One good thing about the election is that I don't instinctively flinch every time the White House releases new policy initiatives. Case in point: tax expenditures. What's a tax expenditure?
Tax expenditures are "preferences and concessions in the income tax that [have] the nature of expenditure programs." In other words, when you can deduct an expense (or receive a refund for the whole cost), that is a tax expenditure. The mortgage interest deduction is also a tax expenditure: if we wanted, we could have the Treasury write you a check equal to the amount of the deduction.
I use that example because it highlights one of the problems with tax expenditures, as opposed to direct subsidies: the higher your income, the more money the government pays back to you. Again, consider the mortgage interest deduction. If we actually think it's good policy to subsidize interest payments on housing (I say not [link]), then shouldn't those who need the money the most--those in lower tax brackets--get the most money per dollar of interest? At the very least, they should get the same amount of money.
So this news item is encouraging:
Administration officials said Mr. Obama would propose to reduce the value of itemized tax deductions for everyone in the top income tax bracket, 35 percent, and many of those in the 33 percent bracket -- roughly speaking, starting at $250,000 in annual income for a married couple.
Under existing law, the tax benefit of itemizing deductions rises with a taxpayer's marginal tax bracket (the bracket that applies to the last dollar of income). For example, $10,000 in itemized deductions reduces tax liability by $3,500 for someone in the 35 percent bracket.
Mr. Obama would allow a saving of only $2,800 -- as if the person were in the 28 percent bracket.
The White House says it is unfair for high-income people to get a bigger tax break than middle-income people for claiming the same deductions or making the same charitable contributions.
I still would prefer fewer tax expenditures and more direct subsidies for all sorts of reasons, but this is a step in the right direction.
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Thanks for providing examples of tax expenditures. What would be an example of a direct subsidy?
Direct student aid, as opposed to a tax deduction for tuition.
Sore subject: I was a single father with three kids in University at once, and the $65,000 cap on AGI meant that I got bupkis in the way of deductions, even though paying for the kids meant that I had a negative net real income. It wouldn't have been so bad if the cap were at least indexed to the number of students or something, but using the tax code to support University education is just freaking stupid -- it mostly helps most those who need it least and helps those who need it most not at all.
I anyone in leadership were really serious about making the taxation work for the regular guy, they'd get rid of income tax reporting...for two reason. How we define "income" is so complex and convoluted (and getting worse as we continue to try to craft it into something it will never be; fair) a regular person can't help but feel they're being cheated..and of course they are. When the amount of tax one pays (or doesn't) correlates with how clever your CPA is then the system is just as fair as if your tax were determined by how well you could paint the Mona Lisa. As an artist who can paint passably realistically (can't everyone?), sucks at math, has never earned much to speak of, and hates his every encouter with the IRS, I can tell you I'd love to see it come to that.
Secondly, having to report to a quasi governmental beaureau filled with linear thinking authoritarians (or become a criminal), is a coercive technique which makes us something like slaves.
But what else can we do? Move to a consumption based tax because if there is one thing that the rich do far more than the poor do, it's buy stuff...expensive stuff, and here is where one's wealth, and therefore one's rightful share of taxes, is best and most fairly determined.
Sure there will be problems with that...black markets and whatnot, but I'd rather have the govenrment going after those guys than going after the non-conventional free living work a day guys, which is what they do...in case you haven't been audited yet, well, just make sure you live in fear of having it happen. Oh, or just start a small self-employment gig with irregular hours and expectations...hoo-boy!
And I'd make it clear that I'm referring to private individuals taxes, and not businesses, which is a whole nuther kettle of fish.
How about taxing wealth instead of income? A flat-rate wealth tax would be vastly more progressive than any income tax could possibly be.
The problem used to be compliance, because measuring wealth (other than real property) used to be infeasably difficult. One of the little things that's crept up on us with technology is that it's now actually easier to track wealth than it is to track income. Bank accounts are obvious, major purchases are easy, securities are registered, and even stuff like jewelry is insured. (Yeah, someone could go "bare" on the jewelry but that's not a real bright way to save money.)
The flat-rate wealth tax could be ridiculously low, too -- the last time I looked, the net worth of the private sector in the USA is something on the order of $1E14, so a Federal budget of $4E12 would be about a 4% tax. For almost everyone, that would be a huge savings.
A wealth tax would also stimulate the economy by changing the incentive from "don't generate taxable income" to "may as well make this sucker pay."
Of course, there's nothing that Congress can't screw up.