This issue of SquareTwo features a fascinating account of failed tax reform in Utah in the early 2000's by then-Governor Olene Walker. As our country heads towards the "fiscal cliff," our government is in need of excellent ideas for tax reform at the federal level. Almost all adults in the USA have at one time or another said to themselves, "If only they would just do X to the tax code, it would make so much more sense!" We need our tax code to reflect our priorities, and incentivize them. What specific changes to the federal tax code would you like to see?
Full Citation for this Article: Editorial Board (2012) "Readers' Puzzle for Fall 2012: Tax Reform Ideas," SquareTwo, Vol. 5 No. 3 (Fall), http://squaretwo.org/Sq2ArticleReadersPuzzleFall2012.html, [give access date]
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I. Ryan Decker
The federal government subsidizes home ownership in a variety of ways, including reduced mortgage interest rates due to formerly implicit (now explicit) guarantees and direct subsidies through Fannie Mae and Freddie Mac; advantageous capital gains tax treatment; “affordable housing” programs for low-income families through HUD, FHA, and other agencies; and the tax deduction for mortgage interest. At the least, the mortgage interest deduction should be considered for reform or repeal due to its regressive nature and its encouragement of household leverage.
As tax policy, the deduction is regressive since home ownership is pursued disproportionately by high-income households. Renters pay tax on the portion of their income that goes to housing expenses, while owners may enjoy tax-advantaged housing costs. Poterba and Sinai (2011) estimate that the tax liability benefits of the deduction are anywhere from five to ten times as large for households earning more than $250,000 than for households earning between $40,000 and $75,000. For those who desire a more progressive tax code, elimination of the mortgage interest deduction is a no-brainer; for those who feel the code is too progressive, elimination of the deduction along with reduction in marginal tax rates may be more efficient.
The mortgage interest deduction does not just encourage home ownership; it encourages leverage by directly reducing the cost of debt service to home owners. Hendershott and Pryce (2006) estimate that elimination of interest deductibility for United Kingdom households was associated with a 17 to 23 percent reduction in loan-to-value ratios, a result that is qualitatively consistent with other research. A reduction in household leverage may enhance household mobility and, in general, reduce the economy’s vulnerability to house price fluctuations (see Mian and Sufi (2010)).
Opponents of repeal of the deduction primarily complain that elimination of the deduction would lead to lower home values. Such an outcome is indeed possible, but it is far from clear that housing policy should be designed to benefit incumbent homeowners at the expense of future home buyers. Others point to supposed benefits of a “culture of ownership.” Such an abstract concept seems a weak basis for public policy; in any case, the tragedy of widespread default, forced immobility, and collapse of consumer demand that occurred during the 2006 to 2011 period suggest that the “culture of ownership” has costs as well (see Mian and Sufi (2011); Mian, Rao, and Sufi (2012)). Regardless, the plethora of other explicit and implicit housing subsidies provides abundant incentives for ownership. There exist policy options that can encourage ownership without encouraging leverage and McMansion accumulation. Reforming the tax code should include reevaluating the distortionary mortgage interest deduction.
Hendershott, Patric and Gwilym Pryce. 2006. The sensitivity of homeowner leverage to the deductibility of home mortgage interest. Journal of Urban Economics 60 no. 1:50-68.
Mian, Atif and Amir Sufi. 2010. Household leverage and the recession of 2007-09. IMF Economic Review 58 no. 1:74-117.
Mian, Atif and Amir Sufi. 2011. House prices, home equity-based borrowing, and the US household leverage crisis. American Economic Review 101 no. 5:2132-56.
Mian, Atif, Kamelesh Rao, and Amir Sufi. 2013. Household balance sheets, consumption, and the economic slump. Working paper.
Poterba, James and Todd Sinai. 2011. Revenue cost and incentive effects of income tax provisions for owner-occupied housing. National Tax Journal 64 no. 2:531-64.
II. Janille and Matthew Stearmer
Taxes serve one purpose and that is to pay for the legislated obligations of government. Who pays those taxes, and to what degree, move us from the realm of obligation and into justice and our sense of equity. When certain classes within the population benefit from the tax system we can feel a sense of unfairness. This creates distrust and can lead to a potential break down in social cohesion. The changes I propose address the legal obligations as well as our sense of justice and equity.
I make the following assumptions.
1) There are direct and indirect benefits in our current economy and tax system.
2) Contributions to the economy and taxes are both direct and indirect.
3) Those who benefit most from the current economic system bear a greater responsibility to pay for the system that helps them succeed.
4) Those with money to cheat the system will try to do so; any tax plan should minimize these possibilities.
5) The more moving parts in a tax system, the greater the opportunity to cheat.
6) Income is anything that you take home to spend.
7) The current national debt amount is high, in large part, due to unfunded tax cuts that did not recoup their cost through the promised economic growth.
