An Open Cynical Response to Jason’s Call for Tax Simplification

Jason lobs a volley across the bow of the good ship Progressive:

[W]hy should it be a progressive cause to simplify the tax code? Because every dollar that is spent on help deciphering the tax code is, in effect, payment of a hidden tax. Call it the Complexity Tax β€” and it falls heaviest on those at the bottom of the income scale, since they can least afford to shell out $50 on a copy of TurboTax.

He spares time for a few pot shots at “conservatives”–or rather a small, tiny, disenfranchised subset of conservatives and we proud, happy few libertarians who keep the torch of economic liberty from being completely snuffed out in the current bullshitstorm–because if progressives aren’t careful, these “bozos” will get there first and have their filthy way with Lady Liberty:

Conservatives have already sussed this [frustration with the current tax system] out, and are pushing alternatives like the “flat tax” and the so-called “FairTax” — both of which lighten the burden on the rich and increase the burden on the poor. In doing so, they’re following the time-honored GOP tradition of bait and switch, using people’s frustration with the complex tax code to try and convince them to accept a regressive system that would fall hardest on those who can least afford it.

He then closes with a cris de coeur for progressives to repent, lest they lose, well, progressivity:

It’s possible to envision a tax system that is both simple and progressive, with taxpayers falling into a few broad tax brackets based on their gross income, and with many, many fewer deductions. It can be done. But will we do it? Do progressives have it in them to stand up for the little guy?

My friend Oscar takes him to task for his comments on flat taxen:

Isn’t having separate tax brackets what got us into this overly complicated tax mess? And New Zealand has found that having a complicated tax code doesn’t really gain them more “Fairness”. I’m sure you’ve already seen this but it’s worth a read:

http://www.economist.com/displaystory.cfm?story_id=3860731

Pa! Pshaw! Fiddlesticks! Quoth Jason:

No. Having a zillion deductions is what got us into this mess. Determining whether or not you qualify for deductions is where you get into the weeds — gotta have rules for each and every one of them. (Not to mention that industries and interests love to get deductions written in to benefit themselves.)

And now what started as a comment (the above repeated here for Ginger, who doesn’t like to follow links) has become a post unto itself:

And why do we have a zillion deductions?

To quote Steven Landsburg:

Most of economics can be summarized in four words: ‘People respond to incentives.’ The rest is just commentary.

I’m still puzzled why, especially after seeing research such as that in the piece Oscar linked to, progressives insist on calling flat taxes “regressive”. They are neither progressive nor regressive–they are flat. Social security taxes, to which progressives cleave as to life itself, are regressive. VAT and sales taxes are regressive, because poorer people spend more of their income–yet many progressives find those more palatable (though some because they are under the fiction that corporations pay for VAT taxes, not consumers–corporations and businesses never, ever pay taxes. They just collect them from the consumer in higher prices and pass them along to the government, minus a management fee.)

Actually, all income-based flat taxes are progressive. The usual straw man of a flat tax is a family of 12 making $10,000 a year will pay $2000 in a 25% flat tax scheme. But every income-based flat tax provides a basic exemption, generally up to the poverty level. So if the poverty level is, say $18,000 a year, and a family of 4 lives off $20,000 a year, they will pay not $5,000 but $500 in tax at a 25% flat tax rate.

In other words, the total income tax on them is actually 2.5%.

Now let’s say you’re COO of a hip technology company, and you make $150,000* a year and are taxed at that scheme. You’ll pay $33,000 in taxes…an effective rate of 22%.

Now that I’ve demolished the “flat taxes aren’t progressive” argument, let me tell you why neither conservatives nor progressives — not even a libertarian government — will give you tax simplification of any stripe.

Incentives.

Right now, Jason and I pay a lot more in taxes than, say Oscar–at least on overall household income. That’s because Oscar is married and we’re not. Sure, he pays more on his individual salary, but that’s because his wife the rocket surgeon has a salary that pushes them collectively into a higher tax bracket. If Oscar made as much when he was single as they do together now, he would have paid a LOT more in taxes on that income. The so-called “marriage penalty” is actually a subsidy.

So, are you going to be the progressive who comes out against marriage? I thought not.

Another break Oscar gets is a subsidy on his housing. He is a homeowner, while Jason and I are renting slobs. Homeowners get to deduct the interest on their houses. Tax simplification would mean eliminating that deduction.

So you’re against home ownership now? You know, you’re going to tell the majority of likely voters that you’re going to overnight make their homes–overpriced to begin with and over-leveraged to the hilt and then some–more expensive to own?

I didn’t think so, either. And those are just two of the zillions of worthy goals you’ll have to argue against in your quest.

The problem is that progressives and conservatives love to tinker with society, and it’s so easy to do so through the tax code. After all, any economist will tell you that the surest way to piss off a customer is to raise prices on them while holding them the same for another customer. If you want to encourage more of one type of customer and discourage another, you have to introduce discriminatory pricing–but how can you do it without pissing off your customers/voters?

