I turned in my PhD dissertation just in time. I can’t believe I’m going to be a doctor of public finance. My paper: An Alternative Tax System in the McCain Administration. It is a detailed description and macroeconomic analysis of John McCain’s plan to give taxpayers a choice of paying under the current system or through a much simpler and more efficient option.    more »

John Endean raised an intriguing idea the other day in response to my blog on whether business executives would be willing to give up targeted tax breaks in return for a lower corporate rate, as John McCain has suggested.    more »

I'll be moderating what should be an interesting discussion on fundamental tax reform at the New America Foundation on Tuesday. Other panelists will be New America's Maya MacGuineas and Michael Lind, and Yale University's Mike Graetz, who has designed a new Value Added Tax. If you’d like to join us, sign up at NAF's website.

Johnny, we hardly new ye.

John McCain’s ambitious plan to reform corporate taxes is disappearing faster than the Washington National's chances to win the national league pennant. What once had the makings of a provocative and potentially beneficial idea is morphing into a gimmicky mess.

Earlier his spring, McCain was talking about allowing companies to expense all their capital investments in the year they are made. This would eliminate many of the timing-related issues that make corporate taxes so complicated. It might even have become the first step towards replacing the income tax with a cash-flow levy. In such a system—a version of a Value Added Tax—companies would subtract their costs of goods from revenues and pay tax on the difference.

Back then, McCain had not yet answered one big question: What would happen to the tax deduction companies take for their interest payments? In any sensible expensing scheme, interest could no longer be tax deductible. If it were, businesses would become huge tax shelters.

Now that he’s started to answer this and other questions, his idea is getting worse. In his revised plan, which staffers have described to TPC, expensing would be limited only to short-lived property—equipment like cars and computers--now depreciated over five years or less. The proposal would be temporary, and would expire after five years. Interest payments would be taxable, but only if used to finance specific short-lived investments.

Yuck. Speeding up a deduction that you could take in a couple of years anyway is not much of a tax break. Making the proposal temporary just creates messy new timing issues—and would threaten to become yet another tax “extender” that is part of the annual Washington theater. And tying the interest deduction to the purchase of specific property will surely create endless opportunities to game the system. This will bring joy to the hearts of investment bankers and tax lawyers, but not to the rest of us.

The best that can be said about McCain's latest version is that perhaps it is an effort to shove the tip of the camel’s nose under the proverbial tent: Start with this and get more ambitious later. But that's a reach. Don’t get me wrong, McCain’s initial proposal had its problems, but it was intriguing, potentially far-reaching, and worthy of debate in a presidential campaign. This version will fall into the dust-heap of forgotten ideas. There was a brief moment when I thought we were going to have a serious tax reform debate in this campaign. I should have known better.

For another take on my debate with George Yin on whether temporary tax breaks are a good idea George) or not (me), take a look at economistmom, the new blog by former House Ways & Means Committee chief economist Diane Lim Rogers. She’s got a great anecdote about a conversation with a committee member during a late night markup of an extender bill.

Kudos to Rep. Paul Ryan (R-WI), the senior Republican on the House Budget Committee, for proposing an ambitious plan aimed at bringing government spending under control over the next 75 years. Actually, Ryan would do even more than that. He’d also restructure the tax code, Social Security, Medicare, and Medicaid.    more »

While most observers are focused on John McCain’s proposed summer gas tax holiday, they have missed a much bigger idea from GOP’s likely presidential nominee: A massive tax reform—but one that, at least as it stands now, would be a huge windfall for business.   more »

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.   more »

Like most Americans, I hate preparing my income tax return. And, as a tax policy expert, I know that our current tax system is deeply flawed. But it's not all bad. It raises a lot of revenue ($1.1 trillion in 2007) and, like it or not, we have to pay for government. Income taxes are also progressive, raising the lion's share from those most able to pay, and little or nothing from those at the bottom. Sure, we could and should make it simpler and fairer, but we could also do a lot worse.

The financial burden of the income tax on most people is pretty bearable. Most taxpayers pay more in payroll (FICA) taxes than in income taxes. For example, the median income of married couples in 2007 was about $74,000. (That is, half of couples earned more and half less.) Their average income tax bill was $3,400, or less than five percent of income. The median-income single taxpayer earned $22,500) and paid about $610, or three percent.

