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Tax Reform and the difficulties of simplification [Long OP]

spacekungfumanspacekungfuman Poor and minority-filledRegistered User, __BANNED USERS regular
edited December 2011 in Debate and/or Discourse
I know there are other threads this discussion could go in, but I think the topic of tax simplification is important enough to warrant its own discussion separate from discussion of income inequality or the campaign process.

In looking over these forums, I have seen a number of people arguing that one clear way to improve America would be tax reform and simplification. As a corporate tax and employee benefits attorney in private practice at a major US law firm who recently completed pro bono work on a draft federal tax credit for certain low income individuals, I just wanted to make it clear how difficult that simplification can be. This is not intended to be a discussion about whether or not tax simplification should occur; instead I want to focus on why it is so difficult to accomplish it.

For purposes of this discussion, I will assume that someone in favor of tax simplification (i) generally supports uniform effective tax rates for similarly situated people (i.e., that people earning similar incomes should pay taxes at the same rate, instead of being able to lower their effective rates through credits and structuring) and (ii) is not concerned with the (extremely complex) transition issues in going from the current tax system to a new system.

If we stick with an income tax like the current federal tax system, the first issue that we face is defining income. While this might seem simple (just look at what people earn or receive) there are a number of key questions that we face, such as if people should be taxed on cash or cash plus property (including the receipt of non-cash services such as employer provided healthcare). If we answer by saying we will only tax cash, then people who can afford to be less liquid will take compensation as property. If we say that both cash and property should be taxed, then we may require people to sell property they would not have or to decline things like health care, to afford to pay their taxes. There are countless other questions around the definition of income, but this should illustrate that there is no easy answer.

Questions like the above are not easy to answer, but they are also not impossible. But my sense is that when people talk about tax simplification, they are largely concerned with the benefits that corporations and high income individuals get through tax “loopholes.” While there are certainly some sections of the tax code that seem to fit this description (such as so-called rifleshot provisions which are only intended to apply to a single taxpayer in a single year), a lot of these “loopholes” actually serve important purposes. For example, people often say there is abuse around the like-kind exchange rules (rules which allow two taxpayers to exchange similar property without paying tax until they sell the property they receive) and while abuse is possible, without the rules there would be no way for these exchanges to happen, since both parties would have to sell the property they exchange to cover their taxes. A more fundamental and important “loophole” is the section of the code allowing for tax free reorganizations of businesses. Without tax free reorganizations, companies would not be able to change their corporate form or merge with other companies without triggering extremely high tax bills. On the one hand, these rules are enormously complex, and navigating them in connection with a single merger or acquisition costs tens or hundreds of thousands of dollars in legal and accounting fees. But if we did not have these complex rules in our simplified tax code, then the tax consequences of these deals would distort the market, and cause countless deals which are sensible apart from taxes to be irrational.

A more fulsome discussion of the tax code or tax policy is beyond the scope of a forum thread, but I wanted to illustrate some of the complexities in tax simplification. The code is complicated (the code plus regulations literally takes up a full shelf in my office) but that complexity arose in response to questions that arose in trying to apply the tax code to circumstances that the original authors could not foresee. This does not mean that the code cannot be simplified, but I think it is important to realize that realistic simplification would most likely mean that I would reclaim half a shelf in my office, and some people would pay more in taxes. Expecting more than that (and every tax reform in US history has mostly resulted in changing some sections, while retaining and renumbering most of the code that existed prior to reform) is just not realistic in my opinion, regardless of what any politician or pundit who does not understand how the tax code operates may say.

I'm not sure how much time I will have to participate in any discussion that takes place, but I will be happy to answer any questions people have about the realities of the tax code and tax policy, and to weigh in on the technical meaning of any of the simplification proposals that have been bandied about. Thanks for reading!

Edit: Deleted reference to consumption tax. This is a thread about tax simplification, not the merits of a consumption tax vs an income tax.

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  • CelestialBadgerCelestialBadger Registered User regular
    What's so great about a consumption tax? Doesn't that mean that the very very rich, who earn more than they could ever spend, end up paying the same as the merely rich? Plus, the poor who spend every penny they earn on necessities would effectively pay a larger burden than the well-off who can save somewhat. Wouldn't it also discourage people from spending, which I was under the impression was bad for the economy?

  • bowenbowen Registered User regular
    Sales taxes are the worst taxes, and consumption tax gets lumped right into that. Mainly because rich people, sure, spend more money on average on nicer things, but the vast majority of their wealth doesn't get spent. But the vast majority of their wealth should be taxed (income, not savings). You seriously think a rich person spends more a year than an average person? They usually spend less, but what they do spend it on is usually luxury goods in comparison.

    Think Pepsi vs Store brand.

    If anything sales tax should be completely eliminated and property and income/investment taxes should be adjusted accordingly. You'll probably see an increase in revenue this way, because there's more money in play.

  • HeirHeir Registered User regular
    Bowen, I'm curious why you think a rich person doesn't spend more than an average person.

    It was my assumption they do, but I'd like to see if it's been documented.

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  • JihadJesusJihadJesus Registered User regular
    I was also under the impression that of onsimption taxes were seen as regressive. I also think that a basic issue here is just that we don't see tax policy as expenditure, therefore if we want to encourage a behavior (say, homeownership) we can pass a deduction or credit where we could never pass a sending initiative with the exact same dollar impact on the federal budget. That's a huge issue, because it means whenever we want to incentivize any kind of behavior the tax code gets more complicated.

    Even if we went to an idiotic one sentence flat tax policy the code would not stay simple if we insist on using tax policy as the primary form of implementation for policy.

