Rangel Tax Plan

In response to my previous post on the AMT, a reader asked about the Rangel Tax plan, a tax reform proposed by Democrat Charles Rangel from New York. Being touted as "the mother of all tax reforms" and "the most radical left-wing tax revision in half a century," it is neither, and all the rhetoric about it is merely political posturing.

Plan highlights, via Greg Mankiw:

• The bottom three-fourths of households, those making less than $75,000 a year, are not much affected. They each would receive a tax cut of about $100 per year.
• The next 24 percent, those making between $75,000 and $500,000, would receive much more substantial tax cuts. Those in the $200,000 to $500,000 range, who are in the 96 to 99 percentile of the income distribution, would get a tax cut of about $3,600 per year.
• The top 1 percent, those making over $500,000, would pay substantially more in taxes. Those making more than $1 million would see their tax bill rise by an average of more than $100,000.

As the Financial Times says, "This is not exactly raving socialism." Although the plan does get rid of the AMT, it's not very bold. Raise taxes on the super-rich. Never heard that before.

To me, real tax reform would address the complexity of the tax code. There are too many exemptions, deductions and loop-holes. I would like to see a simplified system that treats all people the same, and doesn't favor certain decisions or tax-payers. I'm not talking about different tax brackets; you can keep your progressive tax rates if you like. What I mean is that we look at things like mortgage interest deductions, charitable donations, company provided health insurance, and make the deductions available to all Americans, not just those that itemize deductions or are lucky enough to have employee provided insurance. If mortgage interest is worthy of a deduction (and an argument could actually be made that it's not, especially considering what we're seeing with the mortgage market nationally) then it should be available to all tax payers, not just the 10% or so with enough interest (and other deductions) to get above the standard deduction.

Also, why should savings be taxed twice, while consumption only once? For example, for every dollar I earn, I pay income tax on it. If I choose to invest what's left, I then have to pay income tax on the interest. However, if I choose to spend it instead, I don't have to pay any tax on my spending.

And last, say what you will that the rich should pay more, I am concerned about the trend of more and more tax revenue coming from a smaller and smaller group. 2005 tax data show that the top 50% of income earners payed 97% of all income tax. True, I would expect the top 50% to pay more than the bottom, because after all they have more of the income. What I was surprised by though, was the number of households that paid no income tax at all. According to the IRS data, 42.4% paid zero income tax in 2005. To me, that's an astounding figure, and it's up from 30% in 1990. Says, the Cato Institute about this number, "[I]t is a problem for a democracy–particularly one less constrained by constitutional rules than in the past–to have such a large and growing share of residents not paying any tax because these folks are unconstrained in campaigning for more benefits for themselves at the expense of others."

A recent editorial in the LA Times articulates this incremental approach to larger and larger government and determines liberals are winning:

Liberals have an inherent advantage. As long as they promise incremental, "pragmatic" expansions of the government, voters generally give them a pass. And every new expansion since FDR and the New Deal has created a constituency for continued government largesse.

If Hillary Clinton promised to socialize medicine -- which, let the record show, she has attempted to do in the past -- she would lose. But her current campaign promise to simply expand coverage sounds reasonable enough -- even though there's no reason to think she'll stop pushing for a national single-payer healthcare system (a.k.a. socialized medicine).

"Liberals sell the welfare state one brick at a time, deflecting inquiries about the size and cost of the palace they're building," writes William Voegeli in an illuminating essay, "The Trouble with Limited Government," in the current issue of the Claremont Review of Books.

Committed conservatives, meanwhile, find themselves at a disadvantage: They advocate smaller government for everybody -- when Americans generally (including most Republicans) want smaller government for everybody but themselves.

I don't know where this is all leading, but I do know that from what I've seen from both Democrats and Republicans, it's just more of the same.