The income tax also helps millions of working families at the bottom. The earned income tax credit (EITC) augments the meager wages of low earners and encourages them to work. Indeed, the EITC lifts millions of children out of poverty.

People with high incomes paid a lot more. The top 40 percent pay most of the income tax. The top 10 percent pays 72 percent. That seems like a lot, but they earn nearly half of all income. Their income tax amounts to about 16 percent of income.

They should pay even more—their incomes have exploded while middle-income households have struggled to get ahead, and they have gotten huge tax cuts since 2001. But, even after the tax cuts, the income tax is highly progressive.

That said, there are huge flaws in the income tax.  Some high-income people pay peanuts in tax because of gaping loopholes. Meanwhile, middle- and even low-income people are so daunted by the unnecessary complexity that most pay professional preparers to fill out their tax returns.

The income tax needs fixing and proposals for doing just that are abundant. But there are also proposals—well funded by millionaires who think they're over-taxed—that would jettison the income tax in favor of a supposedly simpler system.

The so-called “Fair Tax,” famously embraced by Governor Huckabee in his run for the White House, would replace the income tax with a national sales tax. Its proponents argue that just about everyone would pay lower taxes under this system, apparently assuming that most Americans are not bright enough to figure out that this means that the tax would not raise anywhere near enough money to finance the government. In fact, at rates high enough to pay for the government—at least 34 percent, according to President Bush's tax reform panel—it would represent a huge tax increase on the middle class and (surprise) a huge tax cut for millionaires (who spend only a fraction of their incomes).

The flat tax, Steve Forbes's crusade, would similarly bestow massive tax cuts on the wealthy. Fred Thompson proposed allowing people the option of paying tax under a simpler alternative tax system. People would only make that choice if it meant lower taxes, and the people who'd get the biggest tax cuts would be the millionaires. This bit of fiscal magic would add $6 trillion to our burgeoning national debt over the next 10 years.

Senator McCain's proposal, which his campaign admits is a first step toward a consumption tax, would do nearly as much damage to fiscal finances as Senator Thompson's tax giveaway.

Ironically, the Democratic candidates would unwittingly provide ammunition for the income tax bashers by adding a raft of new credits and deductions. Those breaks may make great sound bites on the campaign trail, but they'd make the income tax more complicated and contribute to the perception that it is unfair.

The solution is not to ditch the income tax, but to fix it. Rein in the propensity of politicians of both parties to use it to grant favors to particular constituencies. And make sure it raises enough revenue to pay our bills so we don't bequeath bigger tax headaches to our children.

While the Presidential candidates are campaigning on grandiose and often radical reforms to the current tax system, they are missing out on a simple commonsense reform that would make tax filing easier for millions of Americans.    more »

A News Years Eve, 1965, Time magazine article quoted iconic free-market economist Milton Friedman as saying, "We are all Keynesians now." Friedman later explained that the quote was taken out of context. He meant that even though the language of John Maynard Keynes—famous for recommending fiscal policy as a tool to manage the economy—had pervaded popular consciousness, most people had no idea what this meant.   more »

Mike Huckabee wants to replace the entire federal tax system with a national retail sales tax of 23 percent. Trouble is, he can't do it and maintain anything like the government that Americans have come to expect.   more »

The Wall Street Journal editorializes ($) admiringly on Fred Thompson's "voluntary flat tax" (or alternative maximum tax to use the tax code's current lingo). Putting aside questions of the desired size of government, cost, feasibility, equity and so forth, I'd like to zero in on the claim that "there would only be five lines on the tax form."   more »

An awful lot of Democrats suddenly seem to think that senior citizens are overtaxed. Presidential hopeful Barack Obama wants to exempt seniors making less than $50,000 from paying any federal income tax. House Ways & Means Committee Chairman Charlie Rangel (D-N.Y.) has tucked a new $700 above-the-line deduction for real estate taxes into his proposal to extend Alternative Minimum Tax relief for another year. While Rangel doesn’t say so, seniors who have paid off their mortgages and no longer itemize would be big beneficiaries of the new tax break.    more »

In the October 30th Democratic presidential debate, Hillary Clinton was asked what she thought of the tax reform plan offered by House Ways and Means Committee Chairman Charlie Rangel (D-N.Y.). She responded by expressing her deep admiration for the gentleman from New York and explaining that, "I don’t know all the details of what Charlie is recommending." This, of course, is Washington-speak for "I ain't getting anywhere near this soaking puppy."    more »