Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
Suggested Reforms of the Personal Income Tax
After passage of the 16th Amendment in 1913 authorizing enactment of income taxes, Congress enacted the personal income tax. Income had always been considered a good measure of ability to pay. The income tax was conceived as not merely a revenue source but could be used for social engineering. The first bit of social engineering was the taxation of income at progressive rates as a way of reducing income inequality. Another reason given was that very high annual personal incomes are basically undeserved resulting from what economists term economic rents.
But how progressive should the income tax be? That was a question not easy to answer. During WWI, the top marginal rate reached 92%. But that rate could not continue because of its anticipated adverse effect on investment. Reason suggested a better rule based on benefit and cost, namely, that in normal times, the top tax rate should not be higher than the rate that at which the negative effects on the economy equaled the perceived benefits of reduced inequality. No one knows how to determine that rate.
Reform proposals include a reduction of the number of tax brackets from currently seven to three. This does not simplify the calculation of the tax at all. Regardless of the number of brackets, once taxable income is calculated the calculation of the tax liability is simple involving at the most calculation of the sum of two numbers. Reducing the number of brackets interferes with the progressivity of the tax. Over wide ranges of income the tax rate becomes constant with those at lower levels of the income brackets paying the same rate as those at the highest level of the range.
In any case, progressive taxation has been in existence since the first days of income taxation. Congress, soon after the 16th Amendment was adopted in 1913, learned that they could conceal in the income tax code and regulations all kinds of subsidies that benefitted selected constituents. That made it unnecessary to show in the budget how much those benefits, called tax expenditures by economists, cost taxpayers. What followed is that Congress passed bill after bill adding thousands of pages to the personal income tax law which encompassed about 500 pages in 1930 and now covers 2652 pages. Some estimate that the internal revenue code and its regulations cover 74,000 pages!
As the Tax Foundation points out, Over the decades, lawmakers have increasingly asked the tax code to direct all manner of social and economic objectives, such as encouraging people to buy electric and hybrid vehicles, turn corn into gasoline, purchase health insurance, buy a home, replace that home's windows, adopt children, put them in daycare, purchase school supplies, go to college, invest in historic buildings, spend more on research, and the list goes on....
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