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  • spacekungfumanspacekungfuman Poor and minority-filled Registered User, __BANNED USERS regular
    What's so great about a consumption tax? Doesn't that mean that the very very rich, who earn more than they could ever spend, end up paying the same as the merely rich? Plus, the poor who spend every penny they earn on necessities would effectively pay a larger burden than the well-off who can save somewhat. Wouldn't it also discourage people from spending, which I was under the impression was bad for the economy?

    I actually was hoping to discuss simplificaiton, not the merits of a consumption tax vs an income tax (which is a completely seperate and extremely complex question). I have edited to OP to reflect the focus of the thread.

    Without going into much detail, a consumption tax with a large exemption (i.e., no tax on the first $20-50k in consumption for the year) has gained widespread support among academics for a number or reasons, including the fact that it encourages saving, and saving is positively correlated with economic growth. A consumption tax also lowers certain barriers to the efficient movement of money which exist under an income tax (i.e., if you are invested in a company and see that there is another company you'd rather invest in, you may choose not to move your money due to the tax hit for selling your stock in the original company).

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    Chanus wrote:
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  • ThanatosThanatos Registered User regular
    Heir wrote:
    Bowen, I'm curious why you think a rich person doesn't spend more than an average person.

    It was my assumption they do, but I'd like to see if it's been documented.
    He isn't saying they don't spend more; he's saying they don't spend more as a percentage of their income.

  • bowenbowen Registered User regular
    What Thanatos said.

  • spacekungfumanspacekungfuman Poor and minority-filled Registered User, __BANNED USERS regular
    JihadJesus wrote:
    I was also under the impression that of onsimption taxes were seen as regressive. I also think that a basic issue here is just that we don't see tax policy as expenditure, therefore if we want to encourage a behavior (say, homeownership) we can pass a deduction or credit where we could never pass a sending initiative with the exact same dollar impact on the federal budget. That's a huge issue, because it means whenever we want to incentivize any kind of behavior the tax code gets more complicated.

    Even if we went to an idiotic one sentence flat tax policy the code would not stay simple if we insist on using tax policy as the primary form of implementation for policy.

    I think everything you have said is true, but I think its imortant to remember that even if you did not want to build social policies into the code, you would still need to introduce complexities like the ones I mentioned in the OP to avoid distorting behavior through the code.

    7zh9uu9etcor.jpg
    Chanus wrote:
    It's been a butt come true! I get to work with the absolute best boobs in the business. What more could a money ask for? Kids, aim for the freeloaders !
  • Fallout2manFallout2man Registered User regular
    edited December 2011
    The problem is this, we can't remove an income tax without putting caps on private ownership of both capital and physical property. The reason an income tax exists functionally today, or rather what I think it should exist for, is as a brake against inequality in any kind of a free market. Income taxes allow you to ensure the society doesn't get too stratified and start to decay. So we can exist without an income tax, but then that requires some serious re-jiggering elsewhere to ensure that we don't just repeat the Gilded Age all over again.

    The consumption tax people agree on because on it's face it appears more fair because in theory it is. It provides you with the freedom to chose to be taxed or not to be taxed. But that ignores the greater question of what the actual purpose of taxation is in any sort of a government. Which, let's face it, any and all government spending is redistribution of wealth. Either upwards redistribution through military-industrial and prison-industrial spending and tax cuts, or downwards redistribution through social services, graduated income taxation, etc.

    So you can't even talk about tax restructuring without first agreeing on what your goals of taxation are to begin with. In my own humble opinion I want taxation and government to act as a guarantor of fundamental fairness in all things and that means that it needs to curb certain excesses so I find the idea of progressive income taxation (with income defined as both direct cash income earned as well as any and all income earned via interest, if you tax income and interest as one unit then you prevent investments from escaping taxation) far more preferable. I'd rather we actually just got rid of loopholes all together and offset the closure of loopholes with direct spending in other areas.

    Historically tax incentives have proven to only motivate mega-corporations and wealthy individuals to contribute less to the tax base and that while it does produce some ancillary good behavior by and large it robs us of the revenue we need to seriously attack problems like poverty and proper regulation of certain industries. I'd rather that each year we adjust progressive taxation on an ad hoc approach each year based on the economy, to allow the tax policy to reflect the state of the economy and also to enable it to work for economic recovery versus against it, then also tweak spending levels each year similarly.

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  • HamHamJHamHamJ Registered User regular
    What's so great about a consumption tax? Doesn't that mean that the very very rich, who earn more than they could ever spend, end up paying the same as the merely rich? Plus, the poor who spend every penny they earn on necessities would effectively pay a larger burden than the well-off who can save somewhat. Wouldn't it also discourage people from spending, which I was under the impression was bad for the economy?

    I actually was hoping to discuss simplificaiton, not the merits of a consumption tax vs an income tax (which is a completely seperate and extremely complex question). I have edited to OP to reflect the focus of the thread.

    Without going into much detail, a consumption tax with a large exemption (i.e., no tax on the first $20-50k in consumption for the year) has gained widespread support among academics for a number or reasons, including the fact that it encourages saving, and saving is positively correlated with economic growth. A consumption tax also lowers certain barriers to the efficient movement of money which exist under an income tax (i.e., if you are invested in a company and see that there is another company you'd rather invest in, you may choose not to move your money due to the tax hit for selling your stock in the original company).

    How do you possibly implement that. Who is going to keep track of how much I've spent in a year?

    While racing light mechs, your Urbanmech comes in second place, but only because it ran out of ammo.
  • bowenbowen Registered User regular
    What you end up with is a taxing scheme that taxes heavy users (historically, the poorer you are, the more you consume) and benefits the richer people as they have more money to invest because a poor family of 4 will spend a disproportionately higher percentage of their income compared to a rich family of 4.

    At best you add in subsidies for rebates like the EIC and rebate back money at the end of the year (that will just get taxed again as they try to make ends meet) and at best you end up with a taxation system that is burdened by the middle class and casually ignored by the wealthy. And the tax you'd draw in would be marginal as now you've gotta update tax laws and enforce it.

