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Many Americans will be scrambling today to get their 2013 tax return to the IRS. A few can anticipate a refund, but for many wealthier Americans, the dollar amount of taxes due has been a rising number. The top 1 percent of earners pay 29.3 percent of federal tax dollars, a percentage decried, depending on your perspective, as either far too high or not nearly high enough. Most do agree, however, that the US tax code unfairly subsidizes some at the expense of others, is far too complex and is sorely in need of reform. But given today’s political climate, hopes for meaningful change are not high. Please join us to discuss the US tax code and prospects for reform.
- Leonard Burman Co-founder and director, Urban-Brookings Tax Policy Center, The Urban Institute professor, Public Administration and International Affairs, Syracuse University author of: "Taxes in America: What Everyone Needs to Know" Oxford University Press
- Edward Kleinbard Professor of law, University of Southern California Gould School of Law author of forthcoming book: "We Are Better Than This: How Government Should Spend Our Money" Oxford University Press
- Alan Viard Resident scholar, American Enterprise Institute
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. There are very few defenders of the U.S. tax code as it exists today. Thousands of pages of rules on rates, credits, deductions, and exceptions are beyond even many tax professionals to keep up with. But large-scale tax reform in the current political climate is not likely.
MS. DIANE REHMJoining me in the studio to talk about the U.S. tax code and what reforms might be possible: Leonard Burman of The Urban Institute, Alan Viard of the American Enterprise Institute. Joining us by phone from Los Angeles, Edward Kleinbard. He's a professor at the University of Southern California School of Law. And I'm sure many of you have thoughts, your own ideas. Do join us, 800-433-8850. Send us an email to email@example.com. Follow us on Facebook or Twitter. And welcome to you all on tax day.
PROF. LEONARD BURMANWelcome to you.
PROF. EDWARD KLEINBARDThank you.
MR. ALAN VIARDThanks.
REHMThank you. Good to have you with us. Len Burman, start with the positives. What do we currently get right about the tax code?
BURMANThis is a short answer question.
BURMANThe tax code is progressive overall. It raises a much larger share of income from high income people than from those of lower incomes. It actually is an important part of the social safety net. The earned income tax credit, which provides subsidies for low-income working families is, according to the Commerce Department, the single largest -- the most effective anti-poverty program there is.
BURMANIt takes something like, you know, four -- reduces the poverty rate among children by something like 4 percent -- percentage points. And it does raise a lot of revenue, although, for a long time, it hasn't raised enough to actually pay for the government. But those are the positives, from my perspective.
REHMAll right. And to you, Ed Kleinbard, how progressive do you see our tax code today? Does it compare favorably or not to 20 years ago, say?
KLEINBARDWell, the tax code -- the federal tax code is not a really progressive, as Len just said. However, when you add in state and local taxes, which come out of your pocket just as much as federal taxes do, the overall tax structure of the United States is not terribly progressive.
KLEINBARDAnd the interesting point, when you compare us to other countries, is that what we really ought to care about is not the progressive tax structure as such but whether our system as a whole is a progressive fiscal system, which is the net of our taxing and our spending. And there, we are not at all progressive compared to many of our peer countries.
REHMAnd we'll get into how those other countries deal with taxes. But, Alan Viard, to you, how much more complex are the rules today than, again, 20 years ago?
VIARDWell, over time, I think we have seen an increase in complexity. The Tax Reform Act of 1986 swept away quite a few credits and deductions and special provisions. And people predicted at the time -- they said, oh, they'll be added back as time goes on. And that has turned out to be true. It hasn't maybe happened as rapidly as some people were afraid would happen. But, given the course of 25 to 30 years, we have seen quite a bit of complexity creep back in. A lot of it is just so needless. It doesn't serve any policy purpose.
VIARDSo to take a couple examples, today, we have more than 20 different kinds of tax-preferred savings accounts. And they really just serve three, four different kinds of basic purposes. So you could have just three or four types of accounts. And people -- liberals, conservatives, others -- have put forward plans to do that. And I think almost everybody -- they look at that, and I say, yeah, that's a good idea. Somebody ought to do something like that. And the years go by, and nothing gets done because there's not enough of a real push behind it to get it done.
REHMWhy is there not that push considering the complaints about complexity and duality and all the rest of it?
VIARDI'm not sure I know the full answer to that. But I think that part of it is that it's -- that I think members of Congress and people who are working in the policy area, they find it a lot more, I don't know, exhilarating maybe or interesting to work on big policy changes. And the goal of, you know, just making things simpler for average Americans maybe doesn't seem like quite the same type of grand goal to them.
