Wednesday, October 5, 2011

Bumper Sticker Tax Reform

So, while I was writing my last post more details on the Reid proposal were announced.  As I suspected, it's far worse than Obama's original plan.  It's just a 5% surtax on incomes over $1 million.  I'm not opposed to a surtax but this is a bit steep.  I'd prefer 0.5% or 1% hikes on each order of magnitude over $1 million (so 1% on $1 million, 2% on $10, etc.).  The only advantage this plan has over Obama's is that it fits on a bumper sticker better.

The big problem with this though is that given the current number of tax expenditures in the US tax code simply imposing higher rates without closing loopholes just increases their distortionary effects.  Obama's plan did a decent job closing some of the worst incentives in our tax code, though missing the property and health deductions were problematic since this is two areas where the deduction is most likely to lead to cost inflation and resource shifting with no compensating gains.

Unless something really exciting comes up my next post is definitely on how current political dynamics screw over small business owners and possessors of high levels of human capital most of all.  This comes out particularly strongly by the Democratic party proposals.  In particular, I've got these comments in mind:

Democratic leaders said they believed that the new proposal would win support from Democratic senators like Mark Begich of Alaska and Mary L. Landrieu of Louisiana, who had expressed reservations about some of the tax changes in the president’s plan. It was not immediately clear whether the proposal would gain backing from moderate Democrats like Senators Joe Manchin III of West Virginia, Ben Nelson of Nebraska and Claire McCaskill of Missouri, who are running for re-election.

The window dressing about small business owners is BS.  If they were serious about tackling big business the carried interest deduction elimination would have been retained as would have some of the insurance company changes as well as the oil and gas tax deduction changes.  This is clearly a handout to America's biggest businesses, finance and natural resources.  Small business owners are getting screwed by this relative to Obama's plan.

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