    Income and investment taxes would be a much better target, and you'd see a much better outcome too. You've already got the infrastructure in place, all you're doing is upping a percentage.

  • JihadJesusJihadJesus Registered User regular
    What's so great about a consumption tax? Doesn't that mean that the very very rich, who earn more than they could ever spend, end up paying the same as the merely rich? Plus, the poor who spend every penny they earn on necessities would effectively pay a larger burden than the well-off who can save somewhat. Wouldn't it also discourage people from spending, which I was under the impression was bad for the economy?

    I actually was hoping to discuss simplificaiton, not the merits of a consumption tax vs an income tax (which is a completely seperate and extremely complex question). I have edited to OP to reflect the focus of the thread.

    Without going into much detail, a consumption tax with a large exemption (i.e., no tax on the first $20-50k in consumption for the year) has gained widespread support among academics for a number or reasons, including the fact that it encourages saving, and saving is positively correlated with economic growth. A consumption tax also lowers certain barriers to the efficient movement of money which exist under an income tax (i.e., if you are invested in a company and see that there is another company you'd rather invest in, you may choose not to move your money due to the tax hit for selling your stock in the original company).
    For this to be true, wouldn't the highest tax rates on income from capital gains have to be higher than laughable?

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  • spacekungfumanspacekungfuman Poor and minority-filled Registered User, __BANNED USERS regular
    bowen wrote:
    What you end up with is a taxing scheme that taxes heavy users (historically, the poorer you are, the more you consume) and benefits the richer people as they have more money to invest because a poor family of 4 will spend a disproportionately higher percentage of their income compared to a rich family of 4.

    At best you add in subsidies for rebates like the EIC and rebate back money at the end of the year (that will just get taxed again as they try to make ends meet) and at best you end up with a taxation system that is burdened by the middle class and casually ignored by the wealthy. And the tax you'd draw in would be marginal as now you've gotta update tax laws and enforce it.

    Income and investment taxes would be a much better target, and you'd see a much better outcome too. You've already got the infrastructure in place, all you're doing is upping a percentage.

    Again, I was hoping to discuss simplification, which is a different topic than what form of tax system we should have. But the thinking is that if you make the exemption high enough to cover neccesities (the most commonly bandied about exemption i between $15-50k), then even poor families will have the ability to save, which is the only way that a poor family can effectively break out of poverty. It also keeps the tax from being regressive.

    7zh9uu9etcor.jpg
    Chanus wrote:
    It's been a butt come true! I get to work with the absolute best boobs in the business. What more could a money ask for? Kids, aim for the freeloaders !
  • spacekungfumanspacekungfuman Poor and minority-filled Registered User, __BANNED USERS regular
    JihadJesus wrote:
    What's so great about a consumption tax? Doesn't that mean that the very very rich, who earn more than they could ever spend, end up paying the same as the merely rich? Plus, the poor who spend every penny they earn on necessities would effectively pay a larger burden than the well-off who can save somewhat. Wouldn't it also discourage people from spending, which I was under the impression was bad for the economy?

    I actually was hoping to discuss simplificaiton, not the merits of a consumption tax vs an income tax (which is a completely seperate and extremely complex question). I have edited to OP to reflect the focus of the thread.

    Without going into much detail, a consumption tax with a large exemption (i.e., no tax on the first $20-50k in consumption for the year) has gained widespread support among academics for a number or reasons, including the fact that it encourages saving, and saving is positively correlated with economic growth. A consumption tax also lowers certain barriers to the efficient movement of money which exist under an income tax (i.e., if you are invested in a company and see that there is another company you'd rather invest in, you may choose not to move your money due to the tax hit for selling your stock in the original company).
    For this to be true, wouldn't the highest tax rates on income from capital gains have to be higher than laughable?

    The capital gains rate is low for long-term capital gains, but it is still not 0%, so it acts as a barrier to the efficient movement of money. Also, don't forget that if you hold stock for less than 1 year, you pay tax at ordinary income rates.

    7zh9uu9etcor.jpg
    Chanus wrote:
    It's been a butt come true! I get to work with the absolute best boobs in the business. What more could a money ask for? Kids, aim for the freeloaders !
  • bowenbowen Registered User regular
    bowen wrote:
    What you end up with is a taxing scheme that taxes heavy users (historically, the poorer you are, the more you consume) and benefits the richer people as they have more money to invest because a poor family of 4 will spend a disproportionately higher percentage of their income compared to a rich family of 4.

    At best you add in subsidies for rebates like the EIC and rebate back money at the end of the year (that will just get taxed again as they try to make ends meet) and at best you end up with a taxation system that is burdened by the middle class and casually ignored by the wealthy. And the tax you'd draw in would be marginal as now you've gotta update tax laws and enforce it.

    Income and investment taxes would be a much better target, and you'd see a much better outcome too. You've already got the infrastructure in place, all you're doing is upping a percentage.

    Again, I was hoping to discuss simplification, which is a different topic than what form of tax system we should have. But the thinking is that if you make the exemption high enough to cover neccesities (the most commonly bandied about exemption i between $15-50k), then even poor families will have the ability to save, which is the only way that a poor family can effectively break out of poverty. It also keeps the tax from being regressive.

    That seems pointless, you might as well just raise income tax and be done with it.

  • spacekungfumanspacekungfuman Poor and minority-filled Registered User, __BANNED USERS regular
    The problem is this, we can't remove an income tax without putting caps on private ownership of both capital and physical property. The reason an income tax exists functionally today, or rather what I think it should exist for, is as a brake against inequality in any kind of a free market. Income taxes allow you to ensure the society doesn't get too stratified and start to decay. So we can exist without an income tax, but then that requires some serious re-jiggering elsewhere to ensure that we don't just repeat the Gilded Age all over again.

