Blog: Tax Day and a Parable about Fairness

Statement

Today is Tax Day, which means that many of you are likely to be a little grumpier than usual--particularly if you're self-employed and have to pay your taxes quarterly throughout the year instead of having them withheld for you. In observance of the occasion, I'm calling attention to my own policy position on tax reform, as well as some updated factoids about our obscenely wasteful tax code and a modern-day parable about the progressive income tax. (Please suspend disbelief for a moment; it's actually good reading!).

Fundamental tax reform--by which I mean a real change in the way we raise revenue rather than just fiddling with rates or deductions--has long been one of our most pressing political needs. On this website, I treat it as a matter of reforming Congress. Here's what I've written there:

This may be the most important reform of all. The Internal Revenue Code, weighing in at a hefty 5.5 million words, is an affront to human rationality. Its complexity saps billions of hours of productive energy from the economy and provides an all-too-tempting hiding place for political favors to well-connected special interests.

In addition, the dizzying welter of rates, exemptions, deductions, and credits has undermined social consensus about who should pay what. High-income Americans sometimes argue that they are paying more than their fair share. For example, the Census Bureau reports that in 2000 the richest 20% of households earned 49.65% of the income but paid 76.6% of the taxes. Is that fair? The middle fifth earned 14.85% of the income but paid only 6.9% of the taxes. Is that fair? Meanwhile, lower- and middle-income taxpayers complain that the rich have too many ways to shield their income from taxation. Wages for a hard day's labor are subject not only to income tax but to the regressive payroll (social security) tax, while dividends and capital gains enjoy preferential income tax treatment are not subject to the payroll tax at all. Is that fair? And if the rich really think the poor have it too soft, why don't they just quit their desk jobs and earn less? The subjectivity inherent in the fairness question makes it a perennial occasion for class warfare.

Better alternatives abound, including the Flat Tax, the FairTax, and the intriguing "Automated Payment Transaction Tax." Any of these proposals would be preferable to our current income tax, provided that the income tax is eliminated. Simply layering another tax on top of the existing income tax (as many believe the Obama administration will propose with a "Value Added Tax") would be a disaster.

Tax policy is usually considered primarily as a matter of economic regulation, but we should also consider it as a matter of political philosophy. In particular, a flat tax, sales tax, or APT tax would emphasize our common membership in one community and our common responsibility to ensure that public needs are paid for. For example, if we are already paying a retail sales tax of 25% and we decide to spend $550 billion for a prescription drug benefit, we can either raise the sales tax, cut spending elsewhere, or borrow the money. The one thing we would not be able to do would be to start a big fight about whether the cost of the benefit should somehow be borne by some of our citizens and not others. Even though the rich would pay more tax than the poor, every citizen would be subject to that same 25% rate, and would have a clear stake in the spending decisions we face as a nation. That's a lot of citizenship and a lot of community at a very reasonable price, and we save 6.4 billion hours in the bargain.

Most of that text was written years ago (like I said, I've been beating this drum a long time), and some of the statistics have become a little dated. So I was happy today to receive a friend's link to an updated list of 24 outrageous facts about our tax code. Facts 4, 5, 6, 7, and 23 were my, uh, "favorites." Share yours over on the Less We Can Facebook page.

So what's this about a parable? Well, Once upon a time there were three brothers named Tom, Dick, and Harry. But I'll let Kip Hagopian tell you the rest (as it appeared in the Hoover Institution's Policy Review last April.) Trust me on this and follow the link. Even if you only read the first ten paragraphs, you'll thank me.

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