Is a simpler and fairer tax code achievable?

Well, I'm not an expert, but I'll weigh in anyway, limiting this to the personal income tax.

Simpler could conceivably be achieved.

Fairer is much harder to quantify and depends on value judgments about what "fair" would really mean. As one example, take itemized medical deductions. Consider two taxpayers with the same income:

TP-1 has large medical bills through no fault of their own TP-2 does not Would it be fair or unfair for them to pay the same tax on their income?

On the one hand, the medical bills are not freely chosen and clearly reduce the amount of disposable income of TP-1. That argues for a reduced tax on TP-1 since they already are suffering some malady or injury that they would certainly rather not have, and taking more of the smaller amount they have for living expenses hardly seems fair.

On the other hand, both parties have the same income, so how is it fair to TP-2 to have to assume a larger tax burden?

As for simplicity, there are clearly some things that could be done that would simplify the tax code:

1. Eliminate itemized deductions. Reduces complexity and record-keeping.
2. Treat all income the same as far as rates go.
3. Eliminate the AMT.

I think for most people this would go a long way toward simplifying things. Some of this was done for the 1986 tax reform, but not all of it.

There would still be a lot of residual complexity, especially with regard to the definition of what constitutes income, but that is unlikely to affect the majority of taxpayers. You would still have capital gains calculations to contend with, since that is probably the most common item of income that is not easy to measure for most people.

The AMT is really a "bug fix" in the tax code to try to handle the cases where the complexity of the code and various tax benefits are combined to avoid taxation. With simplification, this should be unnecessary.

I would preserve progressive tax rates, since I buy into the fairness argument about having the rates be progressive, and this adds hardly any complication to the tax computation -- it is either a table lookup which would be the same work with or without progressive rates, or at most a table lookup, with one addition, one subtraction and one multiplication.

Schedule-C taxation would still be complicated. The only real simplification of business taxation I can think of would be to shift to a gross receipts tax with no deductions. That would likely cause major economic effects as it greatly favors high-margin businesses and makes starting businesses really tough. So that may not be workable.

Taxes could be made simpler and fairer...if the only aim was to finance the country, but a huge part of the impetus behind tax laws is manipulation of the economy, and of our society. The Earned Income Credit is supposed to reward people for staying off welfare. Depreciation is allowed to encourage business investment. Anyone who works with taxes can give examples. I just don't see Congress giving up that kind of power.

I concur. This "power" is the power to buy votes.

I think the Death Tax should be eliminated, or replaced with a version of the Canadian system - all assets are marked to market, and the existing tax structure used to calculate what is owed. No unrealized gains at time of death - no taxes. Very low exemption threshold, and some method of postponing taxes by retaining the existing basis at time of death.

Indeed. This is fundamental problem with the Fair Tax idea that a "simpler" flat tax system will lead to a burst of economic growth (as if the real complexity in the U.S. income tax code came from the fact that it's a progressive income tax).

I'm frequently amused by the fact that the economists who bemoan the impact of the tax code's complexity are so often the same people who advocate using the tax code to address perceived imbalances, externalities, etc.

First, I'd want to be clear about what makes taxes complicated and what doesn't. The complication is entirely in the calculation of taxable income. For most people, the various tax brackets add no complication whatsoever because they're baked into the tax tables.

So I'd take special cases out of the tax code. A good place to start would be the mortgage deduction, which is close to worthless as a way to make housing affordable, since the people for whom it'd matter don't itemize. Since housing prices are mostly determined by what monthly payment buyers can afford, all it does is inflate housing prices, which is a gift to real estate agents paid a % of the sale price. The medical insurance deduction should go too, an antique left over from trying to evade WW II wage controls.

Actually, the estate tax (please use its real name, not the disinformation misnomer) works pretty well. With a $10M deduction for married couples, and most rich people are married, it only affects a small number of people who can afford it. The stories about breaking up family farms and small businesess are mostly, perhaps entirely bogus, and frankly, if you have $10M in assets and you never bothered to make an estate plan, it's hard to feel sorry for you.

The problem with marking to market and not collecting tax is that creates a giant loophole for illiquid assets passed from one generation to the next, such as big chunks of real estate.

That sounds a lot like getting rid of the regular income tax and applying the AMT to everybody.

On Sun, 22 May 2016 20:24:13 EDT, "Reggie" wrote in

Unfair, and unwieldy to boot.

An 11% flat tax starting at $40k gross income.

The mortgage interest deduction puts homeowners on the same footing as renters, since interest is a deductible expense for rental properties, and thus is reflected in the rental price. The fact that many people don't itemize is irrelevant. It simply means they are paying little or no tax, or the tax simplification intended by the standard deduction is working.

