When the facts change, I change my mind. What do you do? -- John Maynard Keynes

Saturday, March 31, 2012

Tax reform--it is not going to go away

Who can argue that tax expenditures give politicians a way to hand out favors and engage in indirect spending, all without explicit accountability? Given the fiscal unsustainability of the U.S., it is past time for comprehensive reform of the entire tax code and tax system, including elimination of loopholes, tax expenditures, etc.--or as Uwe E. Reinhardt in the New York Times puts it:

" . . .the best approach would be to abolish the distinction between capital gains and ordinary income altogether and desist from using the tax system for any kind of economic or social engineering. . . . Consider now a person who bought a vacation home for $500,000 and two years later, during one of our recurrent real-estate bubbles, sells it for $1.5 million. That $1 million profit is now taxed at a rate of only 15 percent. If the home had been the principal residence of this person and his or her spouse, half of the $1 million profit would not be taxed at all. Suppose next that this tax-favored person’s neighbor were a busy neurosurgeon whose many hours of hard, physical and intellectual work earned him or her a net practice income of $1 million during those same two years. That neurosurgeon would pay the ordinary income-tax rate on that income (on average a bit less than 35 percent, because only income over $388,350 a year is taxed at 35 percent). By what definition of the term would can one call the glaringly differential tax treatment of the real estate investor and of the neurosurgeon horizontally equitable? Indeed, by what theory of justice could one defend it on ethical grounds? . . . But if encouraging capital formation is the argument in favor of the capital-gains tax preference, why not include in “capital formation” the formation of “human capital,” that is, the personal investment required to produce well-educated and well-trained individuals? Corporations and nations thrive economically on the strength of their human capital, which is arguably their most valuable asset. . . . If the partners at Bain Capital are granted a low 15 percent tax rate on what basically is an earned commission for hours smartly worked, rather than a return on their own invested capital, should not the return on the neurosurgeon’s own investment in his or her human capital be granted the same preference? . . . " 

So who in Washington is going to lead on this issue?  So far I haven't seen any real leadership-- Democrat or Republican. And yet the solution is simple.


The Big Picture

Financial Crisis - The Telegraph

JohnTheCrowd.com | The Sailing Website

Craig Newmark - craigconnects