The current tax system favors those with the ability to manipulate the tax code. Any system which allows larger profitable companies to lower their tax obligation to near nothing, while taking profits, violates our sense of fairness. If nothing else, they have recieved indirect benefits from the system - from the road and infrastrucure systems, to the education system, to our military presence and security measures throughout the world that make the international system a generally safe place for Americans to do business. In addition to these indirect benefits, wealthy corporations/individuals then also recieved direct benefits from subsidies and tax breaks that most Americans cannot take advantage of. Because of these benefits, their obligation to the system should be higher, and our sense of injustice is higher when they pay lower amounts than others who have received few benefits.
But the incentive to create and exploit loopholes is high and those at the highest income brackets have the greatest ability to find ways to get out of this obligation.
At the same time, there is a perception that those who are poor actually receive most of the benefits because they recieve many of the direct benefits of the tax system through the public education system and safety net program benefits. Regardless of their individual contribution, there are many who feel that the poor are the individuals who, in fact, exploit the system.
Given this scenario there are a few changes that can be proposed that could lead to an increased accountability for those in the higher brackets, as well as a reduction of the negative perceptions of those in the lower brackets.
If the goal is a better taxation on income and to avoid the incentive to cheat, one change would be to follow the lead of the "Fair Tax" movement and the elimination of income taxes all together, and replace them with a flat consumption tax. No matter how rich or poor one is, the money has to be spent. There is no opportinuty to cheat. Everything that is bought has the tax built into it and as soon as it is spent, the tax is collected. This would be a flat rate. This removes the incentive/opportunity to cheat and creates a sense of fairness that all of us have "skin in the game." It treats all income, no matter how it is obtained, as income as soon as it is spent. It is also very simple. Everyone can understand and predict the cost.
This system, however, treats all income as equal and so still violates our sense of justice that those who benefit the most should pay more for the benefits they recieve, and that those who have been disadvantaged by the system should not be punished by also needing to pay the same as those who benefit the most. Consistent with the "Fair Tax" idea, every American would recieve a tax return (on some interval like monthly, quarterly or annually) up to the poverty level. Meaning, that all taxes paid up to that poverty line are refunded to everyone. Everyone recieves this benefit, but that value is more beneficial to those on the poor end because it is a larger share of their income. However, it is applied across the board to fullfill our sense of fairness. The lower end of the spectrum is now taken care of, without undue intervention in regards to welfare and income, and the average income earners are taken care of, but those who benefit most still must pay some additional amount to fulfill their obligation to pay the most for the system that has benefited them the most.
First, I acknowledge that those who spend more will pay more, but not at a higher rate. To some this is fair; to others is it unjust that a millionaire should pay the same percentage as a wage earner. While I am sympathetic to this arguement to a degree, I still look at the past system and see that a large percentage of the debt is due to those in the upper income not paying the same historic rates for the cost we have set up in our system. Thus I would propose that those with incomes (meaning anything that you take to spend) over $350,000 should be taxed at an additional flat rate to pay for the debt already incurred by a system that preferences them above other earners. This additional amount will remain in place until the debt attributable to the previous income tax breaks has been paid. At this point their unequal benefit received over the last several decades will be paid in full and then we can go back to the level playing field of taxation based on consumption.
I would add one additional tax in the system based on financial transations. It does not make sense to me to apply the same rate to financial transation as they are not consumer goods, and they are traded much more frequently than one buys food or a TV. Thus the rate should be lower because the income can be made up in volume of transactions. For example, a one cent tax on each financial transaction could generate large amounts of money in a very short amount of time.
This system fulfills our sense of fairness through the entire range of income, it reduces/removes the ability to cheat by those that can afford to game the system, and provides a mechanism to recoupe the wealth that was transfered into the super wealthy back to creating a stable and secure government system.
How to pay for the system is one question - the harder one perhaps is what we should spend it on. Rather than use the tax system directly to benefit the poor through tax returns and credits, other programs should be put into place so that the tax system itself remains simple and just. This benefits everyone, and does not preclude paying for social safetynet programs (and even expanding them as necessary). How these could be organized must be addressed in a seperate opinion.
III. Stephen Cranney
A common complaint against people who have children when they cannot afford to single-handedly support them without any reliance on government assistance is that we are free riders. This sentiment leads some people to delay childbearing or to have less children than they would normally have out of a sense of obligation to be able to provide for their own without government assistance.
However, this framework is demonstrably false. The reverse is true: those who do not have children are free riding off of those who do, as children provide a public good by paying into the support for the elderly.
Berkeley economist Ron Lee (2003) quantified the size of this externality, calculating that in 1996 a child born to parents with a high school diploma had a net worth to the system of $171,000, and a child born to parents with more than a high school education was worth $245,000 (this is after costs of education, childhood health care and, yes, food stamps, was deducted). "This large positive fiscal externality reflects in large part the fact that the family does not benefit directly from old-age support when it has a child, although society does. It is possible, although perhaps not likely, that this externality is partly responsible for the low fertility observed throughout industrialized nations today."