The medical insurance deduction should go too, an antique left

All employer paid health benefits should be included in taxable income.

It is a death tax. There are many types of estates, and this applies to DECEDENTS estates, A DEATH is required. It is not a misnomer to call this a death tax.

With a $10M deduction for

And this is unfair. If there is such a tax it should apply to all.

The stories about breaking

Thanks, pal, I have worked hard, paid boodles taxes, and this is the thanks get. I don't think anyone's idea of who "should be felt sorry for" should have any business in taxation. I don't feel sorry for the MILLIONS of people who get BILLIONS of stepped up basis without paying a dime in estate or capital gains taxes.

Fine. Collect the tax. From EVERYBODY, not just those you "don't feel sorry for".

Canada may have a method for collecting those taxes over time, or our better thought out tax laws could.

Without definitions of 'fair' and 'unfair' this isn't an answerable question. Since there is no universal (or even widespread) agreement on what is 'fair' in regards to the tax system, the details all get fought out in the political system where self interest and political power are far more important than any abstract sense of fairness.

Discussions on tax fairness tend to be as productive as discussions about religion.

Not really. Landlords can deduct interest, but they also have to pay income tax on the rent. It would be grossly impractical to tax homeowners on the imputed value of the rent they pay themselves, so it's a lot easier just to say no tax on the rent and no deduction on the interest.

It's odd, I hear this a lot from people who will never have anything close to a $10M estate, not so much from people who do. I'm reminded of the famous Anatole France quote "In its majestic equality, the law forbids rich and poor alike to sleep under bridges."

You can do whatever you want with your money while you're alive. The estate tax only limits what goes to people who did nothing but be lucky in their choice of ancestors. And it's not like you can't leave them anything -- after the estate tax they still get $10.9M plus about

The point of the estate tax is partly that it funds the government and partly that it deliberately makes it hard to have huge hereditary estates passed down over generations. One of the reasons the US has been different from Europe and other countries is that we haven't had entrenched rich elites. Of course, these days a lot of people seem to think that would be a good idea.

For those of you who even care about this (I don't.) and have an hour and a half to view an intelligent discussion of just this topic........

The intro:

You're wrong, death is not required for the tax to kick in. It's actually an integrated gift and estate tax. If you give away all your assets when you are alive, you will pay the same tax as if you wait until after you die.

As the Republicans like to say, this is a society of merit. What kind of merit is there in inheriting a huge sum of money?

I would suggest that the best way would be let the people getting the stuff decide. If you want the step in basis, pay the tax (although I would keep it at the cap gains rate). If not, you don't and pay the cap gains when the asset is finally sold and not just passed along.

Serious question: Exactly how does it put the same footing as renters. The renters don't pay the interest and don't get the deduction, the owners of the property get the deduction. Did I miss something?

I have NEVER heard anything other than "let's take iit from the rich". You have actually heard low net worth people say THEY should pay an estate tax, even a small amount? Never!

I'm reminded

If it was truly designed to avoid large hereditary estates, it would take into account how much money is being given to an individual. $10M to one person is taxed the same as $1M to each of ten people.

It also treats two estates vastly different, depending on circumstances.

that is only because they wanted to fix the loophole that allowed people to escape the death tax.

quite a bit more than someone who has no relation to the deceased, and who never did a thing to help the deceased earn the income, assist with illnesses, etc. Clearly such a family member is more deserving than someone sponging off the money that has been filtered through the government.

Why is it better for the government to decide what to do with the money than the person who actually made it? If the next generation is able to keep up the good work, then again why should the government decide. If the next generation blows it, the problem is solved. Estate and Gift Taxes are solely and utterly based on the assumption that someone has more money than some else thinks they should. There is no real economic reason for their existance.

That is quite true -- they reflect a policy decision going back to the early 20th century that we don't want ever greater concentration of wealth. They're a fairly efficient way to do that, since 998 out of every 1000 estates don't have to pay anything so the administrative costs are small, and it is a well accepted economic principle that the marginal utility of money decreases as you have more of it.

And, for the umpteenth time, for those 2 out of 1000 estates that do pay tax, it's not like it's suddenly impoverishing anyone. With no estate planning at all, a couple's heirs still get $10.9M plus 60% of everything above that. Brookings says the average tax rate on the few estates that pay tax is 16%.

Your math doesn't add up like mine :-). One also has to consider the state's estate tax. I was executrix for an estate which was valued a tad over $500K because of a life insurance policy which was a workplace benefit. I ended up writing two checks greater than $100K for estate taxes. The state's check was greater than the Fed's because of the state used the entire valuation of the estate; the Fed used the amount greater than $500K.

However, "huge" is no longer an upper class value; it can very well be a lower class value if the deceased owns a home and has life insurance.

/BAH