Whiting column: Tax code must be simple
Everyone benefits if our income tax code is simple, efficient and equitable.
Last month we eliminated thousands of deductions/credits. Next we must consider tax rates that are an economic component of fiscal policy leveling out capitalism’s cyclical characteristics.
All economists agree the most efficient way to boost the economy, in the short and mid-term, is to get dollars in the hands of those who spend it. Lowering tax rates will accomplish that simply and quickly.
History and simple logic reinforce this strategy’s effectiveness. Whether individuals or business, if we have more money we tend to spend most, if not all, of it.
Additional money being spent increases demand for products and services increasing the need for additional employees and business infrastructure regardless of the form it may take.
If not spent, but used to pay off debt, the amount allocated from income toward the debt is decreased, freeing up money to be spent elsewhere. If some is saved, it facilitates future consumption, which is essential to economic recovery if a recession occurs.
Recently adopted modifications of the tax code include many provisions, but are primarily a tax reduction for both individuals and business. Individually, the tax reduction varies, but whether large or small it will result in increased spending and the resulting benefits.
The first 20 percent of small business income is now exempted from tax. This will have an immediate nationwide effect since 99.7 percent of businesses are small. Small business produces the majority of increased employment, which is especially important to the Western Slope and other regions yet to experience economic resurgence. Large corporations are reducing employees and/or can afford to instead use technology.
Large corporations received a tax reduction from 35 percent to 21 percent. The goal is not only to free up money for spending, but also facilitate repatriation of the $1.7 trillion currently stored in foreign bank accounts avoiding our high tax. Time will tell whether repatriation occurs, but a recent sign validating the concept is China, last week, immediately responded with a tax break for foreign corporate investment, fearing both money leaving China and future foreign money invested in the United States. The goal is also to have future corporate profits, whether domestic or foreign, stay and used here as opposed to heading abroad.
To be fair, we are not considering the effect on revenue and budgetary surplus/deficit in the long term. Whether there is surplus or deficit is also a function of the other aspect of fiscal policy: government spending.
Some economists have argued that the economic boost generated by decreased tax rates could produce income growth sufficient to generate higher tax revenue. Whether this has ever occurred, historically, is hard to determine since a tax reduction is a leading series (results lag) and economists disagree as to whether the lag time between rate reduction and income growth is one year, two years or 10 years.
Some economists feel a tax reduction will reduce the need for and consequent budgetary cost of welfare, unemployment, food stamps and other governmental social programs. Logical, but again very difficult to determine since myriad factors are involved.
If the tax code is to be simple, efficient and equitable then tax rates must reflect that goal. Not an easy task. There is some logic to a progressive tax structure where the higher the income, the higher the tax rate. This creates inherent complexity and can be demotivating to an individual or business seeking to increase their income.
The ultimate in simplicity and equity would be a flat tax rate in which everyone pays the same rate. In practicality, however, such could be perceived to be unfair and a political hard sell.
Equity is not served when some do not pay any income tax. Some 44 percent of the population doesn’t pay any income tax leaving the entire revenue need to the other 56 percent. One solution would be to require everyone to pay income taxes regardless of income, even if only 1 percent for those with income under $20K income, for example. View it as the “dues to be an American.” Regardless of anyone’s personal situation, we are all better off than any other country whether viewed from an economic, freedom or national security standpoint. If everyone paid taxes it would make us more cognizant of and involved with what our city, county, state and federal governments are spending. A worthy goal.
Simplicity also dictates the need to simplify the definition of income. Now the tax code defines and differentiates between many forms of income: earned, unearned, ordinary, wage, tip, capital gain, gift, interest, dividend, trust, pension, inheritance and more. Each has its own treatment. Not exactly simple.
Why not define income as “any money you have this year that you didn’t have last year.” Money is money. Differentiating makes things more complex. If you sell a stock and make money, it is income. If you have a job and earn money, it is income. If you receive interest, tips, a pension, it is money you didn’t have last year and you are taxed at your rate. If you had money in savings last year and it’s still there, it’s not taxed because it’s not new to you.
It would make things more simple. If your grandmother gives you a painting worth $5,000, why tax it? Sitting on the wall, it’s not money, it’s a nice painting and memory. If you choose to sell the painting and convert it to money, it would be taxable. This would eliminate the need for the limited gift tax exclusion and the time spent trying to get something in the right amount and form to take advantage of it. Money is what we use, so its source is irrelevant.
The need for inheritance tax would be eliminated. If a rich man leaves his children cash, it’s taxed. If he leaves them a business worth millions, that’s only of value if they get money from it. If they do, then tax it. Why should a father be penalized for wanting to leave something to his children?
The current inheritance tax only serves to make big corporations bigger. If a farmer wants to leave his children the family farm in excess of the current inheritance tax exemption of $10 million (which given the cost of land today isn’t a large farm or ranch), the only way they can find the millions necessary to pay the tax is to sell it. The problem: They are no longer farmers, and the only producers with the cash to buy the farm are the large corporate farmers. If in the future, the kids decide to sell the farm, then it’s new money and they will incur a tax liability. The same is true of any small business. The inheritance tax only facilitates large corporations buying up the smaller businesses and making large larger.
It is our personal responsibility to pay our fair share of our government’s costs, but it is also our responsibility to make sure the tax code is simple, efficient and equitable.
Bryan Whiting feels most of our issues are best solved by personal responsibility and an understanding of non-partisan economics rather than by government intervention. He recently retired after 40 years of teaching marketing, entrepreneurship and economics. Comments and column suggestions to: email@example.com