Explaining Southern California's economy

Why we don't need a simpler tax code

Activists Critical Of Corporate Tax Rates Demonstrate Outside Of Financial Institutions

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They have nothing to do with Frank McCourt or Magic Johnson.

Tax day (extended to April 17 from the familiar April 15) just passed, but the Buffett Rule has been blocked in the Senate. That's the intertwined story from taxland over the past few days. The timing is interesting because, understandably, a lot of people get...more than mildly annoyed whenever they have to do their taxes AND there's a movement on the political left gaining steam to hit the wealthy with higher taxes. 

Those on the right are horrified. The impasse means that there just had to be a split-the-difference, "third way" solution on the horizon, and it arrived on Monday, in the form of a New York Times op-ed by Syracuse professor Leonard Burman. He doesn't like the Buffett Rule, but he does believe that capital gains taxes — the taxes that, for example, mega-rich hedge-fund managers pay in income treated as investment returns — should be restored to Reagan-era levels. 

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Fred Wilson lobbies for a flat tax, but why not just raise taxes on capital gains?

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The top of a form 1040 individual income tax return.

Fred Wilson, a venture capitalist at Union Square Ventures in New York, blogs daily at AVC and blogs well. His is the first post I read almost everyday, from a Google Reader that pipes in hundreds. I've written about his thinking before. There are times when he's great. And there are times when he drives me crazy.

On Sunday (he doesn't take the weekend off) the crazy was in evidence (in me, not Fred). After some speculation on where Mitt Romney's income comes from and why it's taxed at 15 percent, he goes on to discuss his own misgivings about getting a similar deal in his own business, due to the "carried interest" exception that allows him to treat income as capital gains. Then this:

...I am bothered by the unfairness of the situation. When I get a big distribution from our funds, I always ask my accountants how much of the distribution I should set aside for federal, state, and local taxes. The answer is usually something like 28% (the difference between 28% and 15% is the state and local taxes). And then I often think of my two brothers who probably pay 40-50% of their income each year in federal, state, and local taxes. It just seems so unfair.

And so lately I've been more and more attracted to the idea of a flat tax where everyone pays the same tax rate on income above a minimum amount. In this model, we would eliminate all tax deductions; for mortgages, charitable giving, for medical expenses, etc. There would be no difference in tax rates for ordinary income vs other forms of income (ie capital gains).

If we did that maybe everyone could pay a 15% tax rate like Mitt Romney and our family does. We would have a fair tax system.

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Rick Perry's Bizarro World tax plan

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GOP Presidential Candidate Rick Perry

I honestly didn't think anyone could — or would — come up with a worse plan for U.S. tax reform than Herman Cain did with his 999 proposal. But Texas Gov. Rick Perry just released his "Cut, Balance and Grow" plan, which is also being referred to as the "20-20" plan, echoing Cain's 999. The difference is that Perry replaces Cain's 9 percent flat income and corporate taxes with a 20 percent flat tax for both. But there's more! And just in time for Halloween, it's...terrifying!

I'd like to call it stupid, but ridiculously stupid would be better.

The plan has four key pieces:

  1. Americans will be able to choose between the current tax system and the 20-percent flat tax. 
  2. Corporations will see their tax rate cut from an average of 35 percent under the current system to a flat 20 percent with Perry's plan.
  3. Federal spending would be capped at 18 percent of GDP, which Perry argues is the average since 1960. This will, he insists, balance the budget by 2020.
  4. Workers would be able to opt out of Social Security.

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