Hedgehog Party

Defending the AMT

Michael Kinsley defended the Alternative Minimum Tax (AMT) in an October 20, 2007 article, which I think is worth a quick read.  You can find it here at Slate.com.  His most useful comment is as follows: 

"It resembles the "flat tax" of many reformers' dreams: a high basic exemption, so that low-income people don't pay it at all; very few deductions, credits, or exclusions; and (because of that) a much lower top rate than the current system: 26 percent compared with almost 40 percent."

But his support for the AMT is rooted in his desire to prevent the rich from escaping the full burden of a progressive rate structure, not because he likes the flat tax. 

It would be great if Mr. Kinsley and others of like mind could see that a progressive rate structure has a number of serious flaws, two of which I'll cite here.  First, it's never the rich and powerful who pay the highest rate.  They're the ones who, in time, are able to get laws and rules implemented that enable them to pay at a lower rate.  Only W-2 wage earners end up paying the highest marginal rates, and many of them are not "rich."  Second, multiple rates invite constant tinkering with the tax code.  Politicians and taxpayers are constantly thinking about how to shift the tax burden around.  The result is endless corruption and manipulation, a distorted and unfair tax system, and eroding public confidence. 

Mr. Kinsley should embrace the single rate tax in "The Rats are in the Cheese," which will do much to ensure that the rich pay taxes like everyone else.  I realize that "flat" doesn't meet his requirements that the tax code should be progressive.  But he should focus on accomplishing "progressive" through spending rather than tax policy.  Michael, if you're reading this, what say you? 

Tax Philosophy - Barack Obama

This is another in a series of postings on the tax positions and philosophies of the major presidential candidates.  Today's posting is about Barack Obama, whose views are summarized on his campaign website here under "fiscal issues." 

I found three tax-related proposals under Obama's overall fiscal plan:   

• Reverse Bush Tax Cuts for the Wealthy: Obama will protect tax cuts for poor and middle class families, but he will reverse most of the Bush tax cuts for the wealthiest taxpayers.

• End Tax Haven Abuse: Building on his bipartisan work in the Senate, Obama will give the Treasury Department the tools it needs to stop the abuse of tax shelters and offshore tax havens and help close the $350 billion tax gap between taxes owed and taxes paid.

• Close Special Interest Corporate Loopholes: Obama will level the playing field for all businesses by eliminating special-interest loopholes and deductions, such as those for the oil and gas industry.

When I clicked the link to "read more about the plan," I got an error message:  "the page you are looking for doesn't seem to exist."    How embarrassing; his staff should fix this. 

I did find a summary elsewhere of what Obama has said on tax policy, which you can see here.  His views on taxes are clearly progressive:  he supports repealing Bush tax cuts for the wealthy, keeping the estate tax and curtailing corporate tax loopholes.  He also voted 'no' on repealing the Alternative Minimum Tax.  Obama is rated '100%' by Citizens for Tax Justice, a liberal tax policy group (100% = most in favor of progressive taxation). 

I like Obama's view that the rich should pay more.  Closing loopholes for corporations and the wealthy is a good thing and will, to use one of his quotes, simply restore "some fairness and a sense that we're all in this together."  Here is another of his quotes that I like:  "We talk about welfare and we talk about poverty, but what people really want is fairness. They want people paying their fair share of taxes."

At its core, however, Obama's tax policy is populist in nature.  Nothing he proposes suggests any pain for anyone other than the tiniest minority of Americans - the "wealthy."  There is nothing particularly brave or far-sighted about his proposals.  If he is elected President, I'm sure we'll see fewer corporate loopholes, and certainly a more durable and aggressive estate tax.  My guess is that we'll also see much higher taxes for middle to upper income W-2 wage earners. 

• End Tax Haven Abuse: Building on his bipartisan work in the Senate, Obama will give the Treasury Department the tools it needs to stop the abuse of tax shelters and offshore tax havens and help close the $350 billion tax gap between taxes owed and taxes paid.

• Close Special Interest Corporate Loopholes: Obama will level the playing field for all businesses by eliminating special-interest loopholes and deductions, such as those for the oil and gas industry.

When I clicked the link to "read more about the plan," I got an error message:  "the page you are looking for doesn't seem to exist."    How embarrassing; his staff should fix this. 

I did find a summary elsewhere of what Obama has said on tax policy, which you can see here.  His views on taxes are clearly progressive:  he supports repealing Bush tax cuts for the wealthy, keeping the estate tax and curtailing corporate tax loopholes.  He also voted 'no' on repealing the Alternative Minimum Tax.  Obama is rated '100%' by Citizens for Tax Justice, a liberal tax policy group (100% = most in favor of progressive taxation). 

I like Obama's view that the rich should pay more.  Closing loopholes for corporations and the wealthy is a good thing and will, to use one of his quotes, simply restore "some fairness and a sense that we're all in this together."  Here is another of his quotes that I like:  "We talk about welfare and we talk about poverty, but what people really want is fairness. They want people paying their fair share of taxes."

At its core, however, Obama's tax policy is populist in nature.  Nothing he proposes suggests any pain for anyone other than the tiniest minority of Americans - the "wealthy."  There is nothing particularly brave or far-sighted about his proposals.  If he is elected President, I'm sure we'll see fewer corporate loopholes, and certainly a more durable and aggressive estate tax.  My guess is that we'll also see much higher taxes for middle to upper income W-2 wage earners. 

Linbeck defends FairTax

In a December 26 Wall Street Journal editorial here or here (no subscription required), Leo Linbeck, chairman of Fairtax.org, defended the virtues of the FairTax, a proposal to replace the current income tax with a national retail sales tax. 

As I've said many times, the FairTax idea is an excellent one, with many favorable attributes, which Mr. Linbeck highlights in his piece.  My main questions, which he does not address, are as follows: 

1.  It is highly unlikely that we can switch from an income to a national sales tax "cold turkey."  Rather, we probably will have an extended period where there is both an income and a sales tax, a period likely to be extended by politicians for quite some time.  I predict that in the long-run, we will end up with both taxes.  How do we manage the transition and not end up with a worse tax situation than we have now? 

2.   Although the FairTax folks have estimated carefully how much revenue (net of the "prebate") their proposal will raise, I worry that they are overly optimistic.  I think they underestimate how much people's behavior will change under a heavy sales tax.  Keep in mind that the proposed FairTax rate of 23% does not include state or local sales taxes.  If, as is likely, these states and localities convert to a FairTax for their own revenue needs, I can see the "all-in" FairTax rate approaching 40% or more in high tax states like New York and California.  At rates like this, won't citizens become surprisingly creative at avoiding the tax?  If so, how much higher will the rate have to go to raise the required revenue?   

3.  I don't see too many Democrats supporting the FairTax.  If this site ("Democrats for FairTax") is indicative, broad Democratic support for the FairTax is decades if not centuries away. 

As we enter a (likely) period of Democratic dominance in national politics, "Republican" tax proposals like the FairTax are simply not going to be enacted.  How will the FairTax ever command the broad support required for passage? 

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Take another look at the Hedge Tax proposal, which we believe can attract support from both ends of the political spectrum.  This summary of "The Rats are in the Cheese" provides an overview.