Monday, July 23, 2007

Wyden's Flat Tax

I’m always ready to be surprised by a Democrat legislating in the nation’s capital.  It’s even more neato when that Senator is from my own home state of Oregon, who’s blue-state credentials usually allow Democratic legislators to tow party line without having to answer to their constituents.

For the past 5 or 6 years, I’ve heard nothing regarding Bush’s tax cuts in 2001 but “It’s the sole reason for the recovery” from Republicans and “It’s a gift to the rich and caused the big deficit” from the Democrats.  But this is something new:

      Wyden's proposal to replace the 1.4-million-word tax code with a simpler system is the most ambitious bill of his 26-year congressional career. It would fundamentally change the U.S. economy and shake up nearly every special interest in Washington. But Wyden acknowledged that, without Bush's support, his bill doesn't stand a chance until at least the next presidential administration.

      The Wyden plan would reduce the six-bracket income tax system to three. And all income -- including wages, capital gains and dividends -- would be taxed at the same rates. The plan would eliminate many tax loopholes, allowing for a one-page 1040 form.

Now, it remains to be seen exactly what the fine print of the bill is about.  Some conservatives have some pretty strict ideas about what tax reform should look like, but I’m wondering why more libertarian and conservative types aren’t at least publicly excited to see a Democrat actually bring this out for discussion.

This isn’t a pure flat tax, there would be three taxpayer rates instead of the current 6, and there would still be standard deductions for families.  And given that Bush’s tax cuts will end in a couple of years, it’s time for congress to start hashing out what the tax code is going to look like after that.

What Wyden is doing is not only messing with the tax structure, but also politics as usual in Washington.  As George Will states:

      Conservatives like tax cuts as means for restraining—or so they think—government spending ("starving the beast"). Liberals like tax benefits as ways to spend without seeming to. Therefore tax simplification serves a third objective, one that Wyden is perhaps too polite to stress—reform of Washington's political culture.

Which is a long time in coming.  I’ve said before that all the hubub about corruption, spending, earmarks and the like would be rendered less important and damaging to the country as a whole if the federal government was less able to secure funds from the people.  Will a flat tax do that?  I don’t know.  I would imagine that Wyden’s plan is to simplify the tax code without reducing federal tax receipts, but the imposition of a simpler tax code, and perhaps some congressional rules about how this new tax code can be amended (to make it harder) would make raising taxes more politically dangerous.

And then there’s the other affects to our culture as a whole.  How much do the deductions that are there to promote small business and charity, home buying and medical care, going to change the economy?

      As Michael J. Graetz of the Yale Law School has written, the political class "uses the income tax the way my mother employed chicken soup: as a magic elixir to solve all the nation's economic and social difficulties." Americans, gripped by cognitive dissonance, want tax simplification—and all the current complexities that benefit them.

Certainly I think that we would be better served by a simpler tax system that actually taxed us less as a whole.  I don’t pretend to be able to give so much that it affects my taxes all that much, so that kind of thing won’t affect my giving, but it might to that class of society that gives the most.  No, not the poor or the middle class, the wealthy.  It’s where most of the charity in this country comes from, and how much will they continue to give without tax incentive (I know that sounds cold, are people really that crass, but think about it).  And some of those other deductions do come into play in my budget, like the mortgage deduction.

George Will calls Wyden “Sisyphus,”  the mythological character who was destined to roll a boulder up a hill for all eternity, as Wyden is “determined to roll the boulder of tax reform up Capitol Hill yet again.”  Let’s hope that he doesn’t have to keep rolling quite that long.

Update:  I’ve read a bit more, and past attempts by Wyden have included other deductions, such as home mortgages, so this is looking less like a “flat tax” and more like severe tax code reform.  Which is OK too.

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