Flat Tax? 9-9-9?
Is this the year when a scrap-and-rewrite of the tax code will finally come to reality? It seems like a rite of passage in the Republican primaries for at least one less-popular candidate to get attention by announcing some version of tax simplification. This year we've got two. Herman Cain started the fun with his 9-9-9 tax proposal. Rick Perry is now trying to resurrect his campaign with a more "traditional" flat-tax proposal.
I can't imagine either plan ever being enacted, even in a modified form, and I'm not at all sure I would want either one, or anything like them. But, I've had a difficult time clearly understanding my hesitancy. Scott Adams (he of the Dilbert comics) helped me out today with a post on his blog.
Flat Tax
The quote that really stood out to me:
"I think most people like the idea of a simpler tax code. No argument there. But I've never met a person who would volunteer to pay higher taxes in exchange for simplicity."
He goes on to explain that these ideas play on a vague impression many of us have that the rich in our country pay a lower tax rate than the middle class, because they find some way to trick the system. That may be true for a few, but it is probably not true for most.
If we are going to simplify the tax code, I think we need to do it gradually over about 20 years, systematically removing tax exemptions, addon taxes, and other tax complexities, and compensating for each change with slight increases in the base tax rates.
Adams also makes a great point about the use of the word "fair", and how both sides of the argument use it for their own purposes. It has not real meaning in itself (it means whatever the hearer thinks it should mean), but it carries great emotional power. That gives it a unique power to be divisive.
What do you think? Do you have a great suggestion for revolutionizing our tax code? How would you define "fair" taxation? Flat tax? Progressive tax? Something else?
Mark
22 comments:
Great topic and questions, Mark! Unfortunately for you all, I have much to say on this subject! :-)
(1) Scott Adams has surely met people who would pay higher taxes for a simpler system. In fact, I suspect that he is one of those people.
There are many costs to tax complexity: time, effort, money paid to accountants and lawyers to meet (or avoid) the rules and regulations, etc. At a minimum, people would much rather pay that money as taxes. That is wasted money. This doesn't even consider the money saved by the government in managing and enforcing the regulations.
(2) In the sense that taxes pay for police and perhaps appeasement, taxes do reduce the odds that jealous mobs will kill Adams, but the question is: are taxes the best way to accomplish that and if so, how high should they be? Surely there's a limit, even for Adams.
That's where "fairness" comes in. Assuming for the moment that taxes are the best way to accomplish all the services that government provides, what is a "fair" price for those services?
The problem with answering that question is that people value the services differently. Adams thinks he's paying a fair price at the moment. Others don't. Value is ultimately subjective. That's why Adams calls "fairness" a "fairytale", but it is not.
The free market handles the dilemma of subjective value beautifully: each person decides for themselves if they'll trade and what for what. A "fair" price might then be approximated as the average of what everyone pays for the same service.
But government doesn't work that way. It is coercive. It takes taxes and spends it as it sees fit. We don't individually decide each trade -- at best it is decided by a majority of representatives (always dissenters in the represented), and at worst, one person in charge decides for everyone else. In a democracy!
That is why government is fundamentally worse at aggregating individual interests and determining value than the free market: the granularity of the decisions. That is also why a Stimulus is inherently a bad idea.
Between the government's deficiency in aggregating interests and its moral deficiency of being based upon coercion, we have a powerful argument that the government should be as small and limited as possible. Adams's trap is assuming that because the government may be justified to take his money for a common defense that it is justified to take his money for any reason and that it is put to good use.
(3) I cannot imagine the government simplifying the tax code over the course of 20 years. Maybe I'm wrong, but I see a steady entropy of the limitations of government and a massive growth. Regulations and the powers of bureaucracy have increased over time (Frank Dodd, the upcoming FDA ban of supplements, etc. come to mind).
There is a fundamental failure of the public philosophy of government and economics. I see glimmers of change, but I'm not sure how swift it will be. I'm actually a little concerned there will be a tipping point with a semi-cataclysmic reversal that will muddy its perceived value.
(4) IMHO, a "fair" tax would mirror the free market. e.g. defense should be a percentage of property defended, likewise for a fire department, but only if you own property they protect, roads if you use them, etc. Morally, I don't think the federal government should coerce charity; that also confuses value.
