Wednesday, December 12, 2012

Dollars,Taxes

As we continue to hurtle ourselves toward the fiscal cliff as the Mayans predicted, the prospects for meaningful tax reform dwindles. I thought I'd take a second to reflect on some brief ideas about what good tax reform should encompass.

  • Simplification - this is the lower-hanging fruit. We need fewer exemptions, deductions, rates, categories, etc. Unfortunately, this reform has some of the biggest obstacles since so many vested interests are at stake. 
  • Eliminating the worst tax policies from an economic-desirability standpoint - this is where economics needs to trump emotion. We need to stop taxing capital--capital gains (both individual and organizational), dividends, interest, corporate profits, etc. These taxes are economically destructive. They discourage savings and lower the trajectory of economic potential. The economic distortion from taxation is no where more insidious than in capital taxation. There is certainly crossover between this reform group and the next. 
  • Eliminating the worst tax policies from a justice/fairness standpoint - this is where justice and ethics need to trump envy. We need to stop taxing estates. Death should not imply an additional tax liability. Not only does this tax unfairly tax wealth that has been repeatedly taxed already, but it also causes economic resource distortions as people go to great lengths to avoid the tax. Additionally, we need to stop taxing so progressively. Taxation that compounds as success increases assumes that property rights have a diminishing marginal validity. I fail to see how that can be a reasonable principled position. 
In a later post I plan to sketch out my idea of the tax policy I would most like to see replace our current nightmare.