A reform oriented ruling class will seek reform is the areas they understand best and the areas that offer the quickest return. Governance has always been about picking the low hanging fruit. In a democratic system, long term planning is impossible, which is not the terrible thing many claims. More than a few disasters have been the result of grandiose plans cooked up by megalomaniacs looking for a legacy. There is something to say for muddling through the problems that are presented, in order of urgency.
The most obvious place the political class can be effective is in tax policy. In present day America, tax policy no longer serves the needs of the political class and is a source of mischief that is one cause of the public unrest. The point of taxes is to fund government, but the modern welfare state is funded by credit money, created via the banking system. How long this can go on is open to debate, but if there is ever going to be a return to sound fiscal policy in the United States, the tax system will need a complete overhaul.
Even if Congress wanted to fully fund spending, the present system prevents it. The acres of loopholes, exceptions and vague contradictions make tax avoidance too easy for the people with money. Washington faces the same problem Julian faced when taking command Gaul after defeating the Alamanni in 357. Raising taxes just meant more bribery by the rich to avoid paying any tax. The answer was lowering taxes in exchange for increased compliance.
It is not just the complexity of the code that is a problem. It is the underlying philosophy of who gets taxed and how that needs to be administered. Returning to Rome, a problem in late antiquity was that wealthy landowners not only avoided taxes, but they also avoided military service. They also shielded their workers from service. There was a chronic shortage of military age men. The result was a version of the tragedy of the commons. The people benefiting from empire contributed little to maintain it.
Today, large global enterprise pays little in tax, but gain enormously from Federal policy. Smaller businesses, on the other hand, have huge tax and regulatory burdens, getting little but trouble from the Federal state. Small business, of course, always sees government as an obstacle, because they have zero influence over legislators. Compounding the problem is that business taxes are ultimately passed onto employees and customers through reduced wages and higher prices.
A reform that would solve a few problems for the political class, as well as position the economy for the modern age, is to eliminate business taxes entirely. For starters it would re-shore about a trillion in assets squirreled away in tax havens. Companies like Apple spend a lot of time hiding money around the world to avoid US taxes. It would also encourage global corporations to headquarter in the US.
Corporate income taxes are about 11% of federal tax receipts so eliminating this tax is not insignificant. Some of it would come back through increases in other taxes as business activity ticks up due to the new tax status. The rest should be raised through increases in personal taxes on the rich. There is simply no reason for special tax treatment of capital gains, for example, other than as a sop to the wealthy. Government is about protecting the assets of the rich. They should be paying the bulk of the cost.
An overhaul of the tax code like this, with flattening of personal taxes in general, would be an easy sell to the public. On the one hand, it would be an instant boost to the economy. On the other hand, it would address the growing sense that the super-rich are out of control. No one will lose any sleep over the government taxing the billionaires. The amount of money involved to off-set the elimination of corporate income taxes is not so much that a “tax the rich” campaign would set of rich flight.
Finally, the elimination of corporate taxes means the end of charitable deductions and not-for-profit tax rackets. Washington is now ringed by 501(c)(3) operations that are just lobbying and public relations organs for the rich and various business interests. Eliminating the tax provisions will not make them go away, but it will eliminate the incentives to create them. These think tanks are a shadow government hobbling Congress, the regulatory agencies and damaging the normal functioning of the mass media.
None of this will do much to address public finances or the corruption of government, but it begins the process. It also offers the biggest bang for the effort. Overhauling the welfare state is a growing necessity but doing that is impossible in the present environment. With near zero trust in government and both parties in a state of disarray, passing difficult reform is impossible. Going for the low hanging fruit is an obvious first step.
As a final note, this is why a guy like Trump in the White House could be a boon to the political class if they decide to go down the reform road. Trump is not ideologically tied to any form of tax reform. He would be a good pitchman for whatever tax overhaul package comes out of Washington. He is already signaled his willingness to tax the financial class. He is the perfect guy to provide cover for genuine tax reform.
