Tax reform

North Carolina’s Get-Out-the-Conservative-Vote Constitutional Amendments

The North Carolina General Assembly has passed bills to place six constitutional amendments on the ballot on November 6th. A simple majority vote puts these ill-advised amendments into the state Constitution.

The purpose of these amendments is to get right-leaning voters to the polls for the crucial mid-term elections. Take Senate Bill 677, a Constitutional amendment to protect the right to “hunt, fish, and harvest wildlife”. Is there some threat to these activities? Nope. But it sure sounds like something that the GOP’s base would want to come out to the polls to support.

Other than cluttering up the Constitution, SB 677 sounds harmless, although maybe there’s something nefarious about it that I don’t understand. But some of the other amendments are terrible for the future of North Carolina. I’m going to analyze one of them, a cap on state income tax rates, in the rest of this post.

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Tax Expenditures Flying Under the Radar

Many of the tax breaks in the Federal tax code are classified as tax expenditures because, like many government spending programs, they subsidize particular economic activities or help particular groups of people. Tax expenditures contribute to the federal deficit, but don’t appear in the Federal budget and generally fly under the radar.

They’re Huge

Although you rarely hear tax expenditures being discussed, they are huge: The Congressional Budget Office (CBO) expects 2017 tax expenditures to be 8% of GDP. This graph from the CBO shows just how big a deal they are by comparing them to other expenses and to sources of revenue:

CBO comparison of Tax Expenditures, Revenues, and Selected Spending
Revenues, Tax Expenditures, and Selected Components of Spending in 2017

You can see that tax expenditures dwarf defense spending, or Medicare spending, or Social Security spending. They are almost of the same magnitude as individual income tax revenues.

Tax expenditures are a big deal and worth understanding!

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Tax Credits Can Provide Progressive Subsidies

Tax and Credits section of IRS Form 1040, illustrating various tax credits that are available to taxpayers.

In my last post, I discussed why tax deductions are inherently unfair in that a deduction of a certain dollar amount is worth more to someone paying a higher marginal tax rate than to someone paying a lower marginal tax rate. In this post, I will discuss tax credits, another mechanism used by the tax code to subsidize certain economic activities and behaviors. Tax credits have several advantages over tax deductions, but are less-widely used.

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Tax Deductions for Individuals are Unfair and Complex

Tax deductions for individuals are an important part of federal income taxes and most states’ income taxes.

In a previous post, I outlined four desiderata for a reformed tax system: responsive, fair, simple and transparent, and enforceable. In this post, I aim to convince you that tax deductions for individuals are neither fair nor simple and transparent. (Important: tax deductions for businesses are different and not discussed in this post.)

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Real Tax Reform: Desiderata

The word desiderata describes perfectly what I want to discuss in this post on real tax reform. I first encountered it taking Professor Fred Brooks’s computer architecture course in grad school in 1977. In his 2010 book, The Design of Design, Brooks defines desiderata as the secondary objectives of a design.  Using design of his beach house as an example, the primary goal is to build a beach house. The desiderata are things like being able to survive hurricanes, showcasing the stunning views, and being able to seat and sleep 14 people.

I previously discussed three goals for a tax system, the most important being to raise funds for public services.  Let’s agree for now not to debate what public services are appropriate nor how much money should be spent to provide those services. Whatever the amount, the money must be raised. That’s the goal.

What are the desiderata for a reformed tax system?Read More »Real Tax Reform: Desiderata

Real Tax Reform

Not Tax Reform

The misleadingly-named Tax Cuts and Jobs Act of 2017 is law, but it is not tax reform.  Whatever it means for various taxpayers and corporations remains to be worked out. As one writer put it:

Ultimately, the new tax rules are actually complex enough that it will likely take months or even years for all of the new tax strategies to emerge … On the “plus” side, though, at least ongoing tax complexity means there will continue to be value for tax planning advice?

What it means for the US economy is equally murky.

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