A Tax Change Whose Time Has Come
If you read through the proposal by the bi-partisan commission on deficit reduction there are a few important details that didn’t make the headlines. That’s unfortunate because there’s a lot to like about the entire proposal.
Most beltway politicians either have criticized it or have tried to distance themselves from it (Obama). It’s easy to see why, it addresses many sacred cows or ‘third rail’ issues such as the mortgage interest deduction, investment tax rates and Social Security benefit
What hasn’t been reported widely is that the proposal suggests reducing and simplifying all the income tax rates. The top tax rate in the proposal would only by 23%. How is this possible, if the plan is trying to reduce the deficit? Well, all those sacred cows are slaughtered. By eliminating deductions, there is room to reduce the deficit as well as lower rates.
I’m going to go out on a limb here and call this a Flat Tax. You will never here any politician who is looking to get elected call it that, but that’s what it is.
You see, marginal income tax rates have varied over the years from very low (<10%) to very high (90%). Inevitably, when rates go higher, special interests seek relief which manifests itself as “special treatment”. It’s all that special treatment that’s gotten us into this mess of having such a complicated tax code.
You may have seen past articles that talk about how most taxpayers pay similar overall
tax rates (a fact that Warren Buffet has famously pointed out previously) no matter how much income they make. This is a clear indication that the higher marginal tax brackets aren’t working to get more revenue.
At some tax rate, though, most people will not seek special treatment, especially if
all the various forms of income are treated equally. For example, workers might seek
investment compensation instead of wage income because the rates on each are currently significantly different. Also, the mortgage interest rate deduction distorts the housing market by creating incentives to overbuild home size. If these distortions didn’t exist, this would create more efficiency in the economy as well as raise more revenue.
This is a change whose time has come.