New Year’s Tax Wishes: If I Was Dictator of America

December 27th, 2011

Based on the notions of economic efficiency that I laid out here, if I could do whatever I wanted I would make the following changes over a ten-year period. (Some faster, some slower, some phased in, some implemented instantly on a given date.) The appropriate amounts in each case require a better calculator than I have access to.

Tax All Corporate Profits Like S-Corps, and Eradicate Taxes on Corporations, Dividends, and Capital Gains. Credit for the idea goes to Milton Friedman (Capitalism and Freedom, page 174 in my edition). Shareholders pay taxes on the year’s corporate profits (at normal earned-income rates or higher), whether or not they’re distributed. No more double taxation, but no more preferencing over earned and interest income, or indefinite/eternal deferral.

Eradicate Tax Deductions for Interest Payments — Personal and Corporate. Mortgage- and corporate-interest deductions are terribly distortionary; they encourage borrowing — debt financing — over equity- and self-financing. And they’re regressive.

Eradicate Business Deductions for Employee Health Care/Insurance. Destroy the distortionary historical artifact of employer-based health care coverage. Stop discouraging self-employment and personal choice of health-insurance options. (Having been self-employed for decades, I take this very personally. It’s cost me many tens of thousands of dollars.)

Scrap the Cap on Social Security Taxes. Include all earned income. This only makes a terribly regressive tax somewhat less regressive, and it expands the tax slice from that still-regressive tax — a tax that discourages working for a living because it only taxes earned income. But it makes Social Security cash-flow solvent beyond the foreseeable horizon (revenues support outlays). Other propositions here should be scaled to compensate for its regressiveness and work disincentive.

Change All Local Property Taxes to Land-Value-Only Taxes. Land value taxes are the least distortionary taxes around. This would remove the disincentive to improve land. Since it’s non-distortionary, it would also be good to increase its total share of the tax take.

Greatly Expand and Simplify the Earned Income Tax Credit, and Deliver it on Weekly Paychecks. Beyond its manifest benefits to tens of millions, and turbocharger effect on the economy, it could allow for some reduction or eradication of other (economically inefficient) means-tested payments.

Tax Carbon. Since people/businesses aren’t paying for their negative externalities, it’s distortionary not to tax carbon. All hail Arthur Pigou. This is a non-progressive tax, so other taxes would need adjustment to compensate.

Reduce Income Taxes and Make Them More Progressive. As possible and needed, given the other changes, to achieve:

Overall Results:

1. Make the whole tax system — local, state, and federal combined — actually progressive. All the way from the bottom to the top.

2. Increase the total tax take by a few percentage points of GDP. Because Americans (notably, Tea Partierswant the amount of government we’ve got. So they need to cover the costs. True conservatives pay their bills.

Cross-posted at Angry Bear.


  1. beowulf
    December 27th, 2011 at 14:53 | #1

    Tax capital gains and dividends at ordinary income tax rates, eliminate stepped-up basis on inherited assets, tax unrealized capital gains retrospectively by adding at realization an interest charge for each year asset was held. All of these steps (advocated by William Vickrey) could be accomplished by amending one section of the Internal Revenue Code.

    Strike “26 USC 1(h) Maximum Capital Gains Rate ” and replace with the following,
    “26 USC 1(h) Vickrey Tax”:
    “Notwithstanding any other provision of law, if the taxpayer disposes of a capital asset then the rules of Subsection 1271(1) shall apply to any gain recognized on such disposition in the same manner as if such gain were an excess distribution in respect of stock in a passive foreign investment company.”
    http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00001291—-000-.html

    I’m a fan of Romney’s plan to exempt families earning less than $250k from capital gains taxes as well, doesn’t lose much revenue and would make the tax system much simpler. As for an annual land value tax, can’t really be done at the federal level (direct taxation constitutional issues). But if Congress can give a tax credit against income/payroll taxes for any foreign taxes paid, it could certainly give a tax credit against STATE land value taxes paid (as with foreign credit, phasing out with higher incomes).
    It would take state legislators about 10 seconds to realize every dollar in tax burden shifted off sales, income and property improvements onto land value would be a dollar of taxes its residents wouldn’t have to pay those suckers in Washington. :o)

  2. December 29th, 2011 at 17:20 | #2

    Agree with all points except the carbon tax. If climate scientists were polled anonymously, one would find no consensus that carbon dioxide is a significant problem.

    Another possibility for property taxes on residences might be for jurisdictions to automatically reduce the tax rate on the structure annually, given wear and tear.

  3. beowulf
    December 30th, 2011 at 20:50 | #3

    OK that should be Subsection 1291(a)(1). I followed Steve’s link to the Domenici-Rivlin plan.
    http://www.asymptosis.com/have-domenici-and-rivlin-been-reading-my-notes.html

    Had some interesting ideas but the sheer deficit hawkery of it all is kind of a bummer. Its like an Evil James Livingston had written a book called In Favor of Thrift.
    Having said that, I really liked where their heads were at by revamping EITC to make it a universal 21% tax credit on the first $20,000 in income (with a separate $1600 per child tax credit) payable on each paycheck instead of an end of the year lump sum.
    Minimum wage for a full-time worker should be bumped to at least $20,000 ($10/hr) anyway. At that rate, the reformed EITC would be like a $2.10/hr wage subsidy. Congress could enact an automatic fiscal stimulus formula that’d mark up the 21% credit rate whenever U3 rate is above full employment (4.0% U3 per Humphrey-Hawkins act). A 31% credit rate, say, would be an effective $3.10/hr wage subsidy for someone earning $10/hr.

  4. Clonal Antibody
    December 31st, 2011 at 10:03 | #4

    @beowulf
    Beo,

    This is a workable idea, but the minimum wage structure has to be tailored to the local CPI’s. Thus, e.g. in the California major metro areas, the minimum wage should be closer to $16-$18 per hour. Also, the minimum wage has to be indexed to CPI. Without the indexation, it would not work.

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