With the 2012 elections over and a political landscape remade, the stage is set for our next U.S. drama, a tussle over how to prevent the budget and economy from tumbling over a “fiscal cliff.” From the tone of preliminary discussions, it’s looking hopeful that all parties (save a few Tea Party holdouts) have taken their “act-like-an-adult” pills. Investment wizard John Mauldin may turn out to be right, after all – that grownups will act in the nick of time, transforming the deficit from an all-destroying monster into a mere-worrisome beast.
That is, if President Obama can get Congress to swiftly do the very first thing, the immediate top priority: pass legislation guaranteeing tax stability at current levels for the Middle Class, so that markets won’t panic on January first. All else can be thrashed out in an “outline” for the next Congress to finalize by March.
That is, if Speaker Boehner can herd enough Republicans into accepting more revenue from the rich. And if their masters on-high grumble but accept what the election’s Super-Pac Collapse showed, that the oligarchic putsch is waning. With tax rates near their lowest in 70 years and with Federal revenue as a share of GDP at its lowest since the end of WWII, it’s time to ignore those imbeciles maniacally preaching hatred of our own government, blaming it for all things. And time for the uber-rich to accept what the First Estate foolishly refused in 1789 France – that it’s time to pay a bit for being members of a civilization.
Oh, but liberals will have to give, as well! This can all happen if the President delivers sincere counter moves on entitlements: the easiest being simply to tell Americans the truth. “Hey, you live a lot longer than your parents did, so you can work just a tad longer… and 70 is the new 50 anyway.” If he does that, in exchange for an end to Bushite supply-side voodoo largesse for aristocrats, then our children will be saved at a single stroke.
The rest of the deficit? Well, as I explained elsewhere, half of the causes of our current mess should dissipate, once the other half come under control, and now that we are safe from our house being ruined again by the same fools who bulldozed it over a cliff from 2001 to 2009.
== The Role of the Tax Code in All This ==
Now, Let’s be clear; the deal that emerges may have some twists to it. Republicans will be seeking a face-saving way to increase inflows from the rich — an approach validated not only by the electorate but also a report from the Congressional Research Service declaring that Supply Side mythology is, was, and always will be hokum. That incantation worked far too long, hypnotizing a generation on the right, but it’s over and good riddance. (Adam Smith himself said that most aristocrats do not invest any sudden largesse into innovative capital. That was a fantasy.)
While admitting the inevitable, GOP politicians are eager not to explicitly violate their “no new taxes” pledge to Grover Norquist, who still has some clout despite his star fading, at long last. Desperate for a fig leaf, Republican legislators tout a semantic distinction between “augmenting revenues” and “raising tax rates.”
The leading proposal on the table right now appears to be eliminating the ability of the rich to evade taxes through deductions, a suggestion offered briefly, during the many policy gyres of GOP presidential nominee Mitt Romney. By eliminating a wide range of deductions, or else capping all deductions at – say – $25,000 per person/year, a large flow of revenue could be tapped while allowing the actual marginal rates of income taxation to remain at Bush Cut levels. (Not enough, according to Treasury Secretary Geithner, but a good start.)
Another approach would be to raise – or even eliminate – the regressive cap on the payroll tax that feeds social security and Medicare. If that were also applied to capital gains and dividend income, so much new revenue would be generated that the rate of the payroll tax would have to be reduced, lest serious damage occur! (That mere fact shows just how skewed our values have become – that honest work is taxed harsher than what Adam Smith derided as “rent-seeking” – the lowest form of economic activity, according to Smith.)
Any of these approaches might work. I am partial to the elimination of whole deductions if only for one reason, that it would contribute to another long term project, simplifying the Tax Code.
As a matter of fact, there is a way to do that, and minimize the amount of kicking or screaming or obstruction. It seems worth doing on its own merits! Some of you have read my proposal before and I’ve been encouraged to keep pushing by folks who work in this very field. It ought to work.
== The Goal of Simplification ==
Just after being elected in 2008, President Obama said he would seek a reform of the U.S. tax code, calling the current system is a “10,000-page monstrosity.” But that promise has been made by others before and every proposed change ran up against a wall. Every “simplification” would gore someone’s ox. The more code-trimming you do, the more people will scream.