“There’s simply no reason for special tax treatment of capital gains, for example, other than as a sop to the wealthy.”
One commenter caught this howler, but let me expand. First the government debases the currency causing horrendous inflation, then declares the inflated and mostly worthless sale revenue to be ‘income’ and taxes it at extraordinary rates. “Make the rich pay”. Especially your grandparents who bought the house 60 years ago with money worth money and sweated to do so for a long, long time. Screw them, tax their ‘profit’ into oblivion.
As for indexing it to inflation, please, who calculates the inflation rate? The same guys who debased the currency? Fabulous.
Perverse incentives all over the place, and this blog is the last place I thought would fail to see them.
Capital gains ought to be entirely tax free as a special reward for recognizing wealth using brainpower alone – pay attention to that dude and slap the rest about the face and ears. Slap especially hard the politicos and bureaucrats who have never been able to recognize value trends, and never will – if they could, they would, but they can’t, so they don’t, they just cheat and steal from the rest of us.
What a bunch of nonsense. Giving favored treatment to one form of income over another is the very definition of perverse incentive. Demanding the government put its thumb on the scale is inviting corruption.
I’m late with my reply, but you are quite right, my final paragraph was intended to be tongue in cheek.
However, I can’t agree that capital gain is always ‘income’, at least in inflationary times. Also there is the involuntariness of deemed sale on death, which we have here in Canada. When my surviving parent, my mother, died in 2010 her estate was deemed to sell her home at fair market value with the result of a net loss on the actual value of the place due to inflation, made worse by taxation of the resultant ‘income’.
Anyway, once again, great blog.
Everyone should have some skin in the game. Currently, 49% of US wage earners pay NO income tax! Has to be a floor as well as a ceiling.
One of the biggest problems with the tax code is after installing the stupid Federal Income Tax, it was quickly hijacked for income redistribution and has been like that for decades. So we’re seeing the end times of that kind of tax policy where cut-outs here and there for folks that have an ear or progressives in the Government think they should put incentives… and everyone else.. too bad.
So we’re near the end, and it was all predictable. We can no sustain a tax system that merely takes from those unconnected and gives to those that vote the right way or helped write a carve-out.
I’ll give you the best possible tax reform in the USA: Abolish the IRS and the 16th Amendment, and eliminate the Federal government’s ability to tax any person, organization, or corporation of any kind. Restrict it to three ways to raise funds: first, by the sale of public lands or assets; second, by import tariffs and the like; and three, when the power of taxation is returned to the states where it belongs, and where it might be more responsive, each state will be asked to contribute 5-10% of its takings from the previous year.
In this way, states compete to find the most effective means of revenue raising without a “one size fits none” approach as currently in use; the fed is hog tied and left for dead wearing nothing but a pair of orange socks, restricting its activities; and the 10th Amendment is given new life.
The suspicion I always have of “tax the rich” campaigns, most recently Obama, is the these end up becoming “tax the working wealthy”. Defined as those who primarily work wages/bonus/stock, run successful small businesses etc, but have little control over timing and form of the bulk of their income. Nor do they possess “fuck you” wealth. Secondarily, where one actually has capital at risk for long periods of time, the lower long term cap gains rate, should in theory, compensate for the investor not simply defaulting to risk free returns (historically medium term Treasuries) and the impact of inflation. I’m not sure I’d chuck cap gains in total, but might reclassify what is eligible for favored rates. And certainly carried interest is simply a charade to mask income as cap gains.
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Instead of re-inventing the wheel, it might be worth looking at how other countries manage their tax systems. Especially where their tax systems work well for private individuals and corporations. According to this list, America comes in nearly dead last followed by Italy and France. Add to the fact that America is the only country that double taxes, meaning ex-pats who work here in Europe must pay to the country where they work AND again to the USA. Talk about medieval! Here in Europe, you only pay taxes in the country where you work and live and this includes ex-pats from other countries.
