More on Tax Progressivity & Complexity
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Two follow-ups to my previous post on the Alternative Minimum Tax as a case of "stealth progressivity" --
ITEM: The working poor tend not to have high state and local income or property taxes (e.g., if they're renters, then they have zero property taxes to deduct). So Congress and the IRS have invented phantom state sales taxes for lower-income filers to deduct:
Now of course the rich, with their yachts and Hummers, would almost never come out ahead from this new deduction, even in those states with no income tax. Only filers with little or no state income tax or property tax will benefit from this new sales tax deduction -- it's one or the other. So of course it's the working poor who will qualify.
And there's absolutely nothing wrong with that. I'm the kind of libertarian who thinks that any reform that reduces anybody's taxes is a good thing. A dollar less tax paid, whether by me, or Bill Gates, or a minimum-wage bricklayer in Nevada, is to be celebrated.
On the other hand, let's be intellectually honest about whom this change is for and how it will impact progressivity of the federal income tax burden. And let's not turn around and say, after we've implemented yet another way to ease the tax burden on lower-income households, that it's fair on top of that to then say that higher-income households should still be required to pay "just a little bit more -- they can afford it."
That's two bites at the progressivity apple, and it's not fair.
ITEM: People who like to argue for a flat tax or a consumption tax similarly miss the point about the balance between the relative tax burden (i.e., progressivity) and the total tax burden (i.e., fiscal leviathan). Samizdata puts it succinctly:
Indeed. The same goes for the (misguided) advocates of a consumption tax -- would a national sales tax be such a good idea if it were set at 40%? And of course a consumption tax would, either initially or eventually, also include progressive elements no different than the income tax. Elements that would likely escalate over time. Do you really think politicians will allow food, clothing, diapers, rent, college tuition, etc., to be subject to a national sales tax, either at the outset or for very long?
Look at some of the complex rules at the state level regarding what is and is not subject to sales tax (e.g., soda is taxed but juice is not, hot dinners sold by supermarkets are taxed but frozen dinners are not, bowling shoes are taxed but tennis shoes aren't).
Bottom line, don't be seduced by the "simpler is better" siren song. Lower is better. And simpler does not guarantee lower. And simpler never lasts anyway. So what's the point?
Cut out the middleman. Worry less about tax simplicity and more about tax burdens. Choke off the fiscal leviathan entirely, and egregiously excessive tax progressivity will wither on its own.
Related Posts:
Alternative Minimum Travesty
More on the Deductibility of State & Local Taxes
On Property Taxes and Assessments
Sales Taxes and "Helping the Poor"
Red Tax, Blue Tax
ITEM: The working poor tend not to have high state and local income or property taxes (e.g., if they're renters, then they have zero property taxes to deduct). So Congress and the IRS have invented phantom state sales taxes for lower-income filers to deduct:
[A] new deduction, available in 2004 and 2005, lets taxpayers deduct state sales taxes in lieu of state income taxes if it helps lower their tax bills.
...
To figure your deduction, you can use a table provided by the IRS or add up the sales taxes paid in 2004.
...
Justin Ransome, a senior manager in private client advisory services at PricewaterhouseCoopers, said the benefits may be rather limited for taxpayers in states with income taxes.
...
"If you bought a couple of Hummers and a yacht with your disposable income, you might very well find that the sales tax deduction is a better bet for you," said Jackie Perlman, a senior tax research coordinator at H&R Block.
Now of course the rich, with their yachts and Hummers, would almost never come out ahead from this new deduction, even in those states with no income tax. Only filers with little or no state income tax or property tax will benefit from this new sales tax deduction -- it's one or the other. So of course it's the working poor who will qualify.
And there's absolutely nothing wrong with that. I'm the kind of libertarian who thinks that any reform that reduces anybody's taxes is a good thing. A dollar less tax paid, whether by me, or Bill Gates, or a minimum-wage bricklayer in Nevada, is to be celebrated.
On the other hand, let's be intellectually honest about whom this change is for and how it will impact progressivity of the federal income tax burden. And let's not turn around and say, after we've implemented yet another way to ease the tax burden on lower-income households, that it's fair on top of that to then say that higher-income households should still be required to pay "just a little bit more -- they can afford it."
That's two bites at the progressivity apple, and it's not fair.
ITEM: People who like to argue for a flat tax or a consumption tax similarly miss the point about the balance between the relative tax burden (i.e., progressivity) and the total tax burden (i.e., fiscal leviathan). Samizdata puts it succinctly:
[A]rguing ... mere flatness is not the point. Just having a flat roof to the graph is a hideous compromise. It must be flattened until it is zero-height roadkill.
Indeed. The same goes for the (misguided) advocates of a consumption tax -- would a national sales tax be such a good idea if it were set at 40%? And of course a consumption tax would, either initially or eventually, also include progressive elements no different than the income tax. Elements that would likely escalate over time. Do you really think politicians will allow food, clothing, diapers, rent, college tuition, etc., to be subject to a national sales tax, either at the outset or for very long?
Look at some of the complex rules at the state level regarding what is and is not subject to sales tax (e.g., soda is taxed but juice is not, hot dinners sold by supermarkets are taxed but frozen dinners are not, bowling shoes are taxed but tennis shoes aren't).
Bottom line, don't be seduced by the "simpler is better" siren song. Lower is better. And simpler does not guarantee lower. And simpler never lasts anyway. So what's the point?
Cut out the middleman. Worry less about tax simplicity and more about tax burdens. Choke off the fiscal leviathan entirely, and egregiously excessive tax progressivity will wither on its own.
Related Posts:
Alternative Minimum Travesty
More on the Deductibility of State & Local Taxes
On Property Taxes and Assessments
Sales Taxes and "Helping the Poor"
Red Tax, Blue Tax
All Related Posts (on one page) | Some Related Posts:
Posted by KipEsquire on
23 February 2005
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