(5) I haven't studied the details much and I haven't calculated the actual cost of complexity or the more subjective value of smaller government, but I lean toward 9-9-9 or a Flat Tax over the current system. Between the two, I'd probably pick Flat Tax because it is simpler and doesn't open up a Sales Tax revenue stream to the federal government. That said, I'd probably pick Cain over Perry.
Phew! :-)
Kevin
How would should we define fair? I would say that it should be a progressive tax system in which deductions and credits are minimized. Right now, we have an extremely progressive tax system with tons of loopholes which make hiring tax attorneys and gaming the system profitable. It is also so extremely progressive that only about half of taxpayers actually pay anything in income tax. People who get screwed tend to be young, single people in expensive housing markets. They can make up for this and turn it into a very profitable trade by not having kids and free-riding on others in their elderly years, but that has its own non-monetary costs.
While phasing things out over time seems ideal, I'm with Kevin in that I don't see it as feasible.
Also, I don't think a plan that makes tax rates for the rich go down on average while raising average tax rates for the poor is feasible or just. Cain's plan clearly punishes the poor and lower middle class while cutting average rates for the wealthy by a bunch. In order for tax reform to work, one needs to:
a) eliminate deductions to the point that way more than the current 50% of the population pays taxes.
b) Keep *average* tax rates for the wealthy and middle class ($75k+) at least what they currently are, and preferably raise them for the wealthy and upper middle class ($100k+).
c) Get control of spending. Any tax reform that leaves a massive deficit years later will be an overall failure.
Anything tax simplification will be very difficult, though. As you point out, people are all for simplification until it costs them money. As complicated and convoluted as our system is, there are huge discrepancies between what households of equal income pay. There will be a ton of losers in this effort: they will understandably hate it and want to vote out the politicians who raised their taxes.
Much of our tax complication involves social engineering: child care credits, charitable deductions, tax free hsa accounts, Roth and traditional retirement accounts, child credits, R&D credits, higher education credits, clean energy gimmicks and numerous other gimmicks to give tax breaks to businesses with expensive lobbyists. Cutting these will be tough, and may not in all circumstances be wise. In some ways, it is simply reflective of how the social engineering we accomplish through tax expenditures and federal wealth transfer programs. Do we really want a system in which the elderly get 40% or 50% of all tax expenditures and parents don't get any breaks? That is a perfect recipe for encouraging free-riding: social engineering at its worst.
Ultimately, though, any fight over our tax system is just another side show if we can't figure out a way to reform medicare and other generational wealth transfer programs. Also, didn't we reform the tax code back when Reagan came to office? As long as bought and paid for politics is the norm, any reform will be short lived and used only for the next election's sound bites.
If I sound cynical and pessimistic, it is because I am.
Sorry for the lack of editing. No time.
After looking a bit more closely at 9-9-9, Doug, I think you are right. 9-9-9 doesn't look balanced well in the steady state. It is seeming more like a gimmick than a good plan.
Here's Peter Schiff on a couple of related issues:
Herman Cain's Hidden Nine
Debunking Warren Buffett and other tax myths
Kevin
Kevin,
I see Schiff's point, to some extent. However, these deficits are being driven (by and large) by promises made to seniors by lying and ignorant politicians. It would be unfair to place the burden on any given generation, which is why I think my taxes should be raised. That said, the problem is going to be making seniors understand their 1.5 children can't afford to pay for their medicare out of pocket on an aggregate basis, not the other way around.
http://www.hoover.org/publications/policy-review/article/7123
I agree: the problem is bad promises. We should abide by our current bad promises, but we need a way to phase them out in the future. The question is, to what end?
Doug wrote: "It would be unfair to place the burden on any given generation"
Does that include the generation that benefits? IMHO, that is where the burden should be. More specifically, the actual people who benefit. Not now, but throughout their life. You pay for your own retirement.
If SS is merely forcing people to contribute to their own retirement, it sounds reasonable (well, other than the "forcing" part). But when SS was introduced, this would have created a delay in benefits, which is unacceptable: the People want benefits and the politicians want to give it to them. There's a nice and utterly destructive symmetry there that epitomizes the problem: the government has become the preeminent means to getting what you want, because it is uniquely coercive.
The other part of SS is charity. I do not believe that charity is best administered by government, because it results in entitlement rather than gift. It results in resentment rather than personal responsibility and obligation. It results in rewarding the _need_ for charity. The government is centralized and macro rather than decentralized and micro, and its attempts at micro control produces a whirlwind of bureaucracy or a failure of checks and balances, often both.