The high US corporate tax rates are one big reason you can’t keep jobs in the US. Don’t think so? Look at GE who just paid around 14-Billion (USD) for Alstom’s power division and is now setting up their European headquarters in Switzerland. Switzerland of all places -THE – most expensive country in Europe. GE could have opened shops in the US, but like everyone else, doing business here is a much better deal even when you consider we have great pay, 30-45 days paid holiday every year, maternity leave, affordable (really) health care…you get the idea.
http://taxfoundation.org/article/2015-international-tax-competitiveness-index
“The United States places 32nd out of the 34 OECD countries on the ITCI. There are three main drivers behind the U.S.’s low score. First, it has the highest corporate income tax rate in the OECD at 39 percent (combined marginal federal and state rates). Second, it is one of the few countries in the OECD that does not have a territorial tax system, which would exempt foreign profits earned by domestic corporations from domestic taxation. Finally, the United States loses points for having a relatively high, progressive individual income tax (combined top rate of 48.6 percent) that taxes both dividends and capital gains, albeit at a reduced rate.
Estonia currently has the most competitive tax code in the OECD. Its top score is driven by four positive features of its tax code. First, it has a 20 percent tax rate on corporate income that is only applied to distributed profits. Second, it has a flat 20 percent tax on individual income that does not apply to personal dividend income. Third, its property tax applies only to the value of land rather than taxing the value of real property or capital. Finally, it has a territorial tax system that exempts 100 percent of the foreign profits earned by domestic corporations from domestic taxation, with few restrictions.
While Estonia’s tax system is unique in the OECD, the other top countries’ tax systems receive high scores due to excellence in one or more of the major tax categories. New Zealand has a relatively flat, low-rate income tax that also exempts capital gains (combined top rate of 33 percent), a well-structured property tax, and a broad-based value-added tax. Switzerland has a relatively low corporate tax rate (21.1 percent), low, broad-based consumption taxes (an 8 percent value-added tax), and a relatively flat individual income tax that exempts capital gains from taxation (combined top rate of 36 percent). Sweden has a lower than average corporate income tax rate of 22 percent and no estate or wealth taxes. The Netherlands has competitive international tax rules. Additionally, every country in the top five has a territorial tax system.”
Keep it simple, and as you say go first for the low hanging fruit. 1. Flat tax every individual on every traceable bit of cash that comes in, including transfer payments. I’m on military retirement and social security, and I’m taxed on both, so it can be done. 2. Flat tax business on gross revenues. 3. Flat tax NGOs, including churches and charities on gross revenues. NGOs are infested with do-gooder wealth-redistributors, only their wealth doesn’t get redistributed. 4. Deal with unintended consequences without altering 1, 2. and 3.
Overall good suggestions. But, I have two questions Z.
One- you seem to be more than averagely well-informed about Ancient Rome- I have an interest myself- I’ve read all the Colleen McCullough books, Steven Saylor’s oeuvre, books by Simon Scarrow, as well as an ebook series called Marius’ Mules. I do not know much about Rome pre, say 125 BC. Anything, particularly novelizations, you care to recommend about the early days of the Republic?
Secondly re the capital gains tax- my unsterstanding is that capital gains were taxed at lower rate to counter the effects of inflation. Am I in error, and/ or what is the specific issue with the lower rate?
Raising taxes just meant more bribery by the rich to avoid paying any tax.
Which is why I find Trump’s initial call for more taxes on the rich to be a curious thing. A code, almost. A wink and a nod to those in the club. Please note that I’m not anti-Trump, I’m pro-survival. My eye is permanently jaundiced.
Or possibly more public posturing, bone-throwing to the working class?
Or a nifty tactic to throw the Hillary campaign off their track. They spent millions readying ads that claim Trump will reduce taxes on the wealthy. That claim just went out the window, along with all that money!
Trump playing chess while the Hillary campaign is playing checkers.
I think the thing to keep in mind when observing Trump is there are three facets to his public presentation. There’s the tactical, the rhetorical and the strategic. His apparent contradictions are a tactic to keep the conversation focused on something that plays to his favor. For example, he will say he plans to tax hedge fund players and then back off. He’s not really interested in the policy of taxing hedge funds. What he is interested in doing is getting the press to broadcast the fact he is not in the pocket of Big Finance.
