Its Monday. That means I've got several hours of down time in between classes. Sure, I COULD spend that time doing useful things- but, I'd rather this.
I enjoy thinking about policy problems, and trying to find novel ways to approach them. One of my biggest criticisms of Washington is that policy makers seems unwilling to consider new ideas. Given my political leanings, I tend to lay the blame for this problem at the feet of the GOP. Indeed, since President Obama took office 3 years ago, Republicans have seemingly done nothing, except to dig in their heels. However, Democrats are not immune on this issue either. Over time political positions harden into ideological orthodoxy, choking off debate. What follows in this (and hopefully, subsequent) diary will be discussion of novel approaches to policy.
Follow me below the fold, if you consider yourself a policy wonk.
I approach policy questions from a pragmatist point of view. For instance: We should not have a progressive income tax system just because it is right (although it is), but because it is the most effective. In theory, there should be a point where the tax system is either too regressive, or too progressive. This illustrates the limits of ideological arguments in favor of one policy, or another. If one approaches the issue of the tax system from a ideological position, one necessarily ignores the evidence about what works or doesn't, and substitutes for it an idea of what government 'ought' to do (or not do). As ideologies harden, we end up with people arguing for demonstrably ineffective policies because it conforms to an idea of what government should or shouldn't do.
Here is a suggestion for changing the tax code significantly. A proviso: This is just an idea, not my definite position. If someone with more insight than me demonstrates why it is a bad idea, or why it wouldn't work- well, that's exactly why I'm posting this on the internet. What led me to this line of thinking was a GOP primary debate. I stopped listening to the candidates talk about Mitt Romney, and began to consider: how could the federal government continue to raise sufficient funds to run, without drastic cuts, and also mollify some GOP concerns about a tax code which is quite complex. Although I suspect most GOPers would oppose what I am about to suggest, never the less here it is.
We hear a lot from the right about fairness in the tax code. Too many undeserving poor pay no income taxes! Damn those lucky poor. Meanwhile, the left is hammering on other inequities: hedge fund managers (and those similarly compensated) pay an obscenely low rate on the money they make. Republicans propose drastic reductions in tax rates, in how progressive the tax code is, and on the number of things government spends on. Democrats propose an end to the Bush tax cuts, and the carried interest rule which benefits the wealthy so much.
What if Congress could have it's cake, and eat it too? Imagine the following set of proposals. Would they be effective in terms of policy? Could some kind of consensus be arrived at, such that Congress might actually legislate, instead of grandstanding?
1. Change the differentiation between capital gains, and earned income. These two classes of income are treated differently, for some very good reasons. However, they should not exist in a vacuum. A simple change: earned income + capital gains = total income. Total income would then be used to compute liability for income, and capital gains taxes.
2. Change the capital gains tax. Currently, long term capital gains are taxed at several different rates. The rates are applied qualitatively- that is to say, by class not by amount. So, the sale of some depreciable real property will be taxed at a different rate than the sale of stocks, or bonds. Do away with this. Change long term capital gains tax rates, so that they are graduated on a quantitative basis, like the present income tax. Presently, LTCG are taxed lower because we want to encourage investment. Further, there is a real need for middle class families to get preferential tax treatment when they realize long term gains on assets. For most families, where assets consist of a house, and maybe a retirement account- higher rates would be problematic. Raise the initial threshold for tax liability, so that Average Joe pays little or no tax on his capital gain, but a Mitt Romney would (FWIW, if coupled with other reforms, Romney's idea to do away with LTCG for those with income under 200k is not without merit). As LTCG increases, so too would tax liability in a graduated fashion- along the lines of the current income tax system.
3. Reduce tax rates for earned income. While maintaining a progressive structure, the actual tax rates on earned income could come down for all brackets, and rates could be brought closer together. On the flip side, add more brackets at the top. The top marginal rate shouldn't start at $250k. That's a lot of money to make in a year, but it pales in comparison to what the truly wealthy make.
4. Change the corporate tax structure. End subsidies or already profitable industries- Exxon made enough last year. Close 'loopholes' (otherwise known as complex deductions, or one-off breaks for individual companies), and lower the overall rate. This might be fairly attractive, especially if the overall amount of revenue raised remains roughly the same.
As I see it, this idea would have several effects. Points 1-3 (on the personal tax side) would shift the preference for investment over work in the tax code to a more equal treatment between the two. Linking tax rates to a combination of earned income, and CG would help keep the Romney's of the world from paying a lower rate than the middle class (or, indeed, the poor). Graduating the CG taxes deals with the issue of capturing too much of the middle class' assets in the form of taxes.
Point 4 would have the effect of making the tax code more favorable for smaller businesses, by putting a stop to the larger companies' ability to game the system and reduce liability. Our tax code shouldn't do favors for those doing well enough to have entire tax compliance departments.
Post Script:
So, that was kind of long. I'll be the first to admit, this idea is kind of half-baked. I'm very much interested in discussion of these issues- and I welcome being told I'm wrong (provided, of course, you tell me WHY you think that). I am particularly curious, if someone has the know how, as to what the rates would need to be to keep revenue levels roughly the same. That seems like the kind of analysis a think tank with sophisticated software, would have to do- so I don't expect much in the way of that. But, does anyone see any glaring errors? Would this system be more, or less fair? Would GOPers (do you think) be willing to entertain any of these ideas? What would it take to get them to do so?