One Cheer for the Income Tax
To celebrate April 15, TPC director Len Burman argued yesterday on TaxVox that today’s income tax “is not all bad” and that “we could do a lot worse.” Well, it may not be all bad, but it is pretty awful. And while we could do worse, we could also do a lot better.
The income tax has lost its way. It no longer raises nearly enough money to pay for the government we seem to crave. This year, Washington will spend about $3 trillion. But we are going to collect only about $1.2 trillion from the individual income tax. Most of the rest will come from payroll taxes.
Speaking of payroll taxes, they are how many American contribute to their government these days. On average, the lowest 40% of earners—those making less than $28,000-a-year—pay no income tax at all—in fact many receive cash payments through the income tax (which these days, doubles as an income security system). Middle income earners pay an average effective tax rate of just 2.8%. Is a tax code that effectively exempts half the country the kind of broad-based revenue system we want?
Then, there is the matter of transparency, a subject much on my mind as I was frantically filling out my return this week. Truth is, few of us have any idea why we pay what we pay, and the Code is filled with backdoor ways to collect revenue, such as the Alternative Minimum Tax and the mysterious phase-outs of itemized deductions and personal exemptions. By 2010, the AMT alone will quietly take back more than one-quarter of the Bush tax cuts of 2001 and 2003.
One last complaint (at least for today). Collecting money has become a secondary goal for the income tax. These days it is too often a tool for the government to manipulate social and economy policy. Want people to get their health insurance through their job? Give them a tax break. Want farmers to grow corn for ethanol? Give them a tax break. Want to encourage more people to buy houses—even if they can’t afford them? You got it.
Burman defends the income tax by criticizing some of the worst alternatives, such as the national retail sales tax which was embraced by Mike Huckabee and Fred Thompson’s curious plan to allow people to figure out their taxes two ways and pay whichever is less (an idea that John McCain is toying with as well). To say that the income tax is better than these silly ideas is damning with awfully faint praise.
The income tax is not all bad, however. If the Code were simple, transparent, and fair, I’d probably be out of a job. So, for that alone, it gets one cheer.
We’d love to hear from you. Post a comment and let us know who you think is right. Is the income tax the best of a world of bad choices, or is there a better way? And have a Happy Tax Day.
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There are no cheers for income tax nor for any other form of taxation that is aimed at taking from the working public something that is the direct result of that labor. Tax schemes are not a virtue of government, but an imposition on the population, although this collective form of punishment is supposed to be the way that they can best contribute to the good of the locality and of the nation. Anybody who thinks that to reform the tax system by charging a different form of tax on the products of work by either collecting wages, investment or spendings is mistaken in helping the national economy to grow or to even stay the same. Taxation of these sorts is a moral blow against the freedom of the individual and of the families whom many of them support. It is a Robin Hood act of stealing from one part of the population to help the other and no matter how deserving the poor may be, subsidizing their needs for anything but a short while will only make the situation worse.
But income to the public purse is most necessary and to think that it would be possible for government to manage without taxation and that consequently, the purpose of present taxation is to control the macro-economy is to base the motives for it on illusions of the most dangerous kinds. The form of tax reforms must go further to unburden the earning and spending population and indeed should be aimed in returning to most of them what they surely deserve as previous taxpayers, in return for the money that has been invested on their behalf by our national institutions. This investment has resulted in our towns and cities becoming attractive places to live and work in and to supply the means to relax and be able to enjoy the facilities so provided. But this investment has the effect of raising the value of the one “comodity” that is not produced and will always grow in value namely that of the land. Thus prudent but unscrupulous investors, bankers and landowners can enjoy an income by speculation in the land value for which they do nothing but sit back and allow the city and country to develop the infrastructure, the roads, high-ways, rail-roads, schools, universities, libraries, water supplies, sewage systems, street-lighting and electrical services, social and emergency services, hospitals, sports centers etc.
In view of fact that these benefits are enjoyed by those who speculate in the land and do so by its misuse or non-use, it is surely necessary to make amends. Surely these exploiters of public investment should pay for the opportunity provided by the increased value of the sites they control, by having to pay a tax on land values instead of the money being laid as a burden the earning population.
The one place where this taxation of land-values has been tried in the U.S. is in and around Harrisberg, Pennsylvania, where what was once a depressed and povety-stricken region has recovered and developed a fine degree of reduced crime rate and greater employment.
So when it comes to tax reforms I cannot support the older ways no matter how well dressed up they appear to be. Instead we should be giving serious consideration to taxing takings and not makings.
I certainly wasn't saying that the current income tax is the best we can do. If I thought that was true, I'd find another line of work. My point is that it's easy to bash the income tax (Howard's column actually wrote itself), but the favorite idea of many would-be tax reformers–a consumption tax–would shift tax burdens away from those most able to pay onto the middle class. And even though a theoretically pure consumption tax beats a theoretically pure income tax in simple economic models, a real-world consumption tax would probably not be much of an improvement. Exempting capital income from tax would create an enormous loophole–one lawyers and financial planners could drive a truck through. And it would surely be ridden with tax preferences and unnecessary complexities.