Similarly, his rhetoric is often aimed at using outlandish statements to drag certain topics into the conversation. Look at how he whacked around John McCain in South Carolina. The Buckleyites were horrified. The over the top rhetoric allowed him to position himself in the mind’s of the voters in a way that a more toned down approach would not have done. Most conservatives despise McCain and they knew Trump felt the same way, even if he was a bit mean about it.
Well, there are those who purport to want a candidate that knows how to compete in the new social arena and then are horrified when one presents himself. Or as less Conservative than they’ve suddenly imagined they would like. They ape Breitbart’s moxie of, “War” but they don’t want to appear stupid. I’ve thought him very cunning from the git-go and, much as I like me some smart writers I was dismayed to see that they have no stomach to go along with Trump’s gambit if it makes them look stupid. It’s everywhere, this useless vanity of the Buckleyites. It’s utterly of no virtuous use.
ZMan, you make a decent case for abolishing corporate income taxes, especially with respect to 501(c)3 corps, which are an abomination. However, corporations are creatures of the state, and are granted unique powers that make them superior to natural persons (i.e., perpetual life and limited liability); in a just world, they would pay substantially for these privileges, every year they are in existence, and an income tax would be the logical way for them to pay for these privileges. Also, this would allow unincorporated entities to compete with them more favorably.
Regarding the personal income tax, it should be abolished entirely. Taxing one’s livelihood is tantamount to indentured servitude, and is incompatible with any reasonable interpretation of personal liberty. That said, a flat income tax, applied at an equal rate to everybody regardless of income, and with absolutely no exceptions, deductions, or exemptions allowed, would be the next best thing.
I would agree if a) they actually paid tax, b) those taxes were felt by people got the benefit and c) it did not have such a corrosive effect on politics. If Apple realizes lower revenue due to taxes, it pays its salaried people less and charges more for its products. maybe it shifts more production to the slave labor camps in China. Tim Cooke and the stock holders still get paid and often paid more.
On the other hand, if Tim Cooke has to pay 30% off the top on his income from all sources, he is suddenly going to be much more frugal in his politics. What’s happening today is a game of bad cope/worse cop on the political class. Apple lobbies for tax breaks while Apple execs lobby for spending hikes on piety projects. The political class is being whipsawed and now facing a vengeful public.
“Corporations don’t pay taxes, they collect taxes”.
A simple solution to this would be that if corporations sign away their rights as people then they get the tax break. If not they pay the full rate of people and their liability is the same as people. I think it’s silly corporations can be people for all the good stuff and just a entity when something goes wrong.
On the capital gain tax. Let’s say a software developer makes a software program all by himself. He makes a certain amount of money. Yet someone else can pay someone to make the same program and make the same profits but pay the smaller capital gains rate. Not good.
As for inflation and risk. Index the capital gains to inflation. All revenue (profits) should be taxed at the same rate. If you don’t do this the people at the top paying no or lower taxes will eventually own everything and everyone else nothing.
Yes! The individual tax form has become a form of success punishment. Every year I spend several days collecting all my records from the previous year for my accountant. He diligently assembles it all into his software, then reluctantly explains to me how my wife and I earned too much and hit the AMT. All those nice deductions are stripped away slowly and painfully. When the final bill is calculated, I end up owing thousands even though I withheld at the single / no dependents rate.
On the business and international side, the IRS has become fully weaponized. Not only are they collecting the highest rates in the world, but they are collecting on income earned anywhere in the world. Makes it impossible for Americans to do business.
The tax system has often been seen by the political class as a great fundraiser. they auction off tax breaks to big business and big industry groups. The trouble is they have lost control of it and the auctions no longer work. Instead, the rich and powerful target the regulator apparatus. Of course, it’s good PR, but it reduces the growing power of the un-elected bureaucracy.