    The consumption tax people agree on because on it's face it appears more fair because in theory it is. It provides you with the freedom to chose to be taxed or not to be taxed. But that ignores the greater question of what the actual purpose of taxation is in any sort of a government. Which, let's face it, any and all government spending is redistribution of wealth. Either upwards redistribution through military-industrial and prison-industrial spending and tax cuts, or downwards redistribution through social services, graduated income taxation, etc.

    So you can't even talk about tax restructuring without first agreeing on what your goals of taxation are to begin with. In my own humble opinion I want taxation and government to act as a guarantor of fundamental fairness in all things and that means that it needs to curb certain excesses so I find the idea of progressive income taxation (with income defined as both direct cash income earned as well as any and all income earned via interest, if you tax income and interest as one unit then you prevent investments from escaping taxation) far more preferable. I'd rather we actually just got rid of loopholes all together and offset the closure of loopholes with direct spending in other areas.

    Historically tax incentives have proven to only motivate mega-corporations and wealthy individuals to contribute less to the tax base and that while it does produce some ancillary good behavior by and large it robs us of the revenue we need to seriously attack problems like poverty and proper regulation of certain industries. I'd rather that each year we adjust progressive taxation on an ad hoc approach each year based on the economy, to allow the tax policy to reflect the state of the economy and also to enable it to work for economic recovery versus against it, then also tweak spending levels each year similarly.

    I respectfully disagree with your assertion that the income tax exists as a brake on income inequality. The current tax brackets are among the flatest in US history, and due to the low long-term capital gains rates, the wealthy actually pay less on the bulk of their income than the poor (at least among those of the poor who pay taxes). I think that the income tax is our dominant tax as a matter of historic accident. Most of the world has moved to primarily using consumption taxes, such as a VAT.

    As far as what taxation should be about, that is obviously an incredibly broad topic which I do not think we could make any meaningful progress on through discussion on an internet forum, since it is so subjective. The only thing that I will say is that any tax can be designed to raise a targetted amount of revenue, and we could easily replace the US income tax with a consumption tax on a revenue neutral or revenue positive basis.

    7zh9uu9etcor.jpg
    Chanus wrote:
    It's been a butt come true! I get to work with the absolute best boobs in the business. What more could a money ask for? Kids, aim for the freeloaders !
  • ThanatosThanatos Registered User regular
    HamHamJ wrote:
    What's so great about a consumption tax? Doesn't that mean that the very very rich, who earn more than they could ever spend, end up paying the same as the merely rich? Plus, the poor who spend every penny they earn on necessities would effectively pay a larger burden than the well-off who can save somewhat. Wouldn't it also discourage people from spending, which I was under the impression was bad for the economy?
    I actually was hoping to discuss simplificaiton, not the merits of a consumption tax vs an income tax (which is a completely seperate and extremely complex question). I have edited to OP to reflect the focus of the thread.

    Without going into much detail, a consumption tax with a large exemption (i.e., no tax on the first $20-50k in consumption for the year) has gained widespread support among academics for a number or reasons, including the fact that it encourages saving, and saving is positively correlated with economic growth. A consumption tax also lowers certain barriers to the efficient movement of money which exist under an income tax (i.e., if you are invested in a company and see that there is another company you'd rather invest in, you may choose not to move your money due to the tax hit for selling your stock in the original company).
    How do you possibly implement that. Who is going to keep track of how much I've spent in a year?
    It's super-easy: if it's a $50,000 exemption on a 10% tax, you just write everyone a check for $5000.


  • spacekungfumanspacekungfuman Poor and minority-filled Registered User, __BANNED USERS regular
    bowen wrote:
    bowen wrote:
    What you end up with is a taxing scheme that taxes heavy users (historically, the poorer you are, the more you consume) and benefits the richer people as they have more money to invest because a poor family of 4 will spend a disproportionately higher percentage of their income compared to a rich family of 4.

    At best you add in subsidies for rebates like the EIC and rebate back money at the end of the year (that will just get taxed again as they try to make ends meet) and at best you end up with a taxation system that is burdened by the middle class and casually ignored by the wealthy. And the tax you'd draw in would be marginal as now you've gotta update tax laws and enforce it.

    Income and investment taxes would be a much better target, and you'd see a much better outcome too. You've already got the infrastructure in place, all you're doing is upping a percentage.

    Again, I was hoping to discuss simplification, which is a different topic than what form of tax system we should have. But the thinking is that if you make the exemption high enough to cover neccesities (the most commonly bandied about exemption i between $15-50k), then even poor families will have the ability to save, which is the only way that a poor family can effectively break out of poverty. It also keeps the tax from being regressive.

    That seems pointless, you might as well just raise income tax and be done with it.

    That's fine. But assuming we stay with an income tax system (which is one of the assumptions the OP is explicitly based on) how do you feel about the difficulties in keeping that tax rate relatively "uniform" among similiarly situated tax payers?

    7zh9uu9etcor.jpg
    Chanus wrote:
    It's been a butt come true! I get to work with the absolute best boobs in the business. What more could a money ask for? Kids, aim for the freeloaders !
  • bowenbowen Registered User regular
    Consumption and sales tax rear their head when you start considering people on disabilities and those that no longer draw incomes. Is it fair to tax those people even though they don't draw incomes? If you're, again, tying it to "well if you make less than 50k, you're okay" then what is the difference from a straight income tax? You want to have some free interest while you wait for the rebates to get mailed out?

