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Sunday, March 11, 2012

Cleaning up the tax mess - PBS show

On March 9, 2012, PBS had four commentators, including Bruce Bartlett, address the issue - "Cleaning up the tax mess."  It is posted on the PBS website - here.

A few things I found interesting, with my commentary added:
  • The host asked what the panelists thought about a flat tax. The next question was what they thought about a consumption tax such as a VAT. The "flat tax" as promoted by Steve Forbes in the past and others, IS a consumption tax, it is not an income tax. The flat tax was created by Professors Hall and Rabushka in the early 1980s.  It is a modified subtraction method VAT. The modification is that businesses can deduct wages (but not fringe benefits). Under a standard VAT, there is no deduction or exemption for wages because wages are the "value added" by the business that are subject to tax. The flat tax allows the wage deduction to business but then taxes the wage to the employee at the same flat rate. Thus, the wages are still taxed as they would be under a VAT, but to the employee. Taxing wages to the employee allows the employee to claim a large standard deduction and personal exemptions to address regressivity of a consumption tax.  For more on the flat tax, you can see Hall and Rabushka's book (the third edition). So, when someone mentions flat tax, you should ask if they mean the Hall-Rabushka-Forbes flat tax with few deductions and an exemption for income from savings, or an income tax with only one tax rate - they are two different types of taxes.
  • A suggestion that perhaps the income tax rate structure should be more progressive - more brackets, so that someone with $250,000 of income isn't in the same top bracket as someone with over $1 million of income.  I agree.  We often hear about the top 1 or 2% of income earners, but we should really stratify this further with such brackets as $200,000, $500,000, $1 million, $5 million, and beyond up to probably $250 million. Per IRS data on the top 400 earners, the average AGI for 2008 was $270 million (that's about $31,000 per hour 24/7)! Let's move at least these 400 into a new bracket. Placing them in the same bracket and phase-outs as a single person making $200,001 (only about $23 per hour 24/7) is crazy.
  • Non-renewal of all of the 2001/2003/2010 tax cuts would address the current deficit problem.  Of course, if Congress and the President can't agree on a tax bill before 12/31/12, this is what will happen because the cuts are automatically set to disappear at the stroke of midnight December 31, 2012.
  • The system would be better with a broader base and lower rates.  YES - this helps any tax better meet principles of good tax policy, including simplicity and equity.
  • The home mortgage interest deduction primarily serves to help people who can afford a home (or even a second home) to buy a more expensive home. This is one of the more expensive tax expenditures (the cost is about $90 billion per year and only benefits the 1/3 of taxpayer who itemize deductions and not all of them even have a home mortgage). That $90 billion could be used in a way to benefit more individuals and more types of industries.
  • People running for office often say they will get rid of loopholes or tax expenditures, but usually never say any specific ones that they will get rid of. I think if people better understood our tax system and realized that they themselves and their children would be better off in the short-term and long-term with a broader base and lower rates, they would demand that the politicians be specific as to what "loopholes" they are going to terminate and then push them to do so if elected.
The PBS website has both a 22 and a 62 minute version of the show. My comments above are based on the 22 minute version.

What do you think?

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