Racheting it up on the rich
January 29, 2001
It is an unstated axiom among modern liberals that the proportionate burden on high-income earners must increase whenever any change, up or down, is made to the tax code. All you have to do is say "tax," and you'll instantly be subject to a lecture on how the rich should pay a greater share, never mind that the upper 5% earners already account for something like 50% of federal income tax revenues.
The current debate about Bush's tax proposal is a case in point. The main thrust of the Democrats' argument boils down to making sure the rich don't benefit too much from the tax cut. The flaw in President Bush's across the board tax cut is, well, that it benefits those who pay taxes.
One way of racheting up the proportion paid by the rich is by adjusting the rates disproportionately, such as keeping the maximum 39.6% top rate or decreasing it only a small amount. One problem with that is that it will blunt the benefit on the economy of a tax cut, since, let's face it, it is people in the upper-income brackets who provide most of the capital that drives the economy.
Even worse than fiddling with rates disproportionately is the Democrats' preference for "targeted tax cuts," a favorite Democratic theme of the past campaign. Not only would it add many pages to the already hideously complicated federal tax code, but it politicizes it even further, giving favors to, you guessed it, those with the most political muscle.
The antithesis of targeted tax cuts is the flat tax, which eliminates not only tax brackets (except the lowest income bracket, which is exempt from any tax at all) but also the baroque system of deductions. The dramatic simplification would be a great advantage, but the main benefit would be de-politicization.
Imagine how wonderful it would be if the only thing Congress had to argue about re income tax policy was the level for low-income cut-off for tax exemption and the tax rate for the rest: no interminable arguments about deductions, no arguments about who gets what favors, no lobbyists.
The flat tax is a dream, of course. Although it would be a boon to taxpayers, it is anathema to the political class because the present system is their source of power: the trading of favors, playing off group against group, and, to use every politician's favorite term, special interest against special interest.
The biggest and worst special interest is the political class itself, and that's the reason that the best we can hope for is Bush's plan, which has the advantage at least of not adding to the evils already present.