The two-criteria tax test

December 11th, 2015 at 8:44 am

Does your tax plan raise revenue and push back on pretax inequality? If so, I’m all ears. OTOH, if it loses revs and worsens inequality, well…here’s what I have to say about that.

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2 comments in reply to "The two-criteria tax test"

  1. John C. says:

    1. Equalize rates for earned and investment income (cap gains and divs).
    2. Cap housing deduction at 50K.
    3. Eliminate payroll taxes. Fund social security and Medicare from general revenues. Increase personal rates accordingly.
    4. Eliminate corporate tax on pass-through income. Tax retained earnings at flat 25%. Allow deductions for investment spending.
    5. Estate tax: 0% on estates from $0 to $2M, 20% on estates from 2M to 5M, 35% on estates from 5M to 10M, 50% on estates above 10M.

    • Smith says:

      Social Security and Medicare should not come from general revenues. Even though it is a flat tax, and thus regressive, there are important reasons for keeping the somewhat dedicated tax. I say somewhat because we are currently borrowing from the surplus, and count the net surplus or deficit when figuring out total public debt and impact on national savings and income. First, the regressive nature can be addressed merely by making the income rates more progressive which it already does to some extent. Second, it’s important to tie this universal benefit to a universal tax that everyone pays, and not reduce the amount low income earners pay to a negligible level. That attribute is important so low income earners keep skin in the game, and high income earners can’t say the benefit is unearned. Despite the flat nature, there is already a progressiveness built in due to high incomes not receiving proportionately higher payments, and the somewhat ponziness of getting back more than you pay in, which works thanks to even the moderate population growth and productivity growth. I would favor increasing or eliminating the ceiling on income taxed for social security, as somewhat higher benefits for high earners won’t make up for the higher taxes paid. Doing that would create a huge fight with the 1% as they are fine with a flat tax as long as they wind up paying less taxes. Lifting the ceiling would be a flat tax that instead costs them 8% of their income when not offset by lowering other rates. Doing it should be an easier political argument, as asking the average Joe or Jane why they pay 6.2% and the person making $237,000 pays half that rate. It’s really 12.4 vs 6.2 because the employer portion effectively comes out of the employees wages, any economist will tell you. A universal benefit should be paid for by all and available to all, never means tested, nor payments exempted.

      Eliminating corporate tax on pass through and a flat 25% on retained earnings is a disaster, hurting small business, and the tax base at the same time. No on pass through since the tax affects the rich most of all and thus adds to progressive nature of tax system, and it would discourage investment. No to a flat tax, corporate rates have a desperate need for progressivity as large businesses already have too much power. No to 25% as way too low a rate for companies earning billions and gaining power (even without campaign contributions) be sheer weight of corporate wealth alone. No to special deductions for investment inducements companies would make anyway, and either appreciate or deduct as amortized costs.

      I’d tinker with the estate rates, no need to stop at 50% if someone is leaving $1 billion dollars. Also, there is currently distinctions made concerning spouse, deductibility of state estate taxes, and small businesses. Does it really have to be zero on a million dollars? Everyone should pay at least a small amount.