Society has an obligation to charity, but government does not, because its only unique characteristic is the authority to coerce. If the People are unwilling to separate charity from government at this point, then I advocate that we at least separate charity within government -- make it clear what is charity and what is truly entitlement.
Your link has led me to reflect on "radical individualism" as compared to my perception that collectivism has increased. Do you see the collectivism, too? If so, what do you think it means that "radical individualism" has accompanied a "radical collectivism" in federal government?
I believe they are intimately related. In fact, I think that the failures of individualism that they see, subtly depends upon the collectivism that I see.
Kevin
Kevin, I'm a huge fan of changing SS to a defined contribution type plan. However, we can't do that for the boomers, and they are the people I was referring to when I said we can't just place the burden of their lack of savings entirely on either them or their children/grandchildren. They are too far down the road, and most of them have practically nothing saved for retirement. The median retirement savings amount won't even pay rent, let alone buy food and healthcare.
http://www.washingtonpost.com/wp-dyn/content/article/2009/05/06/AR2009050603322.html
Ultimately, families need to get used to the idea of parents spending their elderly years with their children and saving a whole heck of a lot more to do that in moderate comfort. This fantasy of financial independence based on non-existent personal savings and government mandated generational wealth transfers is nutso. The boomers had far fewer kids than their parents and did a horrendous job educating them on top of that. If there are only 2 people working for every retired person and a third of those working are high school dropouts, such a system is designed for failure. The money just isn't there....
But, that said, is it politically feasible or just to simply scrap those programs that provide for the elderly poor? I don't think simply cutting back benefits to what we can afford at current tax rates is either beneficial or just to those who believed the lies politicians sold them. Too many people would be out on the street or sitting in some ghetto apartment eating dog food. In the libertarian world, old people would pay 100% for their lack of savings and naivete in believing the lying bastards at the AARP. Personally, I think that some of the burden for the boomers running this country into the ground should be born by future generations, both personally (through parents moving in with them) and collectively (through higher taxes). What % of the unfunded liability should be paid for by tax increases vs. benefit cuts is up in the air. I would personally place 50% to 2/3 of the burden on the elderly who ran the country into the ground in the first place, but I'm a firm believer in shared sacrifice and don't think that their kids (i.e., our and our kids' generations) are totally off the hook).
Kevin, I definitely see the two extremes of radical collectivism and radical individualism as interrelated and coming to the fore. I'm reminded of a quote from an article I read this morning, "Even capitalism itself, Diane took from Tocqueville, thrives when it is supported by a culture of virtue, a culture open before the judgment of a transcendent God. Capitalism’s corruption erodes the institutions of democracy."
http://www.firstthings.com/onthesquare/2011/10/donrsquot-confuse-the-common-good-with-statism
People are astoundingly selfish creatures. They will abuse almost any system, if given half a chance, especially if they don't believe there will be repercussions. I was recently involved in a lawsuit where 80% of the people with even the most minor financial stake in the case perjured themselves under oath. I was dumbfounded by that. If that is representative, then most people clearly don't believe in a just God or Karma that might repay a person for perjury when money might be involved. If that is the case, what won't people do? There isn't an economic or regulatory system in the world that can contain people's greed and keep them from fucking over future generations and the vulnerable either through radical individualism or radical collectivism. Some systems are better than others, but all are bound to fail and to fail miserably when virtue is lacking. People are looking for a scapegoat for a disfunctional political and economic system, and they are much more eager to blame an economic system than their own personal and collective lack of virtue.
I agree, we can't just cut off the boomers, and we all will sacrifice for it. I don't know how to apportion the remaining financial burden, so I don't really object to your way. Probably the first thing to do is raise the retirement age, then make participation optional, and then phase it out completely for the youngsters.
I don't know what is politically feasible, but I think political feasibility is changing and will change further as we slowly approach catastrophe, so we might as well advocate for what we think is right.
In the libertarian world, old people would probably not pay 100% for their lack of savings and naivete. They would rely on their children, churches, and other charity. I know you know this and even state as much, but it bears repeating. Removing the coercive "certainty" of government funds (70 cents on the dollar on average for SS at the moment, iirc) does not eliminate charity, though it may seem to make it less certain.
