Wednesday, November 10, 2010

Let's Actually Discuss This!

Amazingly, the National Commission on Fiscal Responsibility and Reform has made an actual recommendation for reducing the federal deficit, and it seems to make some sense.

It means:
  • Raising the retirement age, though not drastically.
  • Reducing income tax rates rather substantially.
  • Eliminating income tax deductions, including the mortgage interest deduction and the charitable donation deduction.
What does SWNID say to this? Let's talk about this formual, and let's move in this very direction!

First, on raising the retirement age. People live longer, healthier lives than they did before. Why shouldn't they work longer? Work is good. Work is fulfilling. It can even be fun. It beats watching Judge Judy. Let's put America's seniors to work! And we say that as a junior senior.

Second, on reducing income tax rates, hallelujah! Let's stop punishing productivity. Call this "making work pay." Oh, that name was taken already. So let's try, "It's your money, actually."

Third, on eliminating deductions, we will surprise some gentle readers by saying, This is a great thing for housing, philanthropy, education and other areas of the economy presently subsidized by tax deductions. This means moving toward letting markets set values, not tax policy. And while this threatens on the edges some of what Americans hold, it's for the good of all those things.

So, over time I [not the SWNIDish we, for we speak of the hypothetical American taxpayer in the first person] no longer get a tax deduction for my mortgage. That means I buy a more modest house and aim to pay it off more quickly. I no longer fret over how I'll lower my taxes as I amortize my mortgage. It's strictly a matter of economic consideration unencumbered by tax implications.

And over time, I give donations to those doers of good who in my view merit support. Never again will I decide to donate a sum primarily to lower my taxes, and then conduct a forced search for someplace nonprofit to park my swag away from the tax man.

Same goes for education. Presently families get a tax break for college tuition. So what they can afford goes up, and institutions raise their rates to reflect that ability to pay. Phase that out and consumers of education will choose cheaper alternatives, forcing institutions to find economies and bringing efficiency to the educational marketplace.

Note well that this proposal runs counter to what one might expect from a mortgage-paying minister-cum-professor/dean. But we believe the following truths to be nearly self-evident:
  • that the benefits of owning a house are independent of the tax deduction
  • that most charitable donations are given not for the tax deduction but for the perceived value of the charity
  • that the best students find a way to finance their education regardless of the tax system
Churches and charities and colleges worth their salt won't be affected negatively by such an economic revolution. If anything, they stand to gain by learning to stand on their own two feet.

And if no one ever again had an incentive to create a fake church as a tax dodge, the world will have taken a small step toward sanity.

But here's the political reality: both parties will have to knock it off if they want to do something like this. We actually think it'll be hardest for Ds, who even in their most conservative moments believe that tax policy must be targeted at social engineering.

Let's join in a big "phooey" on that. Democrats, let the people decide! It's their money, actually.


Anonymous said...

This is certainly an excellent starting point for a discussion that must begin soon.

The proposed reforms to Social Security may be the best part of the plan. The proposal increases the maximum taxable income for social security in phases and "will prevent [a] rapid buildup of the trust fund." I suspect (and hope) that the draft report leaves unsaid that a phased increase would also likely prevent a drawdown of the trust fund. This is important because a drawdown must be funded from the general operating budget and would require significant additional taxes or savings elsewhere in the budget. By phasing in the increase in maximum taxable income and implementing the other reforms to the entitlement, the plan could essentially balance social security revenues with expenditures. If that were done, the so-called trust fund could be simply written off, eliminating $2.58 trillion in debt along with the interest payments (currently 4.486%).

JB in CA said...

What I don't get is why the social security tax rate is flat but applies to only the first $106,800 of one's taxable income. If a flat tax rate for social security is considered fair, then why not remove the upper limit on the amount of income that can be taxed at that rate? In other words, why would a flat tax rate be considered fair up to a point but unfair thereafter?

Jon A. Alfred E. Michael J. Wile E. SWNID said...

As we understand it, the cap on SS and Medicare taxes is to preserve the (false) notion that one "pays into" the system and then gets paid back later. Since there's a cap on benefits, there's a cap on the payment.

Of course, these programs have never been about individual savings/investment/insurance accounts, so it's all a political fiction, which is also a redundancy. They're redistributive taxes that shift wealth from younger to older people.

But oddly, many on the left scorn the idea of lifting the cap on taxes, inasmuch as it amounts to admission that the program isn't what it claims to be.

Anonymous said...

SWIND is correct. The current SS scheme provides for linkage between taxes paid and benefits received. The maximum taxable income thus prevents high-income earners from collecting very large social security benefits in retirement. Preventing that particular outcome was important because the SS system was always intended to benefit the elderly poor, not the elderly rich. The same outcome could have been accomplished through means-testing, but that would have been impolitic because means-testing is associated with welfare.

One should note that as a side benefit, the cap also limited the growth of the trust fund, which is not really a trust fund, simply a way for congress to fund current operations.

Now that the end of the social security surplus is in sight, congress must pass reforms that 1) attenuate SS benefit growth and 2) balance annual SS expenditures with revenue. The Bowles-Simpson proposal would do the first through a modest increase in the retirement age coupled with means-testing for benefits, and the second through a phased increase in the maximum taxable income. Failure to accomplish both of these goals would be catastrophic, but implementing them will reveal SS for what it is: a means to protect the welfare of the elderly poor through income transfer from the working young. It is what it is.