President Obama finally said something that many tax reformers have long advocated for: millionaires should pay the same share of their income in taxes as the middle class. Sounds very akin to a flat tax, doesn’t it? Sadly, it is all talk, with no
serious consideration for reform. Instead, the President has proposed a “surtax” on those making over $1 million a year. In today’s speech, he mentioned the words “fair share” at least half a dozen times when referring to this small, privileged subset of the population. But
nobody seems to explain what the fair share should be.
Most on the left think of a “fair” tax system as a progressive system, where higher-income earners pay a greater share of their income in taxes. The president suggested going back to the Clinton-era top marginal tax rates of the 1990s in order for the system to be more progressive, but as NCPA showed, the tax rates under the Bush administration brought more progressivity to the tax code than under the Clinton administration.
A surtax on millionaires will not ensure that they pay their “fair share” of income in taxes for several reasons. First, the tax code still contains 10,000 pages of complicated rules, deductions, loopholes — whatever you want to call them — that various households can take advantage of depending on what kind of income they have (wage or capital income), how many kids they have, what they grow on their land (if anything), what they use to heat and cool their homes, what kind of cars they drive (“green” or otherwise), and many more targeted tax breaks too numerous to list here.
Second, the millionaires the president refers to rely much more on income from assets and investments than they do wage income. Thus, they have some control over when and how they pay taxes: if a surtax on capital gains is slated to be effective — say, in 2013 — taxpayers can sell large assets beforehand at the current lower rate in anticipation of a much higher rate. Likewise, if the federal income tax rate increases but the capital gains rate remains at its current rate, there will be incentives to classify earned income as capital gains. Thus, all the blame on the wealthy for using tax loopholes rests squarely on the tax code itself: a complex web of perverse incentives that punish savings and investments while rewarding those who have the knowledge and wherewithal to reduce their tax liability. (See John Goodman’s column on why taxing capital is a bad idea.)Instead of politicians preaching populist rhetoric from the bully pulpit, why don’t they replace the words “fair share” and “surtax” with words such as “broad-based,” “simple,” “low,” “flat” or “consumption-based.” In other words, how about replacing our current convoluted system with a tax that:
1) Does not penalize savings and investments and, therefore, does not need to differentiate between earned income and investment income; this would eliminate the disparity between capital gains taxes and federal income taxes.
2) Instead, taxes income that is not saved and invested at a low rate; this rate would apply to most everybody but allows exemptions for low income earners.
3) Is low enough that it replaces the myriad of credits and deductions for everything from home mortgages to sheep herding.
Yes, this would mean that cherished deductions enjoyed by high-income earners would go away, and some low-income earners would no longer be in the bottom 50 percent who pay almost no federal income taxes. But if Obama is all about fairness, as he purported in his speech, he should support this type of reform with open arms.