  • spacekungfumanspacekungfuman Poor and minority-filled Registered User, __BANNED USERS regular
    Thanatos wrote:
    [quote="HamHamJ"How do you possibly implement that. Who is going to keep track of how much I've spent in a year?
    It's super-easy: if it's a $50,000 exemption on a 10% tax, you just write everyone a check for $5000.
    [/quote]

    Actually, you are thinking of a deduction. Exemptions are dollar for dollar, and are unaffected by your marginal tax rate. A $50,000 exemption would mean that you could spend up to $50,000 a year without paying a penny in taxes.

    7zh9uu9etcor.jpg
    Chanus wrote:
    It's been a butt come true! I get to work with the absolute best boobs in the business. What more could a money ask for? Kids, aim for the freeloaders !
  • EddyEddy pale Gengars I loved beside Cerulean CaveRegistered User regular
    The Russians managed to pretty radically simplify their tax code, hehe

    But their government is pretty well established as not being particularly heedful of *spending* the tax income on social projects and such, so that gives them a bit of wider budgetary wiggle room for numbers discrepancies

  • bowenbowen Registered User regular
    That's fine. But assuming we stay with an income tax system (which is one of the assumptions the OP is explicitly based on) how do you feel about the difficulties in keeping that tax rate relatively "uniform" among similiarly situated tax payers?

    Isn't the situation currently uniform anyways? Aside from above the line deductions.

  • spacekungfumanspacekungfuman Poor and minority-filled Registered User, __BANNED USERS regular
    bowen wrote:
    That's fine. But assuming we stay with an income tax system (which is one of the assumptions the OP is explicitly based on) how do you feel about the difficulties in keeping that tax rate relatively "uniform" among similiarly situated tax payers?

    Isn't the situation currently uniform anyways? Aside from above the line deductions.

    If you run a quick google search, you will find articles on the fact that very few of the "rich" actually pay taxes at the top marginal rate. Through the use of tax structuring, planning and industry specific deductions/credits, individuals and corporations with similiar incomes may pay very different amounts in taxes.

    7zh9uu9etcor.jpg
    Chanus wrote:
    It's been a butt come true! I get to work with the absolute best boobs in the business. What more could a money ask for? Kids, aim for the freeloaders !
  • bowenbowen Registered User regular
    Ah well, reforms on investments would probably nip individual taxes, and recalibrating the tax system to remove corporations as people would probably help immensely.

  • zepherinzepherin Registered User regular
    edited December 2011
    Part of the problem with the tax system is a problem that is an epidemic in pretty much every federal system. The government doesn't remove very many of the old rules and regulations. They just keep adding new ones. So with taxes that are all rules and regulations the government keeps adding layers and making changes without cutting anything out. So we now have over 72,000 pages of tax code. For simplification purposes I think we should treat corporations, LLCs, partnerships, non profits, religions, and contractors the same in the eyes of the tax man. no special treatment, nothing extra. Simply deductions to none for any person or organization other than a standard deductions and tax credits to encourage or discourage certain behaviors and businesses. Or maybe not no deductions, but simplify the deduction process. It starts getting overly complicated and many of the rules are unnecessary.

    zepherin on
  • spacekungfumanspacekungfuman Poor and minority-filled Registered User, __BANNED USERS regular
    bowen wrote:
    Consumption and sales tax rear their head when you start considering people on disabilities and those that no longer draw incomes. Is it fair to tax those people even though they don't draw incomes? If you're, again, tying it to "well if you make less than 50k, you're okay" then what is the difference from a straight income tax? You want to have some free interest while you wait for the rebates to get mailed out?

    The exemption can be handled as a rebate check or by not requiring point of sale withholding (which means there is no wait). The difference between an income and consumption tax is really what happens above the exemption. Under a consumption tax, more will be saved, but when you buy things, you will just factor the tax into the cost (just like how sales taxes work now). If people choose to save all their money and never spend anything, national savings rates increase, which has a number of benefits for the economy. If people choose to spend (and most people will continue to buy things like cars, houses, clothing, meals out, etc) then the government will collect its taxes on that spending, including spending by companies (which will have more available capital to spend, since people will be investing more of their income in those companies).

    On the question of the disabled, I guess the question is why wouldn't we tax them? If they have money in excess of the exemption and choose to spend it, I'm not sure that I understand how that is a problem. We tax people on disability income now (at least in certain circumstances), so it wouldn't really be different.

    7zh9uu9etcor.jpg
    Chanus wrote:
    It's been a butt come true! I get to work with the absolute best boobs in the business. What more could a money ask for? Kids, aim for the freeloaders !
  • Fallout2manFallout2man Registered User regular
    edited December 2011
    I respectfully disagree with your assertion that the income tax exists as a brake on income inequality. The current tax brackets are among the flatest in US history, and due to the low long-term capital gains rates, the wealthy actually pay less on the bulk of their income than the poor (at least among those of the poor who pay taxes).

    Oh no, currently I'm in total agreement with the above. I just was saying I think that's what it should be. Looking back at our economy in times of prosperity in general the USA seemed to work best when there was a high level of progressiveness in income tax and larger amounts of government spending on social programs. So it just at least to myself makes sense to try and understand why that seemed to work (Incomes prevented from stratifying too much and downwards redistribution to prevent social decay that occurs when you allow unlimited property and capital accumulation by individuals or business entities.)
    I think that the income tax is our dominant tax as a matter of historic accident. Most of the world has moved to primarily using consumption taxes, such as a VAT.

    Whether the world has "moved on to consumption taxes" are irrelevant. Are the consumption taxes actually doing good or are they not? Before you can even ask that question you need to have decided on what the purpose of taxation even is.
    As far as what taxation should be about, that is obviously an incredibly broad topic which I do not think we could make any meaningful progress on through discussion on an internet forum, since it is so subjective.

