Saturday, June 14, 2008

Fixing the Roof When the House Has A Bad Foundation: Real Tax Reform

John McCain and Barack Obama have been sniping at each other over their respective tax plans, each assuring the American people that their plan is the best and that the other candidate's plan is wildly irresponsible. McCain insists that Obama's tax plan will drastically raise taxes, using a disingenuous tone of warning intended to suggest to everyone who listens to him speak on the subject that their taxes will go up. Barack Obama argues that the working and middle classes are overtaxed and that McCain's tax cuts will benefit the wealthiest segment of American taxpayers and not benefit the vast majority of Americans. This is the expected tax argument between Democrats and Republicans during an election year, and everyone is used to it by now... but the issue of taxes is still, for some reason, the strongest weapon in the Republican arsenal. Obama's language in this election suggests he intends to actually debate the tax issue on some level rather than resort to the standard Democratic counter of social programs, though he has those ready too.

Yes, the richest American taxpayers would benefit greatly from McCain's tax plan. The biggest cuts in his plan go to the top two tax brackets. At the same time, however, his tax cuts for the working and middle class are real. They are not as big as Obama's, it is very true, but they are real. Obama's plan does raise the taxes of Americans in the very top bracket by more than $700,000 a year. Yet his tax cuts for the bottom two tax brackets are nearly ten times McCain's cuts.

So McCain's argument is that the rich are overtaxed and the working class and the middle class are taxed about right, but could pay a little less. Obama's argument is that the working class, the middle class, and the mildly rich deserve tax breaks and the very rich are undertaxed. Each tax plan applies corrections to the perceived problems.

The flaw in both tax plans is that, while the working poor and the middle class are overtaxed in the present economy, the wealthiest Americans are both overtaxed and undertaxed. The highest tax rate, currently, is thirty-five percent. Even I find that excessive. Unfortunately, the percentage of people in the top bracket who pay taxes on their full taxable income is not particularly large. Ridiculous definitions of 'income', high priced tax attorneys not available to the middle class and working class, and a bevy of loopholes and tax shelters add up to equal an entire industry in legalized tax evasion.

The most important cure for the system is to reduce the defintion of 'income' to its real meaning: money received. Eliminate capital gains taxes and the estate tax and classify all capital gains above a specific level and all inheritances as 'income.' This would exempt bank interest and eliminate all taxes on the vast majority of stock dividends, while taxing high risk-high interest mutual funds like any other form of gambling. It would fairly tax inheritances, without confiscating them nearly in their entirety. In an age where stock brokers' questionairres for new customers include an 'income' category and mega-investors make their entire living off capital investments or playing the market, calling capital gains anything but income becomes ridiculous. An inheritance is income, it's money you didn't have that you have now.

The program would also entail the elimination of legal tax shelters and closing of the loopholes available to the wealthiest Americans. Deductions for charitable contributions would be more carefully capped and the definition of 'charity' would be reduced to its true intent much as the word 'income.' The website of the American Prospect advertises that donations to the liberal magazine are tax deductible. I'm certainly on the political left and I am a great fan of prospect contributors Sarah Posner and Courtney E. Martin, but voluntary donations to a business (and the American Prospect is a business, one must subscribe to the magazine to read much of the content, full access to to current issues online is only available to subscribers despite the very fine free content on the website) is not a true 'charitable donation' and should not be tax deductible. The loopholes that allow the 'overtaxed' to pay far less than they are required to pay need to be closed.

Perhaps most importantly, the way corporations are taxed needs to be changed. Instead of the unstable system of corporate taxes currently in place and constantly under conservative attack, corporate entities need to be assessed on a basis of corporate income as if they were individuals paying income tax. Extra taxes not based on this formula should be eliminated and loopholes closed.

Not being a financial expert, I will not presume to set actual tax rates myself. However, I would reduce the number of brackets to three and tax the richest Americans at the same rate as the mildly rich Americans. This would increase the taxes on the latter and significantly cut the taxes on the former. Some of the lower end of the current second highest tax bracket would be readjusted into the bracket below them.

Economists have been saying for some years now that the poverty line should be raised to about $25,000 a year, so I would give the Earned Income Credit to every taxpayer making less than $25,000.

Once the new tax brackets were established and the rates set, tax cuts and tax increases should all be temporary rather than permanent. Tax cuts on the working poor and many of the middle class are entirely appropriate in difficult economic times, but should not necessarily last when conditions improve. Tax hikes on the wealthy might be appropriate when times are flush, but should be rolled back in a bad economy.

I think that this system makes more sense than the system currently in place, and I think that conservatives would be more happy than unhappy with the simplification of the system and the cutting of tax rates at the top levels. Liberals would find that more money came into the system as loopholes closed and corporations and wealthy individuals were taxed more logically and fairly. The tax burden on the working poor would be drastically reduced.

This is a very radical change to our present system, but the problems of government spending and mushrooming debt are real. Our current, conservative administration has proved they can be a nightmare. It's time to do something about it on a practical level, not an ideological level.

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