VIARDAnd yet it's something that our elected representatives ought to care about.
BURMANThe -- it's somewhat baffling. But when I was at the Treasury Department, I noticed all of these different tax-favored retirement accounts. And I actually talked to the head lawyer there about, well, can't we consolidate and simplify them? He said, well, each one of those serves a special purpose.
BURMANAnd there's a constituency for every one of those special tax breaks.
REHMA constituency where, in the Congress?
BURMANWell, in the Congress, but also among actually...
REHMThe people who support, yeah.
BURMANYou should ask Ed about this -- tax lawyers.
BURMANI mean, they have a whole business in sort of tailoring retirement savings for different kinds of groups. And Congress can't resist the urge to try to custom fit their tax breaks for every taxpayer. You know, one of the things that economists like to talk about is this idea of horizontal equity jargon, which means basically treat everybody the same way.
BURMANAnd my colleague Rudy Penner once pointed out that that's something economists all love. Lawyers love it. And real -- and people in Congress hate it 'cause their whole goal is to do something special for you and for you and for you. So they -- if they could...
BURMANYou know, you have the feeling that they would have a special tax code for every American.
KLEINBARDYou know, I think Len is making a very important point, which is that we're often very cynical about Congress, and deservedly so, but it's also the case that Congress has a very refined notion of justice. And every time a -- you draw a line, somebody falls on the wrong side of the line. And Congress then tries to retailor the line to deal with that sympathetic case. And so we end up with one sympathetic case piled on another.
KLEINBARDThen, from the other direction, every time we hear a single abusive case, Congress becomes indignant, and we have to carve out the abuse case. And the result is extraordinary complexity. And then my favorite example is the poor beleaguered IRS, which has to administer this tax system, has a little pamphlet on how to explain the various tax credits, deductions available for educational expenses. Well, that little pamphlet's 94 pages long.
KLEINBARDAnd it's a very dense read.
REHMEdward Kleinbard is professor of law at the University of Southern California School of Law. He's author of a forthcoming book titled "We Are Better than This: How Government Should Spend Our Money." And that will be coming from Oxford University Press. If you'd like to join us, give us a call, 800-433-8850. Send your email to firstname.lastname@example.org. Alan Viard, I understand that David Camp of Michigan has offered some changes to the tax plan, something he's been working on for, like, three years. Give us an outline of what that would do.
VIARDYeah. It's a very impressive effort in many ways. It's not a short, simple plan. It's 979 pages of legislative text.
REHMOh my gosh.
VIARDYet, if you did adopt it, it, I think, would increase the simplicity of the tax system. It does eliminate some of the provisions that create complexity, tries to simplify some of the others. I think that it illustrates really the limits of income tax reform, that -- what happens when you confront reality. When Congressman Camp started this project, he wanted to try to get the top income tax rate down quite a bit, you know, from 39.6 maybe down to something like 25.
VIARDAnd -- but he also wanted to raise the same revenue that we're raising today, and I think that is absolutely necessary, given the fiscal situation. In fact, we'll eventually, I think, need somewhat more revenue. And he also wanted to be distributionally neutral. He didn't want to shuffle -- reshuffle the tax burden between rich and poor.
VIARDAnd what he discovered was that he could actually only get that top rate down from 39.6 to 35 percent. Now he did actually, in the documents he put out, say, well, the top rate is 25 percent, but there is a 10 percent surtax. I thought, well, OK. I think that sounds like a 35 percent rate to me. But I think it does illustrate the limits of what tax reform can do. I mean, there is...
REHMWas there any support in the Senate or the House?
VIARDNo. I think what you saw...
VIARD...was a lot of people saying, this is a, you know, good effort, and we're interested in it. And we think it should be considered.
BURMANAnd one of the most distressing things was, after he came out with this report, which I agree was -- you know, there were flaws, as there would be in any plan, but it was a really good serious effort to overhaul the tax code. It would be a great starting point for debate. The leader of the Republican caucus in the House, John Boehner, said, blah, blah, blah. He completely dismissed it.
KLEINBARDYeah. You know, there were an Olympics in backpedaling.
KLEINBARDAnd (unintelligible) would have been Gold medalist.
VIARDAnd I think the -- part of the problem is precisely the fact that the plan really is a reality-based plan. It really does respect budget constraints and economic limits. And therefore it falls short of the tax plan that everybody imagines in their mind could be done, the plans that people haven't actually tried to write down and make the numbers add up. They look at this plan where the numbers do add up and compare it to what's in their imagination. It naturally looks rather disappointing.
