With the horrible events in Boston earlier this week, and in Texas last night, it seems like I should talk about something pleasant and diversionary today. So how about a post on, oh I don’t know … taxes?
On Sunday, the Times ran a couple of columns on the horrors of our tax code. One piece focused on the code’s unfairness, and how working people often wind up paying higher tax rates than hedge fund managers like me. Another documented how hopelessly complicated the code is, noting that Americans spend 9.14 billion hours filling out IRS forms every year. These twin critiques are not new. I’m old enough to remember when then-presidential candidate Jimmy Carter called the tax code “a disgrace to the human race.” And yet, Carter and every other would-be reformer after him have failed to make taxes fairer or simpler. If anything, the code has gotten both more complex and less equitable since Carter left office. Why is that?
It’s your fault, that’s why. And mine. And everybody’s else’s.
The fact of the matter is, as much as we complain about how complicated taxes are, we like all the goodies and giveaways and perks Congress continually writes into the IRS’s statutes. The mortgage deduction is a classic example. It adds to the complexity of the tax code and makes it less fair–privileging one, usually more affluent group (homeowners) over another (renters). But every politician knows that if they even hint at removing it, they won’t get elected dogcatcher, let alone to Congress or the White House. Ask Mitt Romney about this. He had the temerity to mention cutting deductions, but only in the vaguest of terms–and he still got trounced at the polls! So, the mortgage deduction and other sacred tax cows remain in the code while more get added every year.
Of course, I’m not saying that people shouldn’t take advantage of these deductions, or that they should voluntarily pay more to the government than they owe. Keeping every penny from Uncle Sam is about as American a pastime as you can get. But these deductions are not free, or good for us as a society. They’re backdoor subsidies to powerful and corrupt special interest groups. The mortgage deduction helps keep housing prices artificially high, which benefits the real estate and home construction industries. Healthcare deductions indirectly fund our ridiculously unfair and hopelessly complicated medical insurance system. Student loan deductions prop up the exorbitant cost of higher-education, not to mention everybody’s favorite villain, Wall Street, which profits from the loans and the bonds used to back them. All of these special interests want the tax code to stay lucratively complicated and unfair–and they employ legions of lobbyists to make sure that it does.
Over the years and now decades since Jimmy Carter campaigned on reforming our “disgrace to the human race,” there have been numerous campaigns to streamline the tax code and make it fairer. The most-recent, the Bowles-Simpson Plan, proposes three flat rates (either nine, fourteen, and twenty-four percent or twelve, twenty, and twenty-seven percent, depending on the version). That’s about as simple as it gets. It would also make the tax code fairer by treating capital gains as ordinary income. That means rich guys like me would pay the same rate on our investment returns as Warren Buffett’s famous secretary does on her income. Most economists have said the plan would be help stimulate growth, too. So why hasn’t it been implemented, or at least debated and refined? Oh yeah, it would pay for the fairness and simplicity that everyone pretends to want by eliminating all or at least most deductions. Not surprisingly, politicians from both parties–even the very people who convened the bipartisan commission that produced the plan–have all reacted to that idea with one big collective, “Bowles-who?” Meanwhile, our tax code gets bigger more inscrutable. Just the way we like it.