I agree that without virtue, every system will deteriorate to chaos, though some handle it better than others. A lot of people seem to think that capitalism is about greed, but capitalism is just the freedom to choose. The brilliance of capitalism is that it works even if people are selfish. It is most remarkable and I think it says something special about free will.
The court case you cite does not appear to be a failure or corruption of capitalism to me, but rather a failure or corruption of government. i.e. it sounds as if, based upon perjured testimony supported by the courts, the government will compel an unjust outcome.
Kevin
Kevin,
You are certainly correct that the absence of government does't mean that people are defacto without recourse. However, people have structured their lives based on the false assumption that they can live out their elderly years in independence supported by the government. Many of them don't have children or churches to fall back on, almost none have close to adequate retirement savings and charities are not set up to support them. Private charities haven't taken the lead in helping the elderly in a significant way for over a generation, so any change (especially a drastic one caused by denial and delay) will result in a lot of people falling through the cracks. If the government cannot support the elderly, there are no private organizations capable of carrying that burden. Poverty used to be evenly split between children and the elderly. Nowadays, poverty is primarily the domain of children and young families. It will be quite the culture shock when this pivots again to historical norms. Society isn't structured to absorb this burden in at the community level. This much is certain about the end of SS and Medicare at current levels: lots of elderly will once again go hungry and live shorter, less productive lives. Many will rue the dissolution of their families which will leave them without reliable assistance: dependent on the fickle, inadequate charity of strangers.
Regarding the court case, the judge wasn't corrupt that I can see. So much of what happens in a court of law is one person's word against another's, with lawyers thrown in to twist people's words and meanings around and add further confusion. Probably an extremely wise and intelligent judge could have seen through all the lies and perjury, but maybe not. Incidentally, there was even a land-locked neighbor who needed me to win and was on my side who perjured himself in order to "help me out." It is hard to expect our judicial system to come to just decisions when lying, deceit and perjury are endemic among the people arguing their cases before the court.
I agree entirely, Doug; I'm sorry if I was confusing. The transition will be extremely hard. Families, private charity, and society as a whole will have to adapt.
I was more focused on the steady state -- that a population can morally exist without having the government provide SS.
I agree with you about the court case, too. My point was just that the failure seems inherent in the judicial system (can't really be helped) rather than being relevant to capitalism. I see now that you weren't even implying that it was relevant to capitalism. Sorry for the confusion.
btw, just to be clear regarding "radical individualism", what I meant is that for the major "radical individualisms" there seems to be a "radical collectivism" that actually underpins and supports it.
Of course, it is collectivism that underpins and protects our individual rights, such as due process, etc. but those are not considered "radical" (at least for citizens).
e.g. Roe v. Wade enshrined the freedom to abortion, but when it was enacted, it was "radical" because it was not a result of a 2/3 vote of the states to impose on the other states. It was a result of SCOTUS unilaterally removing power from each state on the basis of a new interpretation of the Constitution that did not previously exist.
I don't mean to get into the question of whether abortion should be a natural right or not or whether it can even be enforced, but rather to point out the radical collectivism involved in forcing that decision upon a population.
Kevin
"btw, just to be clear regarding "radical individualism", what I meant is that for the major "radical individualisms" there seems to be a "radical collectivism" that actually underpins and supports it."
That is a more complex thought process than the one I was on. Thanks for clarifying. I need to chew on it a bit to understand it better.
"I was more focused on the steady state -- that a population can morally exist without having the government provide SS."
Thanks for clarifying. Agreed, though it will be even more difficult in the future steady state than it used to be given the decline in family size and the skyrocketing percentage of childless adults.
Personally, I think that spending approximately 30% of our income in taxes is an awful lot. I'd really like to see government cut control and expenses and find ways to make programs more self-sufficient to the point that people would be spending an average of 10% of their income in taxes, and the government was focused and efficient enough to do what needed to be done on that and leave off with the excessive regulations and control that eat up so much of their funding.
A pipe dream, I know. :)
PK,
Are you suggesting that tax cuts are in order? How do you propose accomplishing that when federal spending on what the government considers "human resources" currently exceeds government revenue?
Human resources consists of Education, training, employment and social services; Health; Medicare; Income security; Social security; Veterans benefits and services. Of course, the bulk of that money is for medicare, medicaid and social/income security and in the long term health care spending is expected to eat up pretty much the entire budget. I just don't see how we can do that as long as society takes the view that "civilized countries don't let people die." We either need to raise taxes significantly or gut programs like Medicare and Medicaid; eliminating benefits like universal dialysis for everyone with kidney failure.