While some rightfully laud and honor parents who stay home to raise children, parents can't feed their family on love, and a genuine appreciation for their contribution to society would include an attempt dispense with the free rider problem. In her book The Feminine Economy and the Economic Man, Shirley Burgraff, an economist at Florida A&M University, raised an intriguing policy possibility that parents receive a "parental dividend" as part of their social security check. Specifically, 15% of their offspring's pay check (about the same as social security taxes) is paid towards their own support. She doesn't refine the model much, so of course it would have to be tweaked to make sure that those who don't have children don't starve, and that those who don't have living parents still pay into the system, but in the principle the idea is worth considering.
Lee, Ronald. 2007. "Demographic Change, Welfare, and Intergenerational Transfers: A Global Overview," in Jacques Véron, Sophie Pennec, Jacques Légaré (eds.), Ages, Generations and the Social Contract
The Demographic Challenges Facing the Welfare State, London: Springer, http://link.springer.com/book/10.1007/978-1-4020-5973-5/page/1
IV. Valerie M. Hudson
I think there are many ways that we can organize ourselves temporally to draw closer to a more heavenly society. And certainly the construction of the tax code is one of those policy instruments that can assist or impede that goal.
Gender equity is a hallmark of Zion--there are no rich nor poor there. That means that men do not enjoy temporal superiority in the heavenly society. Are there means by which we can lessen the gap between men and women in these pre-Zion days through adjustment of the tax code?
An obvious way is to eliminate the marriage penalty, whereby the lower-earning spouse is taxed at the same rate as that of the high-earning spouse. In the case of a great disparity between the incomes of the two spouses, this is simply robbery. I'd also like to see a reworking of the dependent deduction: it is time to consider how much it really costs to support a child, or a disabled adult dependent, and adjust that figure upwards. It's also time to consider increasing the college tuition tax breaks to better reflect the the dramatic increase in average tuition costs our nation has experienced.
Much can also be done to establish temporal gender equity by reforming workplace regulations and law. The single most important thing that could be done would be to mandate--as European nations have--that part-time jobs must pay the same hourly rate as that same job performed by a full-timer, with proportionate benefits. Close on its heels would be the establishment of a paid maternity leave, as all other nations in the world but two others have. Finally, it is time to impute value for hours worked by unpaid primary caregivers in the form of Social Security credit.
The largest risk factor for poverty in old age is to have ever been a mother (not a father). A just society, wholly dependent as it is for its future on the unpaid care labor of mothers who literally bring the nation's future into the world, cannot penalize those women. In the society we have constructed for ourselves, we currently do just that. We punish women for being mothers. It's time to turn that around.
V. Raymond Takashi Swenson of Richland, Washington
I did not take time to respond to the original invitation to comment on the question of tax policy reformation, but after reading the comments made and displayed in the Spring 2013 issue, I would like to submit one more proposal.
Some of the ideas offered involve incentives that support families who decide to raise more children, because of the ultimate value those children have in sustaining the larger society, especially supporting the retired recipients of income from both Social Security and private pension programs. I would like to suggest another incentive, specifically to pay a parent for undertaking home schooling. Assuming some level of community certification of the basic competence of one or both parents to act as teacher to their children, if we diverted a major part of the money normally spent by the state on educating each student, into funds paid to the parents to conduct that education at home, it could have several benefits.
First, there could be a reduction of public school costs, while retaining some of the money that would otherwise have been spent on each pupil, increasing net revenues to the public schools.
Second, with two or more children enrolled in that program, the primary instructor parent would be able to work at home, rather than have to work outside the home and spend a substantial portion of the income earned on daycare for younger children. More pre-school children would be cared for in their own homes, avoiding the risks and other negative consequences of mass daycare.
Third, instructor parents could devote some of the funds to acquiring books and educational materials such as tablet computers and software, which could be used in the family in multiple ways, including preschool education.
Since the standard argument for increasing public school funding is to decrease the student-to-teacher ratio, and give better service to each student, the student-to-teacher ratio of 2, 3 or 4 to one provided by home schooling, especially in an enriched environment supported by real financial assistance, should make it an option just as valid, if not more so, than even the best public schools can offer.
If the subsidy varies based on the educational attainments of the instructor parent, it could be an incentive for that parent to improve their own education, such as completing a college degree or even master’s degree. The funding to instructor parents could help defray the costs of such additional education for the adult, and programs that serve such students, such as through online courses, would grow in response. As children grow up, the experience and education obtained by an instructor parent could be translated into qualifications to teach in private and public schools.
With this kind of program, there would be less emphasis on bricks and mortar in schools and more on development of educational programs and methods that are adaptable to individual aptitudes and interests of each child, tools that can be applied to make public and private schools more flexible in their ability to serve all children.
This would not be a handout, but compensation for real service rendered to the community by educating its citizens. It would also decrease the pool of cheap female labor for many lower wage positions, and force employers to compete with better rates of pay and benefits.
It would also help support parents of children who have special needs, rewarding them financially for part of their work as caregivers.