A Novel Approach to Tax Reform: a True “Maximum Tax”

Sadly, any real attempts at tax “reform” seem to have faded from the current political agenda.  Both sides of the debate (lower rates, but broader base, on the one side, and higher rates for top incomes and fewer “loopholes”, on the other) seem now to be waiting for either a showdown over the debt ceiling or for the results of the 2014 Congressional elections to tip the scales one way or another.  If you take out the common theme (broader base/fewer loopholes), you’re left with the impasse of lower rates versus higher rates and no progress can occur given the current political balances and the nearly sacred ideologies underlying those polar views on rates.  Sadly, no one seems to want to do the hard work of really developing that common theme so that those opposing ideologies wouldn’t be so powerful.

Rep. Kevin Brady (R) Texas cited, in the May 6, 2013 Wall Street Journal, data that tends to inflame economic conservatives.  Since 1980, the share of income taxes paid by the top 1% grew from  19.1% to 37.4%, while the share paid by the bottom 50% shrank from 7.1% to 2.4%.  The biggest gripe is not really the change, but the end result:  1% of taxpayers pay close to 40% of the total burden while almost half the people pay none.  But, of course, that’s not the whole story.  People at the bottom of the federal income tax ledger may be paying some state income tax and some property tax and are certainly paying sales taxes and (if employed) payroll taxes that account for a much larger share of their total income than those at the upper reaches of the income ledger.  But, even that’s not a complete picture.  The relatively wealthy consume more and thus pay more sales tax and have more valuable houses and thus pay more real estate tax.   Local variations on sales tax-exempt items and differentials in “homestead allowances” can make a really thorough and accurate comparison almost impossible.

So, maybe an answer is to approach the total revenue needs of various levels of government within the aggregate fairness notions that society, as a whole, can agree is appropriate.   Maybe we could impose upper limits on the total tax that can be extracted, in the aggregate, from all these forms of taxation.  I don’t pretend that this would be easy.  What is the measure?  Income, assets, some combination?  How would this be enforced?  The already flawed “voluntary compliance” system can’t easily be relied upon for an asset-based limitation.  John Cochrane, finance professor at the Booth School at the University of Chicago (my business school alma mater…but long ago, before it was renamed in honor of David Booth’s huge donation, but still with it’s strong free market policy orientation) argues (April 15, 2013 Wall Street Journal) for applying this notion at least to the federal income tax take as a percentage of income.  As an inviolate promise to entrepreneurs and risk-takers, innovators, and all people willing to work hard, the federal tax law would never take more than X% of income…no matter when the income occurs or how much it is.    Once we would  adopt that concept, we could then have an interesting, centrist debate about what that “X” should be.  And, as a matter of fairness, on some notion that we’re all in this together, I would add a true minimum, Y%.  Again, we could have an interesting, centrist debate on how much that “Y” should be so that every income contributes at least a little to the common welfare.

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