A Thought on Tax Reform

I don’t always disagree with Fox Business on tax reform, but when I do, I prefer smaller, flatter taxes.

They start with a bang (although I really couldn’t tell whether FB agreed with this), quoting NYU Law School Wayne Perry Professor of Taxation David Shaviro:

It’s hard to run an income tax properly because you have to know how assets change in value.  In theory, you should be taxed when assets go up and receive deductions when they go down.  But people come up with ways of getting around the rules.  It’s a cops and robbers game.

Nah.  There’s no economic or moral reason to tax income except as income.  Nor need there be differing treatments depending on whether “assets” or income go up or down.  You had an income last year?  You should have paid (let’s say) 10% of that to the Revenooers.  You had a larger income this year?  Pay 10%.  Period.

Here are a few more examples.

Should Go: Home mortgage interest deduction. Shaviro argues, “It’s a tricky proposition, but I say it needs to go,” he says.  “It creates a tax price that favors home ownership.”
[Personal finance expert Jordan ] Goodman says the deduction should stay, but be more limited.  As it stands currently, those with multimillion dollar homes can receive deductions on interest of up to $1 million on their first mortgage, and up to $100,000 for their second mortgages.
“It’s a reverse Robin hood tax,” he says.  “The bigger the house you have, the more of a tax deduction you get.  It would destroy the housing market entirely to take it away, but let’s cap it at $500,000 instead of $1 million.  This is subsidizing rich people getting a big house with a big mortgage.”

I’ll ignore the idiocy of punishing a disfavored group, as Goodman wants to do.  He’s plain wrong on the impact on housing markets.  Eliminating the deduction, as Shaviro correctly wants to do, would be disruptive only until the new equilibrium is reached; it wouldn’t destroy the housing market.

Needs to Go: Corporate debt buying. Our current tax code favors companies who are loading themselves up with debt instead of equity, Shaviro says.  “This gives companies the incentive to have debt,” he says.  “You deduct interest that you pay to shareholders but not the interest you pay on dividends.”

Correct, but for the wrong reasons.  Businesses shouldn’t be paying taxes in the first place.  They’re not the ones paying, in the end, we consumers are because those taxes get passed on as higher prices.

Should Go: Renewable energy tax credits. The credits the government offers for renewable energy items such as buying a hybrid car or installing solar panels is [well]-intentioned, not necessary, says Goodman.  “The actual results in the real world have been relatively minimal,” he says.  “The solar industry is in a depression now, but if the industry is ‘so big’ the government shouldn’t have to subsidize it.  If it’s that good, let people pay for it on their own.”

Again, correct, this time partly for the wrong reasons.  The tax credits—any tax credits or subsidies or deductions—distort the market and mitigate against rational, market-oriented solutions.  Regardless of the target, whether renewable energy, oil and gas, or mortgage interest, all credits, subsidies, deductions, and what-have-you should be purged from the tax code.

Leave a Reply

Your email address will not be published. Required fields are marked *