The Informationist Tax Simplification Plan
Reed Hundt sent out a call for ideas upon which the Dems could run in 2006. Most of the responses were predictable and general. I suggested tax simplification. I got a few responses, but not enough. So I took things into my own hands. I moved over to the “economics table” and started my own thread using my awesome new power as an author.
Yesterday, Reed Hundt posted a short query called “Not too Early” that set off a spirited discussion of Democratic priorities for 2006 (and I suppose 2008). He suggested three themes: Iraq, safety net, and corruption. Many good suggestions followed; the last time I checked, his post had drawn 65 comments. I proposed something outside the mainstream of the discussion, namely that Democrats stand as the party of tax simplification.
I collected a couple of comments myself, but my input mostly got lost in the noise. I remain convinced, however, that tax simplification is an ideal organizing theme for the party. This essay amplifies my earlier posting and explains that belief.
When I speak of an “organizing theme,” I mean more than just a good idea, a sound policy, a useful tag line, or a pressing need. I mean a simple statement of policy so rich that it pulls together large parts of a political agenda and platform; a signature position that reappears in answers to question after question after question. Tax simplification achieves that goal like nothing else I’ve encountered. It provides a common thread to questions about (corporate) corruption, fairness, and economic growth. If done properly, it will put the forthcoming Republican proposal (likely some combination of Bush’s convention speech and the pending task force report) on the defensive—get their proposal labeled “Democrat lite,” for a change—and win away some economically savvy Republican voters. And it relates to a part of life with which virtually every voter has direct experience.
The crux of the idea is to move the tax debate away from rates and towards the base. Over the past five years, enormous amounts of partisan blood has been spilled debating the relative merits of a complex, distorted tax system with a top marginal rate a shade below 40% and a complex, distorted tax system with a top marginal rate a shade above 35%. The statistics showing what percentage of taxes come from which strata of society are disingenuous because they stratify the population according to AGI (Adjusted Gross Income) rather than gross income. That “adjustment” is the source of massive distortions and inequities.
The basic proposal is simple:
At the personal level, tax base = wages + capital gains + dividends + interest + inheritance + gifts. Basically, if a dollar landed in your pocket, we shouldn’t care how it got there. No deductions, no exemptions.
At the corporate level, get rid of the two sets of books. From now on, corporations report a single set of books to the SEC (where profits look good) and the IRS (where losses look good). Move towards expensing and away from depreciation schedules, and make dividends completely deductible at the corporate level. Corporations that return their profits to their owners (i.e., shareholders) will pay no taxes; we can tax those who refuse to do so at the highest rate in the tax system.
Fine. So the basic proposal is simple—but it’s not terribly sexy. To quote the one bright moment from what was not the Democrats’ finest campaign: “Where’s the Beef?”
Here’s where. This simple proposal provides answers to any number of questions about domestic policy—answers that should garner broad support throughout the fractious coalition we call the Democratic Party. Here are some examples:
Democrats spent a lot of time complaining that the Bush tax cuts were “unfair.” How does your plan address that issue?
Most Americans make most of their money the old fashioned way—they earn it. And they earn it by working hard. In our current system, Americans actually keep less of the dollars they earn as wages than they do of the dollars they get any other way. The Bush plans all made the situation worse. They reduced taxes on capital gains and dividends, and pushed to eliminate them entirely on inheritance. But every time that you reduce taxes on one category of income, you increase the burden on the remaining categories. The net effect is that our current tax system punishes work! We don’t think that a worker who earns $50,000 as wages should keep less of her money than her neighbor who received $50,000 in dividends. Our plan treats all sources of income the same. But that’s not the only thing we’re doing to ensure that this country is fair to all Americans . . .
You’ve spent a lot of time criticizing the Republicans’ handling of the economy. How would you promote economic growth?
Americans waste an enormous amount of time every year preparing their taxes. Even worse than that wasted time, Americans—and in particular American businesses—make many decisions because of the “tax consequences.” Just think about what that means. People and businesses make decisions that seem like good ideas in their own right. Then they think about the tax system, and change their minds. Those decisions hurt the economy! They’re not about growth or productivity, they’re simply about gaming the tax system. Our tax simplification plan eliminates this type of thinking. Under our plan, no one can gain by moving money from one category to another. An economic decision either makes sense or it doesn’t; its “tax consequences” will be straightforward and tough to game. So we start promoting growth by eliminating wasted time and getting rid of investment decisions made solely to game the system. Those are huge boosts to growth right there. But that’s not all that we propose to promote growth. . .
We’ve learned a lot about corporate corruption over the past few years. What would you do to clean up corporate America?
We have always believed that sunshine is the best way to fight corruption. The Bush administration has been highly secretive about many things—and so have our corporations. Even worse, corporations keep secrets from their owners—the shareholders. When you invest in a company, the corporate board “retains” most of your money from year to year. As stock prices grow, so does the tax bite that you’re going to feel if you try to get your money back, and either use it or invest it elsewhere. That makes management cocky. Our system will promote transparency in a couple of ways. First, we’ll make corporations tell the same story to the IRS and the SEC. If they claim huge profits they’ll look good to investors—but either have to pay our ample dividends or take a huge tax bite. If they report losses, investors may think twice. That alone will help keep them honest. Our decision to make dividends deductible means that corporations that give all of their profits back to the rightful owners—the shareholders—won’t have to pay any taxes at all. They will, however, have to convince their shareholders to reinvest, and that will encourage them to reveal a lot more of their internal bookkeeping. It will also shift most individual investment income from capital gains to dividends—making it harder to time returns, and once again removing a deadweight “tax consequences” decision from the economy. So our tax simplification plan takes some important steps towards transparency in corporate bookkeeping. But that’s not all that we’re doing to fight corruption. . .
And so on and so on. There’s a lot more here—these examples are just the tip of the iceberg. But these examples do explain what I mean by an “organizing theme.” Tax simplification is good economics. It would likely be good politics. It can frame the entire discussion of domestic economic policy. And it can relate that framing to something that touches the life of every American.
American politics have not seen such a themed approach since the Contract with America—to which Hundt pointed correctly as a notable success. Tax simplification is even better, because we can back it up with real policies and sound economics.
The party is too fractious to organize around a foreign policy theme; fundamental disagreements about the best approaches to war, terror, and trade run too deep. Cultural themes are more likely to divide than unite, and it’s hard to see how they will win any new votes. Safety net issues are important, but they tend to be long-term, abstract, and open to charges of simply adding complicated government programs; we should advocate a safety net, but not lead with it. The Clinton economic record was strong; we enter with real credibility. Tax simplification provides a thematic approach to leverage our greatest strength.
I really think that this idea deserves serious, high level, strategic consideration.
I actually generated some dialog. I doubt that I can sell my plan, but at least I’ve staked out the pure ground before Bush claims the terrain. Who knows? Maybe he’ll even surprise me by proposing something close to my own heart. Then I’ll have learned something important--and because of the blogosphere, I will have learned it in public. Let’s see how that plays itself out.
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