Saturday, February 9, 2008

TAXES | Rethinking the U.S. Code

FEB. 9, 2008–On Monday I had the pleasure of hearing Chairman Charles Rangel of the House Ways & Means Committee talk about the Federal tax code. He made a lot of sense. Something has to give. The official national debt is up to $9.2 trillion today, according to the online National Debt Clock, which is in sync with the reading on the physical clock (created by the late Seymour Durst) at 6th Avenue and 44th Street in Manhattan. The physical clock posts an average U.S. debt per family of $78,000.

Slowing down the growth in U.S. debt means smaller deficits, which means less spending or higher taxes - a rock and a hard place for Washington's nomenklatura. Chairman Rangel will have a lot to say about how the Federal tax code evolves. He said that the entire code will be up for debate in the coming years, whichever of the candidates is elected President ("whoever she may be").

He noted that some believers in tax simplicity want to impose a Flat Tax and are raising fundamental questions. He didn't spend a lot of time on this topic (see comment below for a possible explanation of the short shrift).
For Chairman Rangel, the concern that seems highest on his list is fairness, as a weak economy punishes the "jobless, the homeless, the hopeless". (Warren Buffett has spoken out against the unfairness of a tax system that requires a higher rate of taxation for his secretary than for him.)

The argument that risk-taking needs to be rewarded may apply to investors in hedge funds, but Chairman Rangel wonders why non-risk-taking managers of hedge funds get to pay taxes on their income at these lower capital gains rates. The argument that the lower rate is good for attracting people to these jobs may be valid, but he wonders whether there aren't executives who could make the same argument for their businesses. In the end, he said, the lobbyists for special interests are not nearly as important to political leaders than the biggest lobby of them all, the American public.

John Skolas of New Hope, PA read my post above and commented to me (I have his permission to append his comment):
Thank you for sending this. As someone who started his career as a tax lawyer, I have always wanted to ask an economist why politicians talk about a flat tax being simpler. The vast majority of tax code complexity seems to be definitional, e.g., taxable income, business expense, transfer pricing - as to what is U.S. income and on and on. A flat tax could get rid of Schedule A for individuals, but leaves the whole rest of the alphabet of schedules and all the same issues for businesses, regardless of the tax rate.