    How will you know if your policy is succeeding or failing unless you have agreed on what success or failure even looks like? You can't do that without first forming consensus on a purpose of taxation and yes, you actually can have a productive discussion on the issue. It's just that you can't allow people to duck out by claiming they don't need to have a reason or explain their views and why they hold them. People are entitled to a subjective opinion but they aren't entitled to have it enshrined in law. But you can form a consensus by asking everyone what they want to get out of a given system and try and find the common ground in what everyone's after.

    This works with people who are required to have a reason informed upon facts for their opinions. The reason consensus breaks down in politics usually is because congress is allowed to be stupid and unreasonable and as long as they parrot whatever sound bytes their voters happen to tangentially agree with (versus actually educating them and then getting their informed opinions) then they can argue dishonestly and talk past each other rather then actually pass meaningful legislation to help people's lives. When you educate people about things you'll find they can very quickly agree to things now that they know themselves what they want.
    The only thing that I will say is that any tax can be designed to raise a targetted amount of revenue, and we could easily replace the US income tax with a consumption tax on a revenue neutral or revenue positive basis.

    But why is the tax better? You can't even tell me why it's better for a reason other than (everyone else is doing it!) which is completely vapid. You raise revenue because as a government you need to do big things, the point of taxation shouldn't just be to raise revenue though. If you let yourself be that short-sighted then you'll end up with a Feudal tax structure, much like ours is slowly becoming. Where the lion's share of tax benefits all go to the people at the top in either individual or business capacity. You're not going to avoid that without first establishing a common purpose that you want to achieve with your tax policy.

    Once you know what success or failure actually looks like in real terms, then that frees you to think very carefully about the most efficient and fair mechanics to implement that vision of success. Without that though, is it any wonder that we're floundering in failed policies politically? We're doing things in a lot of cases just because we want to, and then invent vapid reasons to justify to the public how something unhelpful is somehow helpful to them when all it does is entrench further the established system and lock power into respective place.

    Fallout2man on
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    Then honestly you're not coming out of this looking great either.
  • HamHamJHamHamJ Registered User regular
    The exemption can be handled as a rebate check or by not requiring point of sale withholding (which means there is no wait).

    How do you prevent the former from resulting in a situation were I theoretically spen $0 and just make $5000 at the end of the year?

    How do you track how much tax someone owes at the end of the year with the later method?

    We use income tax in large part because there is a built in paper trail for how much income you have made in a year.

    While racing light mechs, your Urbanmech comes in second place, but only because it ran out of ammo.
  • spacekungfumanspacekungfuman Poor and minority-filled Registered User, __BANNED USERS regular
    zepherin wrote:
    Part of the problem with the tax system is a problem that is an epidemic in pretty much every federal system. The government doesn't remove very many of the old rules and regulations. They just keep adding new ones. So with taxes that are all rules and regulations the government keeps adding layers and making changes without cutting anything out. So we now have over 72,000 pages of tax code. For simplification purposes I think we should treat corporations, LLCs, partnerships, non profits, religions, and contractors the same in the eyes of the tax man. no special treatment, nothing extra. Simply deductions to none for any person or organization other than a standard deductions and tax credits to encourage or discourage certain behaviors and businesses.

    What you are describing actually is exactly how the current system works, except that corporations pay a different marginal tax rate, and non-profits are exempt from taxes. Partnerships (and LLCs that do not elect to be treated as corporations) are pass through entities, meaning that they pass all their profits and losses directly to the partners, who pay taxes at their individual tax rates. Corporations pay an extra level of tax, but also have the ability to hold money without the investors being taxed (i.e., to keep working capital). If we got rid of corporate taxation, then you would have to pay tax on the income of any company whose stock you owned, even though you would not get that income. I think the special treatment you are thinking of is just the "standard deductions and tax credits to encourage or discourage certain behaviors and businesses" you said are ok. And these deductions are things like the deduction for buying equipment and paying salary and benefits, which are of critical importantance to things like job creation.

    All of these attacks on corporate personhood confuse me. Corporations exist for one simple reason: limited liability. If there was no such thing as limited liability, meaning that all investors in a company would be liable for the debts of that company, then noone would invest and the economy would grind to a halt.

    7zh9uu9etcor.jpg
    Chanus wrote:
    It's been a butt come true! I get to work with the absolute best boobs in the business. What more could a money ask for? Kids, aim for the freeloaders !
  • AngelHedgieAngelHedgie Registered User regular
    The problem is this, we can't remove an income tax without putting caps on private ownership of both capital and physical property. The reason an income tax exists functionally today, or rather what I think it should exist for, is as a brake against inequality in any kind of a free market. Income taxes allow you to ensure the society doesn't get too stratified and start to decay. So we can exist without an income tax, but then that requires some serious re-jiggering elsewhere to ensure that we don't just repeat the Gilded Age all over again.

    The consumption tax people agree on because on it's face it appears more fair because in theory it is. It provides you with the freedom to chose to be taxed or not to be taxed. But that ignores the greater question of what the actual purpose of taxation is in any sort of a government. Which, let's face it, any and all government spending is redistribution of wealth. Either upwards redistribution through military-industrial and prison-industrial spending and tax cuts, or downwards redistribution through social services, graduated income taxation, etc.

    So you can't even talk about tax restructuring without first agreeing on what your goals of taxation are to begin with. In my own humble opinion I want taxation and government to act as a guarantor of fundamental fairness in all things and that means that it needs to curb certain excesses so I find the idea of progressive income taxation (with income defined as both direct cash income earned as well as any and all income earned via interest, if you tax income and interest as one unit then you prevent investments from escaping taxation) far more preferable. I'd rather we actually just got rid of loopholes all together and offset the closure of loopholes with direct spending in other areas.

