Sunday, November 8, 2009

All We Want Is A Fair and Simple Income Tax Law

You hear it all the time. Politicians talking about the goal of having a tax law that is fair and simple. Well, excuse me, but the concept of a tax law being simple and being fair are entirely contradictory. A simple tax law is not fair, and a fair tax law is not simple. Simple means one size fits all, and one size fits all is not fair.

One of the most naive and theoretical income tax proposals I ever heard of was made by a government economist, who proposed that federal income tax rates be indexed for regional differences in the cost of living. Actually, this is a eminently fair proposal. Why should somebody who earns $70,000 and lives in Manhattan and barely scrapes by due to the high cost of living be taxed the same as somebody making the same income, who lives like a king in some rural enclave in the South? But can you imagine how terribly complicated such a system would be? Obviously, the person who made the suggestion didn't.

Or how about the section of the tax law which taxes amounts received as punitive damages, but excludes punitive damages awarded in Alabama for wrongful death? Why do we need to clutter up a simple rule concerning the taxation of punitive damages and create a loophole for those silly Alabamans? Because only in Alabama are wrongful death damages categorized as punitive damages whereas such damages are not punitive damages in any of the other 50 states. The simple rule would be a blanket rule taxing punitive damages, but the fair rule is to exempt Alabama punitive damages that are not punitive damages in any other state in the USA.

So why do politicans keep holding out this goal for tax laws that are conjunctively simple and fair. Clearly that's what their constituents want to hear, with the contradiction between the two attributes not readily apparent to the general public. That raises the question of whether the politicians themselves are aware of the conflict, or are they as clueless as the general public. I can't imagine any politicians with any expertise in the tax law not recognizing the conflict, but for the run-of-the-mill non-tax specialist politician, I suspect they too may be clueless.

Of course the opposite corollary is not necessarily true--tax laws might be both unfair and not that simple. And indeed this can occur in the search for fairness. One of the current health care proposals is an excise tax on employer paid health insurance plans that exceed a certain value. The bill recognizes that a $8,000 plan in New York city is not the equivalent of a $8,000 plan in some low cost part of the country, so it provides for an adjustment of the threshold dollar amount for 17 high cost cities. Well that gums things up from a simplicity point of view. But is it fair? How about the people who live in the 18th most expensive city? How about the person who lives a mile outside the city boundary. And what exactly is the boundary? (SMSA defined, I presume.)

So despite what the politicans promise, you can have a tax system that is fair, you can have a system that is simple, but you just cannot have both.

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