Congress is once again considering revamping the tax code, starting with corporate taxes. It may be heresy to say, but there was never a worse time to be considering corporate tax reform. Ditto for individual tax reform. With annual deficits, national debt, state debt, employment and the entire array of ‘entitlements’ all pointed in the wrong direction, addressing real tax reform without a reasonable federal and state business plan borders on silliness.
Add to the overall picture that the President is making tax proposals regarding the oil industry which would drive the price of oil up and enacting drilling restrictions which could only drive the availability of American petroleum resources down.
In this arena, trying to achieve real tax reform is far from priority number one, two or frankly, fourteen.
As with all things, if one does not know where they are going, any road will get them there. If the Congress and the President need a national financial crisis that will make the mortgage crisis look like a game for the “B” team, the game currently being played will get them there, sooner rather than later. Everyone who wants to know accepts that the current federal and state borrowing game will end with the inability to borrow or with federal and state governmental entities finally taking action on entitlements, reducing spending and enacting government pension reform. It is not all that complicated.
If we must first act through the Internal Revenue Code, the easiest place to start is with the individual income tax. There are a few easy, yet politically painful first steps that could be taken.
a) Step one is an income tax hike with entitlement reform built into a few changes to the taxation of Social Security. Changes to the taxation of Social Security payments have been made before and would not be a unique change to the system.
Unlike other pension plans, the investment return on the amounts invested (Social Security taxes paid by the employee) in Social Security are not taxed. The investment return on all other pension plans is taxed. The investment return on Social Security payments should be taxed to level the playing field with all other pension payments. The taxation methodology could be achieved in a manner identical to the taxation of other life annuities.
For tax preparation purposes, the taxable amount of Social Security payments could be determined by the Social Security Administration and withholdings could be made from the monthly payments to insure ultimate payment. Of course, the adoption of such a plan could be phased in and as a side benefit, the mind boggling calculations of partial taxation of Social Security included in the Internal Revenue Code could be eliminated from the law.
This idea would be politically very painful, but with graduated tax rates, the wealthy would bare a higher tax rate on their Social Security receipts and this should ease some of that political pain.
b) Step two is the elimination of the state tax deduction, the lowering of the overall Federal individual tax rate and the accompanying reduction of the number of alternative minimum taxpayers to virtually none. This is one of the great no-brainers available in individual tax reform. This would reduce the brain damage of planning and calculating the alternative minimum tax and eliminate the indirect subsidy that low income tax states pay high income tax states through the deduction of state taxes.
c) Step three is withholding on taxpayers with student loans. This will create increased revenues to the federal government without increasing anyone’s taxes. It would merely create an organized and effective way to collect student loans which were made in good faith and should be repaid in good faith.
Will any of these reforms make a material impact on the deficit? Actually, they probably would make a good first dent. The change to Social Security taxation would produce serious money and the repayment of student loans certainly should produce billions over the next decade. The elimination of the alternative minimum tax for ninety percent of the current payers should produce a significant number of smiles and such a move in the interest of intelligent taxation alone is worth the effort.
As to the initial question: a few solid policies moving the deficit and total debt in the right direction would bring our country a great deal closer to a return to prosperity than rearranging the deckchairs of corporate taxation.
And no matter what happens on the revenue side, governmental spending and involvement in our lives needs to be dramatically reduced.