    Historically tax incentives have proven to only motivate mega-corporations and wealthy individuals to contribute less to the tax base and that while it does produce some ancillary good behavior by and large it robs us of the revenue we need to seriously attack problems like poverty and proper regulation of certain industries. I'd rather that each year we adjust progressive taxation on an ad hoc approach each year based on the economy, to allow the tax policy to reflect the state of the economy and also to enable it to work for economic recovery versus against it, then also tweak spending levels each year similarly.

    I respectfully disagree with your assertion that the income tax exists as a brake on income inequality. The current tax brackets are among the flatest in US history, and due to the low long-term capital gains rates, the wealthy actually pay less on the bulk of their income than the poor (at least among those of the poor who pay taxes). I think that the income tax is our dominant tax as a matter of historic accident. Most of the world has moved to primarily using consumption taxes, such as a VAT.

    As far as what taxation should be about, that is obviously an incredibly broad topic which I do not think we could make any meaningful progress on through discussion on an internet forum, since it is so subjective. The only thing that I will say is that any tax can be designed to raise a targetted amount of revenue, and we could easily replace the US income tax with a consumption tax on a revenue neutral or revenue positive basis.

    The problem with your respectful disagreement is that it flies in the face of of the historic evidence. During the period of low income inequality in the 50's and 60's, the US had a strongly progressive income tax with high upper brackets. As the brackets were flattened, income inequality has increased.

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  • AngelHedgieAngelHedgie Registered User regular
    bowen wrote:
    Consumption and sales tax rear their head when you start considering people on disabilities and those that no longer draw incomes. Is it fair to tax those people even though they don't draw incomes? If you're, again, tying it to "well if you make less than 50k, you're okay" then what is the difference from a straight income tax? You want to have some free interest while you wait for the rebates to get mailed out?

    The exemption can be handled as a rebate check or by not requiring point of sale withholding (which means there is no wait). The difference between an income and consumption tax is really what happens above the exemption. Under a consumption tax, more will be saved, but when you buy things, you will just factor the tax into the cost (just like how sales taxes work now). If people choose to save all their money and never spend anything, national savings rates increase, which has a number of benefits for the economy. If people choose to spend (and most people will continue to buy things like cars, houses, clothing, meals out, etc) then the government will collect its taxes on that spending, including spending by companies (which will have more available capital to spend, since people will be investing more of their income in those companies).

    On the question of the disabled, I guess the question is why wouldn't we tax them? If they have money in excess of the exemption and choose to spend it, I'm not sure that I understand how that is a problem. We tax people on disability income now (at least in certain circumstances), so it wouldn't really be different.

    Self reporting on sales taxes doesn't work. There's a reason states have been fighting with Amazon.

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  • AngelHedgieAngelHedgie Registered User regular
    zepherin wrote:
    Part of the problem with the tax system is a problem that is an epidemic in pretty much every federal system. The government doesn't remove very many of the old rules and regulations. They just keep adding new ones. So with taxes that are all rules and regulations the government keeps adding layers and making changes without cutting anything out. So we now have over 72,000 pages of tax code. For simplification purposes I think we should treat corporations, LLCs, partnerships, non profits, religions, and contractors the same in the eyes of the tax man. no special treatment, nothing extra. Simply deductions to none for any person or organization other than a standard deductions and tax credits to encourage or discourage certain behaviors and businesses.

    What you are describing actually is exactly how the current system works, except that corporations pay a different marginal tax rate, and non-profits are exempt from taxes. Partnerships (and LLCs that do not elect to be treated as corporations) are pass through entities, meaning that they pass all their profits and losses directly to the partners, who pay taxes at their individual tax rates. Corporations pay an extra level of tax, but also have the ability to hold money without the investors being taxed (i.e., to keep working capital). If we got rid of corporate taxation, then you would have to pay tax on the income of any company whose stock you owned, even though you would not get that income. I think the special treatment you are thinking of is just the "standard deductions and tax credits to encourage or discourage certain behaviors and businesses" you said are ok. And these deductions are things like the deduction for buying equipment and paying salary and benefits, which are of critical importantance to things like job creation.

    All of these attacks on corporate personhood confuse me. Corporations exist for one simple reason: limited liability. If there was no such thing as limited liability, meaning that all investors in a company would be liable for the debts of that company, then noone would invest and the economy would grind to a halt.

    Because you can have limited liability without personhood. In fact, that's a goosey argument.

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  • BagginsesBagginses __BANNED USERS regular
    Does anyone know if the MA sales tax is regressive?

  • AngelHedgieAngelHedgie Registered User regular
    Bagginses wrote:
    Does anyone know if the MA sales tax is regressive?

    Yes, because it's a sales tax. It's like asking if the Pacific Ocean is wet.

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  • spacekungfumanspacekungfuman Poor and minority-filled Registered User, __BANNED USERS regular
    Bagginses wrote:
    Does anyone know if the MA sales tax is regressive?

    Yes, because it's a sales tax. It's like asking if the Pacific Ocean is wet.

    That is incorrect. You can structure a sales tax so that the incidence is uniform or even progressive (such as luxury taxes). If you had a sales tax that only applied to luxury cars, clothing over $500 per item, and yachts, I don't think it would make sense to classify it as regressive.