By raising all prices and offering a discount. Then people say, “Well, OK, I’m not getting the discount rate, but I’m not being charged extra.”

If you want to affect behavior, you have to offer incentives. It’s death now for a politician to offer handouts directly (with the exception of pork, which is only to their own district/state) to an entire class of people, but a break on their taxes? Well, what a nice guy!

For the politician, the incentives work the other way. How can you achieve your social goals while staying in power? Spend money. How can you raise more money while not getting voted out? Identify key constituencies, give them a break, and raise taxes otherwise.

This is why I think a libertarian government would last only about three months longer than the GOP did before betraying all the principles they claimed to hold and playing the DC power game–it’s just too easy, and the rewards are just too great.

Without a post-communist-transition-sized fiscal crisis, you will not see dramatic tax simplification in this country. Period.

* I have no idea how much Jason makes.

3 thoughts on “An Open Cynical Response to Jason’s Call for Tax Simplification

  1. First off, I don’t make anywhere near $150,000/year. But it’s nice to know people think I might πŸ™‚

    And I think you’re right that it would take a dramatic fiscal crisis to prompt tax simplification (which is why it’s only happened, for the most part, in the countries that threw off Communism in ’89). Though we may be on our way to such a crisis ourselves, if current patterns hold.

    Now for the quibbles.

    “Actually, all income-based flat taxes are progressive.”

    Not so. As you note, many of the “flat tax” schemes make a nod towards progressive values by exempting earnings below a certain amount — typically the poverty line (which is absurdly low, but for the moment let’s run with it).

    The problem is how many of these plans define “income”. For the most part, they define it as “earned income” — i.e. wages. But this by definition exempts what you might call “unearned income” — income from investments, for example.

    Now, if you’re in the top tax bracket, how much of your income do you make from salary, versus investments? (Note: even if I made $150,000 year, I’d hardly be in the top tax bracket. In fact, I wouldn’t even be in the second highest bracket, which starts at $150,150.)

    In other words, the “flat” tax is only fair if you look at wages. Looked at from any other perspective it’s a way to provide a permanent loophole for the rich.

    (Caveat: maybe there’s a flat tax proposal in Latvia or somewhere that addresses this. I’m no expert in Latvian taxes, so I can’t say. I’m speaking only of the flat-tax schemes that have been floated in the USA.)

    “If you want to affect behavior, you have to offer incentives.”

    So what if you are willing to give up using the tax code to affect behavior?

    That was my whole point — that a million individual efforts to create good outcomes have aggregated to create a bad outcome.

    The key thing about the whole “incentives affecting decisions” thing is that I don’t think they _really_ do, at least if you’re talking about tax breaks. People aren’t as rational as economists say they are. I know lots of people who’ve gotten married, and I can’t imagine that any of them started that discussion with “Hey, honey, you know what would save us money on our taxes next year?”

    “So, are you going to be the progressive who comes out against marriage?”

    Hey, I’m not running for anything so I can afford to tell the truth πŸ™‚

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  2. ok – so you define income as wages + interest + investment income. Do we still need 5 different tax brackets? Having different tax brackets is an incentive to lower your reported income(s) or not declare it at all.

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  3. OK, so you’re the progressive coming out against savings and investment. Good luck, there. πŸ˜‰

    Seriously, if taxing dividends and interest is what it will take to get a flat tax through, that doesn’t particularly bother me (I might prefer taxing it when liquidating to prevent someone thrown out of work from having to cash out savings just to pay taxes, and then counting inheritance as “income” to prevent it from being completely uncaptured).

    As to a million individual efforts creating a bad outcome, no argument here–but my point is the logic of how it got that way isn’t going away soon, and this means millions of people have a vested interest in the current system. You’re being bit by the same thing that frustrates me in trying to get a fairer economy put into place: people would rather be overall poorer but relatively better off than overall richer but have the guy next door make even more. They’ll put up with the shitty system as long as they think they’re getting a break that the other guy isn’t getting. We’re petty like that, we semievolved simians.

    As far as incentives affecting behavior, you need to look up “on the margin”. No, not everyone will assume that marriage is a bad or good idea, but someone living together might decide to live together longer or might decide to get married sooner depending on the tax advantages. It affects enough people that it tempts politicians to play with the tax code to get their jollies.

    Similarly, graduated tax brackets won’t affect everyone, but it will affect people on the margin–or they will behave as if it affected them that way. Russia saw its compliance rates go way up after introducing their scheme, so clearly the only question is not whether it affects income reporting, etc., as Oscar mentions, but how much at what levels.

    Furthermore, the “rational actor” hypothesis doesn’t really matter if it is true or not, so long as in the aggregate people behave as if they were rational. It doesn’t matter if you decide your computer purchases based on whether or not you think it will impress Katrina vanden Heuvel’s pet cat–if yours and my and Oscar’s decisions taken together resemble a rational calculus based on our individual situations, it works well enough for economists to figure out what the market is doing.

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