Thoughts, essays, and writings on Liberty. Written by the heirs of Patrick Henry.

November 2, 2011

The Challenge of Creating an Economically Sound, Simpler, and More Just Tax Code (Part 2 of 3)

by Stephen Littau

Part 1

Is an economically sound, simpler, and more just tax code even possible?

The truth of the matter is that there are too many people on the Left and the Right who do not want a simpler tax code that treats everyone equally.
It’s probably not because the defenders of the existing system necessarily think the existing code is good economic policy nor does a better job funding the federal government. The most likely reasons why there is so much resistance have to do with political pandering, vote buying/special interests, and social engineering.

It’s not too difficult to figure out why the Left panders to the working poor because the poor always outnumber the wealthy regardless of how well the economy is doing overall. What would happen if there was such a tax code where everyone paid the same rate without any tax credits or loopholes and without any hidden or embedded taxes? I’m guessing it would be more difficult to raise taxes on the evil rich if it meant that everyone received the same percentage tax hike. When it comes to the tax code, equality is the very last thing the Left wants.

If there is anything I agree with the Occupy Wall Street crowd or the Left more generally it’s the special treatment politically connected individuals and businesses receive via the tax code and/or subsidies. So you say you want to get money out of politics or do something about the role of corporate lobbyists in Washington?

I do too.

The simple answer IMO is to eliminate all taxes on business and all subsidies that benefit business. If there are no taxes or subsidies, there is no reason for businesses to lobby for special tax treatment or subsidies; the main reason most industries send lobbyists to Washington in the first place. If we would like to go any further in limiting influence of special business interests, maybe just maybe we should get the government out of regulating just about every aspect of business* and restrict the government to its limited constitutional powers. What a novel concept!

Finally there’s the social engineering aspect of the tax code. Frankly, I’m not sure if those on the Left or the Right are worse when it comes to using the tax code as a tool to encourage the American people to engage in particular activities. Even with Perry’s flat tax plans, there are a handful of deductions that are sacred cows. The home interest, charitable giving, and state and local taxes are preserved for those who earn up to $500K. Those who earn under $50K can choose not to file under the 20% rate with a $12,500 per family member deduction (which would eliminate all if not most tax liability under the existing rate for those in this tax bracket). With these deductions as part of the plan, the Perry plan can hardly be called a flat tax.

While I’m critical of keeping these deductions in place (he probably could get by with a smaller rate without the deductions), it’s not difficult to figure out why Gov. Perry keeps them in place. Voters would raise all sorts of hell at the thought these deductions would go away. Maybe there’s a good argument to make that charitable giving should be deducted since these funds help people who might otherwise be on government assistance.

But the home interest deduction? Why is that held sacred? Is there some sort of right for homeowners to get a break because they choose to buy a home rather than rent? I suspect that the realtor and home building lobbies and those in government who truly believe that every person should buy a home perpetuate this notion to a point to where now home owners think they are entitled to this special treatment.

Perhaps the most sacred cow of all of the deductions is the child tax credit. This deduction is a feature of every tax reform I mentioned in part 1 (even the Fair Tax prebate is based on family size). In the last presidential debate, Rick Santorum said in so many words that the federal government should promote families via the tax code.

Is this really the sort of thing the government should be concerned with? Should the amount of taxes an individual pays have anything to do with marital status or number of dependents s/he is supporting? Is it fair to make a single person pay more taxes because s/he doesn’t have dependents?

I don’t think there is an answer that will satisfy everyone.

Part 3

*In the current climate of overregulation, an industry would be foolish NOT to send lobbyists to Washington.

Freedom is sexy, so share!Share on Facebook0Tweet about this on Twitter4Share on Google+0Share on Reddit0Digg thisShare on StumbleUpon0Share on LinkedIn1Pin on Pinterest0Email this to someone
TrackBack URI: http://www.thelibertypapers.org/2011/11/02/the-challenge-of-creating-an-economically-sound-simpler-and-more-just-tax-code-part-2-of-3/trackback/
Read more posts from
• • •
  • Let’s Be Free

    I don’t work for myself. I work for my family. A family is a different economic entity than an individual. Dependent exemptions wouldn’t be necessary if we allowed families to split up income for tax deduction puposes. Without that sensible option, the only way to go is through an exclusion or deduction.

    I agree that marriage should play no role in the tax codeone way or another. The only status issue should be minor (or otherwise economically incapable) dependents.

  • John222

    Dependent exemptions wouldn’t be necessary if we didn’t tax income. How about some kind of a pay per use tax for government services? We could have some kind of base fee for common defense with other services purchased a la carte. Can’t get a job or can’t pay, that’s fine as long as you contribute some time/labor to cover your end.

  • Pingback: The Challenge of Creating an Economically Sound, Simpler, and More Just Tax Code (Part 1 of 3) | My Blog

Powered by: WordPress • Template by: Eric • Banner #1, #3, #4 by Stephen Macklin • Banner #2 by Mark RaynerXML