    7zh9uu9etcor.jpg
    Chanus wrote:
    It's been a butt come true! I get to work with the absolute best boobs in the business. What more could a money ask for? Kids, aim for the freeloaders !
  • zepherinzepherin Registered User regular
    What you are describing actually is exactly how the current system works, except that corporations pay a different marginal tax rate, and non-profits are exempt from taxes. Partnerships (and LLCs that do not elect to be treated as corporations) are pass through entities, meaning that they pass all their profits and losses directly to the partners, who pay taxes at their individual tax rates. Corporations pay an extra level of tax, but also have the ability to hold money without the investors being taxed (i.e., to keep working capital). If we got rid of corporate taxation, then you would have to pay tax on the income of any company whose stock you owned, even though you would not get that income. I think the special treatment you are thinking of is just the "standard deductions and tax credits to encourage or discourage certain behaviors and businesses" you said are ok. And these deductions are things like the deduction for buying equipment and paying salary and benefits, which are of critical importance to things like job creation.
    It would also reduce tax rates across the board, much fewer deductions and a lower tax as a result, also lower overhead because you won't need an accountant. So yes like the current system except less deductions and more uniform taxation of businesses. And also normalizing corporate taxation so that it is more in line with business taxation need not be so much as a direct pass-through that is very much a false dilemma, but the current system is terrible. Investors are penalized for being prudent with taxation on dividends, and not when the company continually reinvests. And non profits and religions, they get taxed too. Too often they get used as tax shelters so they get taxed. Really I just want GE to eat their tax bill instead of legally get out of paying taxes most years.

  • tbloxhamtbloxham Registered User regular
    The problem is this, we can't remove an income tax without putting caps on private ownership of both capital and physical property. The reason an income tax exists functionally today, or rather what I think it should exist for, is as a brake against inequality in any kind of a free market. Income taxes allow you to ensure the society doesn't get too stratified and start to decay. So we can exist without an income tax, but then that requires some serious re-jiggering elsewhere to ensure that we don't just repeat the Gilded Age all over again.

    The consumption tax people agree on because on it's face it appears more fair because in theory it is. It provides you with the freedom to chose to be taxed or not to be taxed. But that ignores the greater question of what the actual purpose of taxation is in any sort of a government. Which, let's face it, any and all government spending is redistribution of wealth. Either upwards redistribution through military-industrial and prison-industrial spending and tax cuts, or downwards redistribution through social services, graduated income taxation, etc.

    So you can't even talk about tax restructuring without first agreeing on what your goals of taxation are to begin with. In my own humble opinion I want taxation and government to act as a guarantor of fundamental fairness in all things and that means that it needs to curb certain excesses so I find the idea of progressive income taxation (with income defined as both direct cash income earned as well as any and all income earned via interest, if you tax income and interest as one unit then you prevent investments from escaping taxation) far more preferable. I'd rather we actually just got rid of loopholes all together and offset the closure of loopholes with direct spending in other areas.

    Historically tax incentives have proven to only motivate mega-corporations and wealthy individuals to contribute less to the tax base and that while it does produce some ancillary good behavior by and large it robs us of the revenue we need to seriously attack problems like poverty and proper regulation of certain industries. I'd rather that each year we adjust progressive taxation on an ad hoc approach each year based on the economy, to allow the tax policy to reflect the state of the economy and also to enable it to work for economic recovery versus against it, then also tweak spending levels each year similarly.

    I respectfully disagree with your assertion that the income tax exists as a brake on income inequality. The current tax brackets are among the flatest in US history, and due to the low long-term capital gains rates, the wealthy actually pay less on the bulk of their income than the poor (at least among those of the poor who pay taxes). I think that the income tax is our dominant tax as a matter of historic accident. Most of the world has moved to primarily using consumption taxes, such as a VAT.

    As far as what taxation should be about, that is obviously an incredibly broad topic which I do not think we could make any meaningful progress on through discussion on an internet forum, since it is so subjective. The only thing that I will say is that any tax can be designed to raise a targetted amount of revenue, and we could easily replace the US income tax with a consumption tax on a revenue neutral or revenue positive basis.

    The problem with your respectful disagreement is that it flies in the face of of the historic evidence. During the period of low income inequality in the 50's and 60's, the US had a strongly progressive income tax with high upper brackets. As the brackets were flattened, income inequality has increased.

    Your second point is also wrong, i don't think there are any advanced economies who don't gain most of their revenue through progressive income taxes on companies and people. Sales taxes paid by the consumer are solidly in second place.

    Income inequality has to be tackled by higher rates on the rich, nothing else can help.

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  • spacekungfumanspacekungfuman Poor and minority-filled Registered User, __BANNED USERS regular
    Self reporting on sales taxes doesn't work. There's a reason states have been fighting with Amazon.

    Self reporting on sales taxes doesn't work the way that we currently enforce them. But, if for example we required you to provide a tax payer identification number along with all purchases, then withholding would occur at the point of sale. That said, the US tax system is the most successful self reporting system in the world, and the administrative cost associated with each dollar collected is amazingly low. But I'm not advocating a change to a consumption tax in this thread (to be honest, I'm not sure how I feel about one, even after years of having all of my tax policy professors from both political parties argue in favor of a consumption tax at NYU law).

    7zh9uu9etcor.jpg
    Chanus wrote:
    It's been a butt come true! I get to work with the absolute best boobs in the business. What more could a money ask for? Kids, aim for the freeloaders !
  • AngelHedgieAngelHedgie Registered User regular
    Bagginses wrote:
    Does anyone know if the MA sales tax is regressive?

    Yes, because it's a sales tax. It's like asking if the Pacific Ocean is wet.

    That is incorrect. You can structure a sales tax so that the incidence is uniform or even progressive (such as luxury taxes). If you had a sales tax that only applied to luxury cars, clothing over $500 per item, and yachts, I don't think it would make sense to classify it as regressive.

    Um, yes, it would still be regressive. It would only be regressive in the pool of impacted individuals, but it would still be regressive.

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  • enc0reenc0re Registered User regular
    OP is using a strange example for how tax simplification is difficult. Most, if not everyone, I know that favors tax simplification isn't thinking about changing the definition of income, which will always be tricky and require many rules. In fact, we could just continue using the current rules and not be that far off base.

    Usually tax simplification is about removing some/most/all (depending on who you talk to) of the hojillion deductions, exemptions, and credits (e.g. black liquor). And maybe taxing more types of income at similar rates (e.g. carried interest).

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