Monday, December 10, 2012
WHY WE NEED TAX REFORM
When I talk about the need for tax reform, as I have been doing for years now, I do not mean only as a way to reduce the deficit.
The current US Tax Code is a mucking fess. I doubt anyone really disagrees with this assessment. It needs to be rewritten. And it would need to be rewritten even if we had a surplus.
As we rewrite the Tax Code we should certainly take into consideration the need to reduce the deficit, but creating more income via taxes is not more important than reducing unnecessary and wasteful spending.
The Tax Code needs to be made much, much simpler and much more fair.
The purpose of the Tax Code is to raise the income necessary to run the government. It should not be used to solve all the financial and social problems of the country. It should not be used as a method of distributing social welfare program benefits. It should not be used as a means of “redistributing” income among the “classes”. The Tax Code is not Robin Hood.
While we need to look at current “tax expenditures” and “tax loopholes” closely and keep only those that are absolutely necessary and appropriate, taking such “expenditures” out of the Tax Code does not necessarily mean doing away with them altogether.
Obviously there are many “tax expenditures” that are neither appropriate nor necessary in any context. For example, we do not really “need” a Schedule A deduction for real estate taxes and mortgage interest on personal use vacation homes, home equity interest on money borrowed for purposes other than personal residence capital improvement, or for mortgage insurance premiums. But there are certain benefits currently distributed through the Tax Code that have true merit as a government expense.
Let us take for example the various tax benefits for post-secondary education, such as the American Opportunity Credit. It is appropriate for the government to encourage such education. The $4,000 available via the AOC should be continued, but distributed through the “normal” method of providing student financial aid as part of the budget of the Department of Education. If a student qualifies for all or part of this $4,000 benefit it should be distributed directly to the appropriate corresponding educational institution as a grant or scholarship.
As I have said before, doing it this way is much “more better” for the student. The aid is provided “up front”, when it is needed to pay for tuition and fees. The student, or his/her parents, does not need to borrow additional money and then wait a year or so until the tax refund is issued to get the benefit.
And it is also “more better” for the government, as the qualification of the recipient can be verified in the normal process of approving student financial aid, greatly reducing potential fraud.
The same argument can be used for the current Earned Income Credit – perhaps the largest federal welfare program and certainly on top of the list of sources of tax fraud.
And this logic can also be applied to energy credits, with the appropriate credit being used as a point-of-purchase “discount”, like what was done rather successfully a couple of years ago with the “Cash for Clunkers” program. And so on.
Removing certain “tax expenditures” from the Code will not necessarily increase net government income. It will just move the expenditure to a more appropriate “location”.
A tax deduction or credit should either be allowed or not allowed. There should be no phase-outs or limitations based on income. If a tax deduction or credit is appropriate, it is appropriate for all taxpayers. Limiting deduction or credits based on income is not a substitute for increased tax rates (and, FYI, I personally do not believe in progressive tax rates).
When, or rather if, the idiots in Washington actually begin to seriously tackle tax reform, deficit reduction should be only a secondary consideration and not the main thrust.