I know a simple way around this. The sheer bulk of the tax code — its complexity, in numbers of rules, words or exceptions — could be trimmed without much political pain or obstructionism! Because the method is designed to be mostly politically neutral. It does not aim at some utopian fantasy (like the Flat Taxers rave about.) It gores only a few sacred cows. It would be cheap and easy to implement. Only accountants should hate it for the effects on their lucrative business. Yet, to the best of my knowledge, this method has never been tried, alas.
(Note: an earlier version of this article ran some years ago and is still available at my web site.)
== How can I promise such a thing? ==
There is nothing on Earth like the U.S. tax code, an extremely complex system that no one understands well. But unique in that it’s complexity is perfectly replicated by the MATHEMATICAL MODEL of the system. Because the mathematical model is the system.
One could put the entire US tax code into a spare computer somewhere, try a myriad inputs and tweak every parameter to see how outputs change. There are agencies who already do this, daily, in response to congressional queries. Alterations of the model must be tested under a wide range of boundary conditions (sample taxpayers). But if you are thorough, the results of the model will be the results of the system.
Now. I’m told (by people who know about such things) that it should be easy enough to create a program that will take the tax code and cybernetically experiment with zeroing-out dozens, hundreds of provisions while sliding others upward and then showing, on a spreadsheet, how these simplifications would affect, say, one-hundred representative types of taxpayers. As I’ve said, this is done all the time. A member of Congress has some particular tax breaks she despises and asks the CBO for figures on the effect, should those breaks be eliminated. Alas, as soon as word gets out, her proposal faces a firestorm from powerful interests fighting like hell to keep from losing millions.
Hence, although American corn-ahol subsidies propel high food prices and hunger around the world while doing little for the environment, nothing is done to end the wasteful program that costs more net energy than it delivers. There are thousands of other special interest groups that each wish the budget to be balanced… on someone else’s back. How to get past this?
A key innovation: program in boundary conditions to the experiment, so there are no losers.
Let the program seek and find the simplest version of a refined tax code that leaves all 100 taxpayer clades largely unhurt. If one group loses a favorite tax dodge, the system would seek a rebalancing of others to compensate. No mere human being could accomplish this, but I have been assured by experts that a computer could do it in a snap.
Here’s the key point: If such an iterative search finds a new, much simpler tax structure that leaves none of the 100 groups more than 5% worse off than they currently are, then who is going to scream?
Oh, well, I suppose a lot of people will. Cheaters will holler of course, and those who benefit from the cloud of obscurity allowed by an overly complex tax code. Even if farmers are guaranteed adjustments in other areas, they will reflexively protest over the end of Roosevelt-era subsidies. In fact, everybody will complain! But…
…but a lot of the HEAT will be taken out of their complaints, if they see that their own bottom line is completely unchanged. And that is the secret. To remove enough heat so that people can calmly re-assess, negotiate, and accept pragmatic simplification that’s good for all.
== Will “no-losers” really leave everyone unaffected? ==
Nope. One hundred sample-type American taxpayers won’t cover everyone, especially at the upper end. Some in the aristocracy have tax laws that were enacted specifically to benefit them! They will hit the roof. But if enough of the rich are included in “no-losers” they might tip the balance, canceling out the final obstructors, for the sake of a new simplicity. And a new patriotism.
Will this method solve all tax-related problems? Of course not! Complexity is not the only thing wrong with the Tax Code. After simplification must come some genuine tax policy shifts that do advantage some and disadvantage others. Like all of you, I have my favorite injustices I’d love to see redressed, behaviors disincentivized, business ventures stimulated… and so on
But, by starting with “no-losers,” you can use politically neutral optimization routines to find a much simpler system. Industrial concerns like auto companies already do this sort of thing, trimming and slimming machinery to use the fewest parts, while achieving similar output. We could similarly refine the machine that is the Tax Code. Then, and only then, will it make sense to argue about steering the vehicle in new directions.
Sign the #NoLosersTax petition to have the CBO perform an open, computerized, impartial mathematical model of the tax code, with 100-500 example tax payers, and zeroing out provisions, or changing credits and exemptions, and establishing boundary conditions, the most paramount being “No Losers!”, to attempt to find a simplified tax code that would not impact any tax payer (below $200,000/yr earnings) more than 5%. Then make the results public.