Roommate Rumble: Zach and Labib Take On Taxes
TRANSPARENCY: THE KEY TO OUR TAX PROBLEMS
By Zach Goldaber
My esteemed colleague and I do have common ground when it comes to the taxation system in one area: I, too, believe the tax code is broken and needs to be re-written. But Americans don’t need to be taxed less – they need to be taxed more. And believe it or not, there is a way of raising taxes on Americans so that they will learn to love it.
The tax code is broken because it is a decrepit, towering behemoth full of loopholes. That the tax code needs to be simplified is something we all agree upon. But taxation in the United States needs a re-working of a different kind, too, one that will make it friendlier to the average American in ways a simpler code never could: It needs to be made one hundred percent transparent.
It’s utterly absurd that most citizens have no idea where their tax dollars go. It should be required of the United States government to send every citizen a simple dossier at the end of each fiscal year detailing where every single cent of their income tax dollars end up.
In the first place, this will make Americans more comfortable with taxation by removing the feeling that your money disappears into a vacuum when you fill out your 1040 form every year.
The act of paying taxes is reprehensible to so many because it represents the unknown, and hand-in-hand with that lack of knowledge is the feeling that tax revenue has no tangible yield for the average American – the money goes away, and they never see it again. That’s not true, of course, and transparency would help eliminate that feeling.
Secondly, transparency yields accountability in ways that no other process can. If citizens learn that that even $2.50 (or some such figure) of their tax dollars is going toward a federal program they believe is wasteful or otherwise objectionable, you’d better believe that they’ll protest about it. If they feel too much of their tax money is being invested in one area, or not enough in another, they will complain.
In a functioning democracy, if enough people complain, change inevitably follows. Through protest, the ballot box, and good old-fashioned debate, transparency would allow the American public to take control of the tax code in a way they could not now. If you have faith in the wisdom of American public – and I certainly do – after a little while the tax code will be efficient and fair.
Taxpayers from all income brackets receive an inordinate amount of important services from their tax dollars as it stands now – most of them just don’t know it. A transparent tax code would only increase the amount that each tax dollar helped an average American, and they would be well aware of the benefits.
I don’t think very many people would argue against paying a high tax rate if the money they paid went directly back toward taking care of all of their basic needs – food, shelter, health care, and the like. And I don’t think very many of the super-rich would object to paying even a 90% tax rate if they knew that the vast amount of money was going toward services that they used and that were directly helping other Americans rather than toward earmarks.
Even conservatives who agree with the idea behind my plan tend to believe that it could not be effectively implemented because the federal government could not possibly do a good job taking care of Americans. I disagree. The federal government has a 200 year history of taking on increasing responsibility for the welfare of each individual American, and for the most part they have done a good job of it – no one wants to get rid of Social Security and Medicare now, do they? Under the eyes of a watchful American public, an effective tax system where everyone pays high rates and is happy is more than possible – and more than that, it ought to be aspired toward.
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ENLARGING THE ECONOMIC PIE
By Jonathan Labib
Famed economist Milton Friedman once remarked that “most economic fallacies derive from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another.” While my roommate and I can both agree that the current tax code is an absolute disaster that might be just about the only thing that we agree on regarding taxes. The tax debate usually comes down to two competing goals: fairness and efficiency. The goal of tax reform shouldn’t be to redistribute more wealth from the 1% to the 99%, but instead to grow the economic pie so that everyone is better off.
The most recent reports by the Congressional Budget Office show that the top 1% of the American population by income pays 39.5% of Federal income taxes while earning less than 20% of all income. In contrast, almost half of all American households pay no federal income tax. The American taxation system is already one of the most progressive systems in the world. If proposals such as President Obama’s “Buffett Rule” are enacted the top income earners will be taxed at an unreasonably high rate.
The question of efficiency can be addressed by removing all of the distortions in the tax code and providing incentives to invest and work more to jump start economic growth. Take the Simpson-Bowles commission tax plans. The crux of the plan is to eliminate all loopholes and deductions in the tax code while lowering the top marginal tax rates.
My one point of difference with the Simpson-Bowles plan is that I would leave the deduction for charitable donations that exists in the tax code, as I believe that it doesn’t have a negative impact on the economy. All other deductions in the tax code distort the allocation of capital, such as the deductibility of mortgages which contributed to the housing bubble. The Simpson-Bowles plan would have led to an extra $1 trillion of revenue over the next decade, and lowered rates for everyone. Under the plan the lowest two rates in the tax code would drop from 10% and 15% to 8%, the middle two rates would drop from 25% and 28% to 14%, and the highest two rates would drop from 33% and 35% to 23%.
I recognize that America’s debt problem, while mostly caused by excess spending, will also need to be solved with some increases in revenue. However, the prudent way to go about raising revenue isn’t by raising rates on the rich, but instead by eliminating loopholes and deductions in the tax code while lowering rates for everyone. The holders of our debt don’t care who the money comes from, just that they get it back. Many argue that a tax cut for the wealthy is unfair because they aren’t paying their fair share, but as demonstrated above they are already paying more than their fair share. If we lower rates for the rich it will increase their incentive to work and invest, which will jump start the economy as a wave of new capital is poured into it.
Flattening and simplifying the tax code will stimulate the economy in two ways; reducing compliance costs, and increasing the rewards for working. As the tax code is currently written filing your tax returns every April is a time consuming and complicated endeavour, one that usually requires the use of lawyers and accountants. With a tax code with no deductions and loopholes besides for charitable donations filing taxes will be much simpler, and much cheaper. The IRS estimates that each year Americans spend 6.6 billion hours per year filling tax forms, the money and time that is spend complying with the tax code is detracting from economic growth. Lowering marginal tax rates on higher income earners will lead to increased production because it alters their risk-rewards calculations.
When someone is deciding whether to invest their money in the US economy they think about the risk that they are exposing their money to, and the potential rewards that they will reap. By decreasing marginal tax rates the reward portion of the equation is increased, because people are allowed to keep more of their profits. When people are allowed to keep more of the money that they earn they will take more risks, which will in turn lead to more jobs and a higher GDP. The United States needs to keep tax rates low to entice people to invest domestically; we now live in a globalized economy and the wealthy have plenty of other places to invest their money.
My vision for tax reform is one which all of the inefficiencies in the tax code that distort the allocation of capital are removed. A tax code that is both simple and fair to everyone. More revenue can be raised while lowering rates at the same time, raising rates on the wealthy in the name of fairness is the wrong thing to do. Under my proposal everyone will be paying their fair share, and the pie will grow for everyone at no one’s expense.
