Tax Day Pipe Dreams

What if we let economists and journalists write the tax code?

To those few truly bold procrastinators among us who have yet to do your taxes: I feel your pain. I've been there. But along with the grand tradition of lavish profanity and despair on the day before taxes must be filed is the even grander tradition of economists and journalists using tax day as an opportunity to offer slightly off-the-wall proposals for tax reform. The upsurge of post-Freakonomics economists with decent writing skills has really pumped up the genre.

As a public service to my fellow procrastinators--read the article, then do your taxes--I offer you the dreams of tax reform from many Aprils, past and present. Read ‘em and weep:

Cap tax bills for the rich, writes Stephen E. Landsburg of Slate. It will distribute taxes down the income scale and make everyone feel growing pains when government expands:

I propose a constitutional amendment capping everyone's tax bill at (say) five times the average. Thus, if the average American pays $10,000 in taxes some year, no American could be required to pay more than $50,000 that year. That would force many taxpayers to share the cost of any new government spending, and so ensure broad opposition to the growth of government....

Adding a cap to the current system would improve efficiency (there would be no disincentive to earn income beyond a certain level), while maintaining the natural safeguards against confiscatory government that are built into the income tax. In fact, those safeguards would be strengthened by the fact that any tax increase would have to be quite broad-based. As a bonus, a cap would bring the income tax closer to being equitable, in the true sense of the word. The offsetting disadvantages? None, as far as I can see.

Clamor for an IRS crackdown, say Freakonomics guys Stephen J. Dubnet and Steven D. Levitt. The IRS should be more "tough and cruel" so that we can pay less:

Unless you are personally cheating by one-fifth or more, you should be mad at the I.R.S.-not because it's too vigilant, but because it's not nearly vigilant enough. Why should you pay your fair share when the agency lets a few hundred billion dollars of other people's money go uncollected every year?

Do away with the estate tax, murmurs Gary Becker, as an aside in a discussion of charitable giving:

Although this will not be the main focus of my discussion, I support the abolition of the estate tax, or at least its significant weakening to cover only very large fortunes, perhaps along the lines of the recent bill on reform of the estate tax passed by the House of Representatives. The present estate tax is too discouraging to accumulations of moderate amounts of capital in small businesses and other ways. It also encourages legal and accounting spending devoted solely to finding and exploiting loopholes that is considerable relative to the tax revenue the estate tax raises (about $30 billion in 2005). If the concern is about inequality caused by inheritance, the tax should not be on estates, which may be divided up among a number of heirs, but on the amounts inherited by individuals.

Suck it up and accept the marriage penalty, sighs former Reason editor Virginia Postrel, in the face of mathematical and political impossibility:

Truly eliminating the marriage penalty, whether by flattening rates or taxing everyone as an individual regardless of marital status, would mean big tax cuts for high-income families--red meat for the people currently denouncing the Bush tax cuts as unduly slanted toward the rich. Just as controversially, these measures would also mean eliminating the marriage bonus.

The penalty persists not only because Americans want contradictory things from the tax code but because the code's very distortions simultaneously serve two political constituencies: traditionalist conservatives who don't want married women to work, and redistributionist liberals who don't want them to earn too much money.

"Expand the AMT!" is the unlikely cry from Alex Tarrabok of Marginal Revolution.

We shouldn't get rid of the Alternative Minimum Tax we should expand it. The AMT is a flat tax, it's broad-based (few loopholes), it doesn't allow for deduction of state and local taxes (which only increases the incentive of states and localities to raise taxes) and it's simple. The AMT should be reformed along the edges e.g. by indexing it to inflation (after more people are covered!) but overall it's a much better tax than the current income tax.

I assume that readers know that I am not in favor of raising taxes but let me be clear. We should expand the AMT but get rid of the income tax.

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