s not this bad. It just feels like it.

It may be that people make decisions about what to buy based on their bracket, but this presumes everyone is perfectly rational and knows exactly where they are tax-bracket wise. Generally, people don’t worry about brackets around April 15 as much as they do in March when the NCAA tourney is on.

Tax reform is difficult and elusive, so let’s not presume that a big program is needed to tackle it.

Let’s start with what we have and work towards something better.  We need a system that is progressive, which is to say raises more money from those who benefit from society the most, and has systemic reform built into it.  Real simplification has to get to the heart of a successful tax code, which is to say one which raises the amount of money needed and is generally perceived as “fair”.  Beyond that?  Whatever.

It's the time spent filling out the forms that hurts.

It’s the time spent filling out the forms that hurts.

How much money is needed? The Feds take in $1.4 trillion in income tax, which is 46% of receipts. The perceived “fairness” of it, however, is another question. A majority of Americans do think the amount they pay is “fair”, which is not bad. Perceptions of “fairness” depend on more than the level of taxes anyone pays – there is also the issue of what everyone else is paying. The idea that business don’t pay their “fair share” bothers 64% of taxpayers “a lot” and the feeling that the wealthy don’t pay their fair share bothers 61% “a lot”.

Complexity, as a concept, only bothers 44% “a lot” by comparison.

Given that we spend an estimated $234 billion figuring out all taxes (individual and corporate) we do indeed have a very complex system. That’s about $2,000 per household just for “compliance”. This figure doesn’t apparently bother people as much as the perception that someone is getting away with not paying what they should, meaning that when tackling complexity, compliance cost is more of a problem than compliance perception.

Forget time - money is what really flies

Forget time – money is what really flies

Given this, the path ahead should be obvious. Tax Reform means eliminating special exemptions and deductions against income that appear to apply narrowly to only some people or business. So how do we tackle this?

Simple. Give up on the big programs and proposals and just do something.

Why not start with a simple formula – plot every possible deduction against how many people actually take it. We should quickly see what the least popular of all deductions are, which is to say those that benefit only a special interest. Exactly which ones to get rid of and where to draw the line should become obvious once we know how popular any deduction is and what it “costs” the government in revenue.

The Result?  A better tax code that raises just a bit more money while affecting the smallest number of people.

Systems like this depend on a functioning Congress, of course, and are not something that a new President can boldly take credit for. Then again, reform work is really rather dull when it’s done well. That’s the lesson the Presidential candidates are getting about now and perhaps they should heed it. In broad terms, it’s good, but in details? A snooze.

13 thoughts on “Reforming Reform

  1. Many of the complications are really hidden subsidies. Let’s be clear and honest about these.
    Hidden in much of the tax plans being floated at the moment is a something-for-n0thing emotional pitch, which adds to the confusion.
    Keep pitching for clarity through all of this. We need more rational voices.

    • Thanks! What I am proposing starts with the most basic kind of reform – disclosure. Right now, we have no idea what special tax breaks there are and how much it costs us. There simply isn’t a table. Compiling one that shows all the breaks, including the relatively rarely used ones, will demonstrate the problem.
      I think from there it becomes easy to keep the tax code simpler. Right now, we really don’t know all the details.

    • It does, but disclosure alone helps highlight just what the problem is. It appears that voters, on balance, actually get this pretty well. So let’s give them the information needed to hone their objections and then we can take action. A functioning government? Only if people insist. 🙂

  2. It IS all about the definition of income and expenses! Nothing else is important. What makes a good accountant is an understanding of what is deductible under certain circumstances as a legitimate expense. The more receipts a client can provide the better!
    I support this because when I read the bulletins I always wonder how many people will be able to take advantage of a situation mostly because the rare ones are the red flags for an audit. That doesn’t mean you shouldn’t take them but it does mean you have to be very careful.

  3. There is no doubt that a rational government could do a lot of rational things. You don’t have to give us examples. The trick is getting government that is rational in the first place.

  4. For example, the tax credits for wind and solar electric. Obviously this shifts the costs to some extent, but most people would probably agree the goal is desirable if not essential. But what about similar cost-shifting tax subsidies for oil and gas (“depletion allowances,” etc). Not good public policy but the public might support them if they were thought to lower retail fuel prices…. I agree it would be very interesting to see the consequences comprehensively racked up.

    • I would prefer if we didn’t put that stuff into the tax code and instead had instant rebates handled separately. I know that sounds like a trivial difference, but I do think that a certain purity in the tax code is important. People need to feel that it really is fair and that there aren’t breaks being given to people for bad reasons. The cleaner we can keep it the better the perception – and the harder it is to genuinely hide things that only benefit a few.

  5. Pingback: Paint the Map Blue! | Barataria - The work of Erik Hare

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