Lots of good topics today but I am settling for taxes. One of the urgent issues facing the lame duck session of Congress is what to do about the “Bush” tax cuts. The choices seem to be let them expire as written in the law, allow them to continue for income under $250,000 a year, allow them to continue for income under $1 million, or let them continue for all income.
Whenever I consider taxes I remember the words of the old professor who taught us taxes, “No matter what you may read or hear there are only two elements of a good tax, one they collect sufficient revenue and two they are easy to collect.” I keep those words in mind whenever I do my own tax reports or when I participated in negotiations to formulate bilateral tax agreeents between the USA and other countries or when I deal with tax matters in business. I am one of the few people who know US tax rules and regulations, as well as those for several other countries.
Clearly our current Federal tax code violates my old tax teacher’s maxim, it does not raise sufficient revenue nor is it easy to collect. That it does not raise sufficient revenue is obvious in the fact that Uncle Sam is presently borrowing one of every three dollars he spends. As for being “easy” to collect, I offer the voluminous size of the code and the elaborate system in place to collect it. What politician worth his salt has not proposed a “simpler” tax code? But I urge caution in responding to this siren’s call. As I always say, a fat tax code is the tax payer’s friend. Fat codes offer tons of ways to lighten the tax load in an almost inverse relationship, the fatter the code the thinner the tax.
The Feds could take a lesson from some of our states in making taxes easy to collect. Consider Texas, it has no state income tax choosing to derive the lion’s share of its income from the petroleum industry by direct taxes on oil production. Look at Florida, that also has no state income tax, instead derviing most of its income by heavily taxing its tourist industry. Of course both states impose a state income tax as do most states. My point here is that these taxes are easy to collect.
Of course the most famous line regarding taxes is, “it ain’t fair.” Many believe that Federal income taxes are unconstitutional, failing to note that they were installed by an amendment to the Constitution in 1913. But what is generally meant is that no tax is going to be “fair” to one group or the other since they are inherently “unfair” when they hit you and not your neighbor. They are also serendipitous with no reliable blueprint for their imposition.
In looking at the “fairness” of taxes I suggest you look at one aspect of the Federal code that is being cited as one reason for the housing “bubble” that broke our economy. The 1986 tax reform bill, probably the most important piece of tax legislation since the 1913 admendment to the Constitution, among other things eliminated deduction from taxable income for interest paid on loans. At the last minute those working on the bill realized that this would include interest paid on mortgages and realized that this is considered by many to be a “God given right.” The problem was solved by making an exception for interest paid on mortgages, clearly “unfair” to those paying interest on other loans and to those renting their home.
To return to my old tax teacher and his maxim, we need to have a tax regime that produces sufficient revenue and is easy to collect. Forget being “fair” and redistributing wealth. No tax will be “fair” to all. And it is easier and more efficient to redistribute wealth through government spending, than through tax collection.
People derided Steve Forbes when he ran for president on a platform of a “flat tax,” or one where we all pay the same rate on our income after a certain level. Critics demanded to know how much tax Forbes had been paying. I responded by saying, “only with a flat tax will we know how much Forbes is paying.”
I now hear many in Congress talking about a national sales tax and it is a concept in the new report being handed to President Obama on how to put our Federal financial accounts in order. One strange argument being used is that it will reduce consumption and encourage savings, the last thing we need in an economy suffering deflation due to lack of consumption.
My suggestion for the present, if we really want to lower our Federal deficits, we need to let the “Bush” tax cuts go for all levels of income. But this will surely encourage investors to move more of their funds to other countries. And it wont be “fair.”