May 12, 2015

FAILING THE THRESHOLD TEST:

Simplify Taxes and Make Work Pay (The Editors, 5/12/15)

The crucial thing is simplicity. The last big U.S. tax reform, in 1986, broadened the tax base by removing or limiting exemptions for various kinds of income and spending, then used the proceeds to cut tax rates. This approach spurs efficiency in two ways. First, lower rates encourage people to work and invest; second, simplicity lets market forces, rather than the unintended interaction of complex preferences, guide choices. It's also more fair, because the tax breaks that Congress has added back since the last cleansing favor the most prosperous taxpayers.

Taken together, so-called tax expenditures -- including the deductions for mortgage interest and employer-provided health insurance -- cost taxpayers more than what the government spends on Medicare and Medicaid, or on Social Security or defense. It would be best to eliminate such deductions altogether. If that is politically impossible, their cost can at least be capped or reduced.

The same idea applies to taxes on capital. The current system taxes income from capital at two stages -- first as corporate profits, then in the form of interest, dividends or capital gains received by individuals. The complexity of the code causes huge distortions. Exemptions at the corporate and individual levels combine, so that some capital income is taxed too heavily, and some too lightly or not at all. Also, earnings from work can sometimes be recast as capital income; that way, much less tax is due. The notorious carried-interest loophole, which partners in private-equity firms have made their specialty, is only one example.

First you have to explain why you want to tax work, investment and savings at all.

Posted by at May 12, 2015 8:12 PM
  

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