BOHANON: Tax Reform Meets the Guy in the Mirror

June 24, 2012

by Cecil Bohanon, Ph.D.

Here is a simple federal income-tax reform proposal. All earners report their income based on the current definition of adjusted gross income (AGI). All current tax exemptions, deductions and credits are abolished. Taxable income becomes adjusted gross income. All tax preferences are gone — tax breaks are nada, nothing, nil, not there.

AGI from $0 to $32,396 is taxed at one percent. This is the income level in 2009 that defined the bottom 50 percent of all tax returns filed, the latest year for which data are available. Income between $32,396 and $343, 927 is taxed at a 12 percent. All income above $343,927, the threshold income level for being in the infamous top one percent of AGI filings, is taxed at 23 percent.

Conservatives should love this proposal.  Everyone has to pay something — all citizens have a “skin in the fiscal game.” Marginal tax rates are significantly reduced for almost all. Taxes are simplified and streamlined: Most taxpayers can file their return on a postcard.

Conventional liberals should love this proposal. The system is progressive — the millionaire pays more both in dollars and percentages than the pauper — and the big boys have no loopholes. Moreover, federal income tax revenues are 12 percent more than what they would have been; and this calculation does not include any “incentive effect” that would likely expand income earnings from the lower marginal tax rates. Tax accountants and lawyers would note their incomes decline, but this is small price for a more efficient and deficit-reducing tax structure.

So what is the chance this or any reform like it will be adopted under any administration and congress? The answer is zero, and here’s why:

• The real-estate home construction lobby — that is, all of us who own homes and have mortgages —would cry foul. Mortgage-interest deductions would be gone, and how can the economy recover if we cripple housing? (Wait, wasn’t it overbuilding in housing that got is into the recession? Oh shut up.) Middle-class folks would demand that this one exception be made.
• Religious and non-profit organization would cry foul: no charitable deductions. Egad, what happens to end-of-year fundraising. Every newsletter from every non-profit will be urging their donor base to rise up in arms against this cruel change.
• And what else? Local property and state income taxes are no longer deductible. Taxpayers will sorely miss this deduction and state legislators and local officials will roundly condemn its elimination as monstrous. And wait — no more deductions for children, spouses, blind folks; no more earned-income tax credit or credits for solar panels or whatever the latest fashion the environmentalistas are pushing.

We see the picture. Congress would be overrun by lobbyist of all stripes crying doom and gloom if their tax break were not added as a necessary exception. They would kill this bill in two second.

But just who are these special-interest groups corrupting policy? Fat-cat suit-clad demons from big corporations? Evil government bureaucrats intent on pushing a social agenda?

Nope, to find the special interests that muck up our political process just get up in the morning, buddy, and look in the mirror. As Pogo said, “We have met the enemy and he is us.”

Cecil Bohanon, Ph.D., an adjunct scholar with the Indiana Policy Review Foundation, is a professor of economics at Ball State University. All data is from Tax Foundation http://taxfoundation.org/article_ns/summary-2009-federal-individual-income-tax-data and from the author’s calculations. Contact him at editor@inpolicy.org.

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