The Buffett rule is not enough. Warren Buffett is rightly critical of the tax code, but the Buffett rule is just an important first step. Don't get me wrong, I support the Buffett rule, but only as a precursor to further, and more fundamental reform. Like Rome, an optimal tax system is not built in a day.
This diary is about what I would consider the ideal tax system. A baseball pitcher would consider 27 consecutive strikeouts as the ideal baseball game. A professional golfer would view 18 birdies as the ideal round of golf. But obviously, the ideal is unattainable in practice, so please keep this in mind as I explore the quest for the ideal tax system below the fold.
The theory that lowering taxes on the wealthy would lead to greater economic activity, job creation, and prosperity for everybody has been disproven by the events of the last decade. Instead of those wondrous achievements glibly promised to us by Republicans, we have a deep recession, a larger annual deficit, a growing national debt, and 8% unemployment. The Bush tax cuts have proven to be an abysmal failure.
Republicans, not being terribly smart, now prescribe more of the same. The presumptive nominee says on his website that taxes on interest, dividends, and capital gains should be maintained at current levels. The reader is invited to take a wild stab at guessing what Mr Rmoney's personal sources of income are. He also advocates abolishing estate taxes. The reader need not ask whether he has any heirs.
Let us ask: with his enormous wealth, how many factories has Mitt Rmoney built lately? How many workers has he hired? His wealth is estimated in the neighborhood of a quarter billion, and that wealth has not produced a single dollar in economic growth in the last decade. Yet he proposes that his income continue to be taxed at a lower rate than that a minimum wage worker.
Supply side economics is a fascinating theory. Simply put, it says that if we lower taxes on the rich, they will build factories, hire workers, and produce goods and services for the rest of us. But it doesn't work because the rest of us don't have as much money to buy the goods and services that the economy can, in theory, produce. That means that the wealthy have fewer customers. With fewer customers, they need fewer workers. With fewer workers, they have no need to build factories.
This is what Joan McCarter had to say in her excellent diary just last night:
The Republican bill is championed by Majority Leader Eric Cantor, and would give a significant tax break, 20 percent, to businesses with fewer than 500 employees. The businesses represented by the above groups argue that the tax break doesn't do a great deal for them, particularly in new hiring, if there continues to be a lack of demand for their products. They argue that a larger investment in infrastructer and public services is needed to spur the economy. [emphasis added]
The Republican vision of the economy is just wrong. It is ordinary consumers that power prosperity, by buying goods and services from one another, and in turn by producing those goods and services with their labor.
The role of the wealthy -- building factories and hiring workers -- is the result of prosperity, not its cause.
The current state of affairs seems to be bad for the rich and poor alike, but that's an illusion. Recession is actually good for the 1% because it increases their power over the 99%. They are less bothered by the demands of labor, because workers are on the short end of the supply-demand equation.
Even today, in the face of the massive and obvious failure of the Bush tax cuts, Republicans want more of the same. How can we reverse the process? How can we put more dollars in the hands of those who would spend those dollars? The answer is transparently simple; we can do it with a rational tax code. Tax the very wealthy at a high rate much like we did in the post-WWII era. Structure the tax system so that it prevents the accumulation of ever-increasing wealth.
We could produce more human well-being by using money more wisely. It would be immoral not to do so, just as it would be immoral to withhold food from a starving child. Shifting the tax burden to the rich, rather than doing the reverse, would increase the net well-being of all our citizens. So, that is what we must do. We must ignore the whining about "class warfare" and "income redistribution" and "death tax". The business of government is doing what is best for the people. Just read the Preamble to our Constitution and ask yourself what we must do to promote the general welfare.
So, the following is my ideal tax system. You may well differ on some of the details, and I am receptive to dissent -- even vigorous dissent. This is not a topic that we will all agree on.
All income, from whatever source, would be taxed equally. Wages, interest, tips, dividends, rents, capital gains, royalties, speaking fees, gambling winnings, gifts, honorariums, inheritances -- all of these would be considered income. Capital gains or losses would be realized at market value as of December 31. This would be done so that the taxpayer could not "shop" for the best tax rate by year. Capital losses could offset future gains, but not past gains.
Income would be taxed according to a steep progressive schedule. The steepness would be such that it would be virtually impossible to accumulate as much as $1 billion, in terms of 2012 dollars. There would be no deductions of any kind. Deductions always favor the rich. If your marginal tax rate is 30%, you get twice the benefit that a taxpayer whose marginal rate is 15% from any deduction.
There would be no income cap for Social Security taxes, and these taxes would therefore be much lower. My uneducated guess is 7-8%, even including medicare tax. These taxes would apply to all income, not just wages. Of course, we would abandon the silly fiction that the employer pays part of the bill.
State and local taxes would be on income only (as defined above). Sales taxes and property taxes would be abolished because they are regressive. Excise taxes, whether federal, state, or local, would require a defined purpose and a fund dedicated solely to that purpose.
Corporate taxes would be drastically simplified, and would always be less than the international average. We should be competitive in the international market, and our corporate tax system should draw corporations to the USA instead of repelling them. (Personally, I would favor abolishing corporate taxes altogether, but I will concede that they are not terribly harmful.)
Some parts of my ideal tax system would require a constitutional amendment. OK, it ain't gonna happen. But shouldn't we keep the ideal goal in mind? During the first half of the 18th century, you might have said the same thing about the abolition of slavery, but it happened nonetheless.
Now ask yourself this: Would our nation be better off under such a tax system? Would we be more prosperous? Would our aggregate well-being be greater? I welcome suggestions and criticism.