I summarized some key tables from the GAO historical budget tables for your reference if you want to check things.
https://docs.google.com/spreadsheet/ccc?key=0AhHbnaRWKe2ndGlnWGEzRE5WWTE4ekFJMUxyeG90dXc
original source: http://www.gpoaccess.gov/usbudget/fy11/pdf/hist.pdf
Thanks, Doug. I got an error message when I tried to load the document. But I can tell you that this isn't actually an issue I've studied or thought through super thoroughly, so it's probably good for me to be challenged to consider and read about it a bit more. :)
I don't really have a specific plan or theory, except that I think the government tries to do far too much, and we'd be better off with more privatization and less control/babysitting by the government. There are so many things that can be cut even before things like social security and Medicare, which people paid into with the expectation that money would be used for a specific purpose. So many resources go into things like monitoring and prosecuting ordinary citizens for minor infractions with what they do with their own property (like tracking down and confiscating lemon trees, the USDA prosecuting and attempting to fine the Dollarhite family nearly 4 million dollars for selling rabbits without a license and making a whopping $200 or so profit, prosecuting people for drinking raw milk from their own cows, prosecuting folks for selling or giving away animals on public property (this is literally defined as animal cruelty in some areas), sending inspectors out to make the people at Quail Hollow Farm pour bleach on their farm-fresh meal prepared by a professional chef, the micromanaging of what goes on in areas far from navigable waters by the EPA, etc.), subsidizing things that I think shouldn't be subsidized (like soy and corn production by big companies), and pouring money into things outside our own nation.
PK, I totally agree that government does way too much. However, most of the things you listed and which we both find so offensive don't actually cost all that much to implement on the expenditure side of things. One could argue that we would get a lot more economic growth without that interference, but that isn't always clear.
In case you are interested in reading more, I'll experiment with an actual html link here.
As Doug implies, I'm curious what you think of the big expenditures, PK, like SS, Medicare, Unemployment "Income Security", Defense, etc.
I'd be happy to get rid of the bulk of "Human Resources", but it also seems strange to me to include things like SS in expenditure metrics since the government is like (or should be) a pass-through for those funds. We could push all our income through the government and they could give it back to us and suddenly that would be its biggest expenditure! That doesn't seem quite right.
And it's not like they are adding any real value for those funds they lose in the pass-through. I mean, at least in exchange for funding defense or the regulations we lament they are ostensibly DOING something.
"I'd be happy to get rid of the bulk of "Human Resources", but it also seems strange to me to include things like SS in expenditure metrics since the government is like (or should be) a pass-through for those funds. We could push all our income through the government and they could give it back to us and suddenly that would be its biggest expenditure! That doesn't seem quite right."
Kevin,
The government rarely does anything other than act as a pass-through. Your reasoning would make more sense to me if SS was set up like personal savings accounts. However, as long as the government is simply redistributing wealth from younger (less wealthy on average) people to older (more wealthy on average) people or from healthy to sick people, it seems fitting to me that it should be counted as an expenditure. Even when the government provides retirement for civil servants, that is analogous to a private company funding a pension, and is included as one of the companies expenditures. The only time companies can take retirement expenditures off the books is when they push that function onto the individual through the employees' contributions to 401Ks and IRAs.
Hehe. :) You are right, Doug, it certainly is an obligation that must be tracked as a liability. And you make a fascinating point about SS transferring money from the (generally) less wealthy to the more wealthy. It also occurred to me that SS has helped to dissolve the integration of (extended) family by keeping parents and grandparents independent longer. Our culture has adapted to it, just as it has adapted to other welfare.
You're also right in identifying the reason for the strangeness I see -- the General Fund. But SS is paid into a Trust Fund that keeps it separate: it seems intended to be an independent program in that way. However, when the Fund purchases Treasury Bills the US is essentially bringing those funds into the General Fund. Of course, the SS Trust Fund doesn't have to purchase T-Bills, but it is run by the Treasury. It's crazy.
"Of all tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive. It would be better to live under robber barons than under omnipotent moral busybodies. The robber baron's cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end for they do so with the approval of their own conscience."
-- C. S. Lewis
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