What might a radical economist's tax plan look like?
A number of candidates have now released tax plans. Most recently Bush has proposed cutting the top income tax down to the his-father-had-doubts level of 28 percent. Rubio wants a nearly-universal basic income with work requirements. Rand Paul wants the so-called "Flat Tax," and while Huckabee has said little he is a long-time advocate of the "Fair Tax." Apparently you can now get taken seriously while proposing extraordinarily radical tax plans with phony-baloney numbers that have no relationship to the actual budget, so I figured I'd give it a shot. Here's what a radical technocrat might propose.
- Abolish payroll taxes
- Abolish joint marriage tax filing
- Abolish all deductions: mortgage income, charitable, standard, maybe ESI
- Abolish corporate tax
- Abolish all tax-deductible dedicated savings accounts (health, education, 401k accounts). See capital gains tax below.
- Abolish estate tax. See capital gains tax below.
- New income tax:
$0-$15,000 -30% $15,000-$75,000 0% $75,000-$400,000 30% $400,000+ 60%
- New capital gains tax:
Everyone gets one capital-tax-exempt savings account with value capped at $5 million. 0% taxes on all income from the savings account, 60% tax on all other non-labor income.
Ok, some points here need to be elaborated.
Here's how that negative income tax works
For each dollar less than $15,000 in labor income an individual makes, they'd receive a $0.30 subsidy from the government. So if you have no income, you get $5,000 a year. Importantly, everyone is an individual tax filer under this plan, so if you have three non-working children, that's $15,000 a year in support. By and large, the vast majority of welfare under this plan goes to children. Notice that the plan virtually eliminates poverty among workers: for a single Mom with three kids working full time at minimum wage that's $14,500 in income plus her own $150 subsidy, plus $15,000 for the kids, for a total income of $29,650, well above poverty level. Since most of our means-tested welfare goes to children, and this plan would cause them to exceed the means-test limits, there are substantial offsetting spending reductions here.
Nothing could be simpler
Without deductions (not even a standard deduction!), marriage filing, tax credits, payroll taxes, or (for most people) capital gains, filing taxes would be simple. Most people wouldn't have to do it.
Special note about ESI tax-exclusion
While it is popular in the health econ world to support ending the tax-exclusion for employer-sponsored health insurance (ESI), to be honest I'm on the fence, for two reasons. First, ending the exclusion makes taxes more complicated for individual filers, because it makes your taxable income dependent on both you and your employer's decisions on health insurance not to mention the decisions of the health insurers themselves, and employers change these options as often as every single year. Additionally, I think advocates for ending the exclusion are overlooking an important detail: ESI markets function a lot better than the individual health insurance market, thanks in large part to the fact that the tax-exclusion encourages all employees to enroll, diminishing the problem of adverse selection.
Dedicated savings accounts don't work
Health savings accounts, educational savings accounts, 401ks and all other dedicated savings accounts have been miserable failures. For one thing, no one understands how to use them--hardly anyone invests their health savings accounts, for example, so the interest value of money they contribute is basically all wasted. Moreover, the fact that these are dedicated means that only the rich can afford to use them because no one else can afford to lock away all their savings into accounts they can't spend in times of need. Compared to a generic savings account, dedicated savings account increase household's risk exposure and perversely discourage actual saving.
The most pro-growth plan ever
Hardly anyone pays taxes: roughly 70 percent of people earn less than $75,000 and owe no taxes. Almost 30 percent would face a 0 percent effective marginal tax rate, representing the bulk of prime-age able-bodied workers. Almost no one would face a non-zero marginal rate on capital. No one can claim this plan isn't pro-growth.
No separate inheritance tax
Here's how the inheritance tax works. There is no separate inheritance tax. Instead, you are allowed to squirrel away as much as you want into your personal savings account. Whatever fits under the $5 million limit is tax-free, but you owe 60 percent of the rest (for simplicity, might be worth keeping the stepped-up basis of the inheritance tax. Otherwise, could tax just the capital gains on inherited assets).
The tax on non-exempt capital gains isn't that high
The 60 percent tax on the non-exempt portion of capital gains may seem high, but it's not: the current capital income tax sums to 53.6 percent on the highest earners. The reason that figure might seem a bit higher than you've seen elsewhere is that it includes both the corporate tax and the capital gains tax, which economists agree are economically one and the same. Combined, the highest corporate income tax and highest long-term capital gains tax works out to 53.6 percent. I increase that very modestly on the very highest earners, while repealing it entirely for almost everyone.
Farewell to budget gimmicks
Without the payroll taxes, there are no more trust funds. Social security, medicare, medicaid, disability get paid out of general revenues funded primarily by the income tax above. But to an extent the negative income tax would replace some of the spending through those programs, and probably almost all of SNAP, TANF, and other means-tested programs that pay out primarily to children.
Of course, like all of the presidential candidates, I have no idea how much this increases the deficit. But my guess is there's not enough net revenue from my income tax, even accounting for welfare spending that would be superseded. Probably the tax brackets will need to be adjusted, with the $15,000 limit decreased and the 30% tax rate increased. Maybe additional revenue could be supplemented by a uniform sales tax--some welfare/efficiency calculations need to be done here. But I think this provides a decent blueprint for what we should be aiming for.