Tags: half-baked

Half-baked Thought #1: A problem with Federal taxes

I often have things I want to say or talk about, be it political, technological, mathematical, etc. But I'm struck by analysis paralysis: if I'm not perfect in what I want to say, I don't say it. This is an attempt to get out my thoughts before they are fully finished, because some thoughts are never fully baked without feedback. So here's the first in a continuing series of half-baked thoughts...

For all the various proposals and bellyaching thrown around over the past couple of decades, the structure of the US Federal Income Tax scheme has been relatively constant: About a half-dozen marginal tax brackets (indexed to inflation) ranging from about 10-35%, with deductions for various essential and incentivized expenses. This structure was put in place in the 1986 tax overhaul, and while there have been 1 or two brackets added (near the bottom) and some of the rates and bracket boundaries have been tweaked, it's nothing compared to the pre-1986 tax structure. In addition to the taxes on earned income in those brackets, there's a separate scheme for capital gains, and the AMT in place to catch people who've been able to take too much advantage of the incentivized deductions.

The above is, of course, a simplification. It ignores such issues as estate taxes and all the various use taxes and fees-for-services that are also part of the tax code. I know that, so don't raise a fuss about that simplification, yet.

Deficit spending is a problem, and has always been a problem in the US (there are occasional, rare, periods when the Federal budget earns a surplus, most recently in the late 1990's, and in the late 1960's before that, but they are not common). I'm not going to pick on any party or president or congress; there's enough blame to go around. Many have seen this as a problem, and there have been many ideas to solve it. Most recently, there have been "pay-as-you-go" rules in Congress, where any spending increase or tax cut has to be offset by a spending decrease or tax increase to balance it. The idea being that the spending bill will end up being "revenue neutral" and with luck will improve things without actually spending any more Government money. This rarely works.

Most often, when a program is suggested that would cost money the result is to institute a "special" tax to pay for it. The tax is usually targeted at the same general field as the program, so either constitutes a use-tax (like the gas taxes designed to help pay for the highway system) or a related excise or sin tax (like cigarette taxes designed to help pay for health care). A current example is the idea of health insurance subsidies for low-income citizens being paid for by a tax on high-cost health insurance plans.

But what never gets touched for this "pay-as-you-go" is the base income tax schedule. I have never heard any politician say "X is a vital service which needs increased government support, and will cost $Y/year, which we can get in a revenue neutral way by increasing the 25% tax bracket to 25.5% or the 15% long-term capital gains rate to 16%." Everything new gets funded by specialized taxes most people don't notice.

The end result is that the government finance system is fragmented: the base income tax system pays for most stuff that's been around for a long time, while there's a whole alternate system of special taxes and fees supposedly designed to make everything "revenue neutral", but of course rarely works.

This is fundamentally different than how most local governments pay for things (in theory, anyway). Most local governments have a known property tax base and an adjustable tax rate. Each year they go "We need to spend $X money to provide necessary government services, and our total assessed taxable properties are worth $Y, so we set the tax rate to $(X/Y)/(property value) and that'll pay for it all." There are of course massive arguments over what constitutes "necessary government services", whether $X is too high, whether my share of $Y is too high, etc, and there are usually other income sources which cut down on the amount of $X needed to be raised by property taxes, but that's basically it.

The local tax rates are determined based on actual budgeted spending, while Federal tax rates are somewhat fixed, and aren't strongly tied to budgeted spending. The local tax rates are determined holistically, taking into account the entire budget, while Federal taxes are broken into several semi-independent tax fifedoms most of which are supposed to be "revenue neutral" by themselves.

I think the Federal system is overly complex, doesn't relate general revenues to general expenses, and has no real method for adjusting tax rates to balance the budget.

A simpler system, such as a flat tax or the "Fair Tax" (national sales tax with monthly rebates of taxes on poverty-level income) would be far easier to tweak, as part of the appropriations bills would be to adjust the tax rate to try to achieve balance, in much the same way that the local tax rates are adjusted to balance.

I'm sure I'm missing something, and I'm sure you'll point it out, but like I said, this thought is only half-baked.