A Modest Tax Proposal

A quick hit:

My proposal is nothing new, nor is it so outrageous that it requires the invocation of Jonathan Swift. Elements of this have been discussed by many people over time. But here’s my synthesis:

Flat tax; single nominal rate, not to exceed 20%. (See Hauser’s Law for the underlying rationale behind the maximum.)

Poverty floor. Earnings equal to or below that floor are not subject to income tax. No carryforward/carryback.

Elimination of all tax credits.

Elimination of all deductions/adjustments except:

  • Charitable deduction. Phase out over time–say twenty years. The sudden elimination of this deduction would be catastrophic for private charities.
  • Home mortgage interest deduction. Phase out over time–at least twenty years. Possibly a quicker phase-out for non-primary resident property residences. Suddenly eliminating this deduction, in addition to being politically impossible, would seriously harm those currently holding mortgages. The deduction is priced into the price of housing, and into the cost of borrowing, and people have made the biggest investment decision of their lives based on that pricing, and on the expectation of the home mortgage interest deduction remaining intact. (See also, “Sacred Cows: The Home Mortgage Interest Deduction.”)
  • Adjustment for family size, head of household, along those lines.
  • The only other deduction to possibly keep intact that comes to mind might be some sort of catastrophic medical expense adjustment–or at least a deferral of tax liability.

Treat capital gains as regular income AND eliminate the corporate income tax. If corporate income tax is not eliminated, capital gains would continue to be taxed at a lower rate than regular earnings (perhaps around half the nominal regular earnings rate). Elimination of the corporate tax eliminates double taxation, would spur economic growth, and would have the side benefit of eliminating the most of the controversy surrounding 501(c) tax entities, since taxation would no longer be an issue. (501[3] contribution deductibility might still be a sticking point though–I haven’t really thought this all the way through.)

If the states want to get cute on a state level, say with a progressive state income tax, they can knock themselves out. All of this only pertains to federal taxation.

I may expand on this later, but that’s pretty much my proposal. Again, none of it is very new.

And no, I am not a fan of a national sales tax. That’s a discussion for another post. Suffice it to say that a national sales tax would seriously screw existing savers by taxing the earnings, and then taxing purchases, thus harming existing savers–the very people who played by the stupid rules that we as a society have constructed vis. policy. There are other issues with national sales tax, as well, but the double taxation visited on existing savers is one of the worst.

And anyway, those who argue for a national sales tax would do well to find the political will to merely institute simplification of the existing tax regime as a starting point toward a complete overhaul–and interim measure, as it were. Otherwise, advocating for a national sales tax is pretty much the usual People For A Perfect World approach to politics and economics–which seldom works out well.

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Additional note: Probably the biggest 800-pound gorilla in all this is what to do with social security and medicare.

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