REHMSo -- but there is, I gather, sort of general agreement within the Congress itself that something needs to be done.
BURMANYeah. I think you'd be hard-pressed to find anybody who'd say the current tax code is just great. The problem is that their ideas about what need to be done are so much different. There's a disagreement about how much revenue to raise. There's a disagreement about how you should tax savings compared with other kinds of income, labor income. And there's also just a lot of misinformation and misperceptions that are in Congress as well as among the public.
REHMLeonard Burman, he's co-founder and director of the Urban-Brookings Tax Policy Center. And he's professor of public administration, international affairs at Syracuse University. Short break, right back.
REHMAnd as you can well imagine, we've got lots of emails, lots of phone calls. We'll try to get to as many as we can but first I'd like to know, from your perspective, Ed Kleinbard, what are the areas most in need of reform from your perspective?
KLEINBARDWell, the personal income tax is more complicated than it needs to be in a number of areas for the reasons that Alan and Len have identified. But frankly when I think of the areas that need to be addressed that would do most for our economy, it really is business taxation. We have the worst of all possible worlds. We have a very high nominal statutory corporate tax rate that is collected really only from domestic companies, while large multinational companies are able to sell through the world unimpeded with effective tax rates on their foreign income in the single digits.
KLEINBARDWe've created an environment that is stacked against domestic investments from a tax-rate point of view. We try to compensate for that with all sorts of special tax breaks, which just distort the economy. The business tax environment, I like to think, is one that could be separated from the larger debate over the size of the government, the total amount of revenues collected, and take business tax reform on separately. That strikes me as at least remotely feasible.
REHMAlan Viard, what do you think about that separation of domestic from multinational corporate tax rates?
VIARDWell, I agree with some of the points that Ed is making because I think that Americans should be taxed on the income that they derive throughout the world. The problem is I don't think the corporate income tax could ever be designed to effectively do that. If we try to start taxing the foreign income of companies that have a U.S. charter then you'll simply see a shifting of doing investment through companies with foreign charters. They'll earn the foreign income and it will still escape the corporate income tax.
VIARDLuckily there is a way to tax that income which is to move the tax to the individual level, to tax the people who own the corporation on whose behalf it actually operates, the shareholders.
REHMWhat do you think about that, Ed Kleinbard?
KLEINBARDI don't think that we need, in fact, that radical a solution. The taxation of multinational income is an area that gets very complicated very quickly. But, in fact, this now becomes lawyers' work and not economists work. And we can design a tax system whereby we can have a pretty good handle on which firms are really American firms, regardless of their place of incorporation.
REHMWhat about some other things like a mortgage deduction, Len?
BURMANSo you asked the question, what do we want to fix and I wrote down two things, mortgage interest deduction and the tax break for health insurance. Mortgage interest deduction is a great example of a huge tax subsidy that is almost completely counterproductive. It actually pushes up the price of housing because high-income people get the biggest benefit from this. Can push -- you know, basically they can afford bigger properties than they could otherwise.
BURMANAnd that pushes up land prices which not only hurts low-income homeowners but also lower income renters. And low-income home owners get little or no benefit. Most people don't itemize deductions, which means they get -- they can't take the mortgage interest deduction. And even if they do and they think they're getting a big benefit, they're probably only -- they're probably barely above the threshold for itemizing so they really get very little.
BURMANA better thing to do would be to turn it into a tax credit that was targeted at the real goal of expanding home ownership. One idea I like is a tax credit for first-time homebuyers, the people who really need help paying for a house. You could do that, actually expand home ownership in a way that would save the government money.
REHMAnd you agree with that, Alan.
VIARDI absolutely agree with that.
VIARDEvery bit of it. A year ago, actually as part of the Brookings Institution's Hamilton Project, I outlined a particular option for reforming the mortgage deduction which was exactly what Len is talking about, turning it into a...
REHM...make it into a tax credit.
REHMAnd what do you think, Ed Kleinbard?
KLEINBARDWell, I agree that the home mortgage interest deduction is incredibly distorted. It means that we've overinvested in housing stock as opposed to productive investment. It means that we have an upside down federal subsidy program where the richer you are the bigger subsidy you get, just as Len and Alan have identified.
KLEINBARDAnd so all of that suggests that the home mortgage interest deduction is something that really needs to be fixed. But Len's suggestion is a perfect example of complexity waiting to spring out of the bag. Once you go to a first-time home buyers credit then you have to decide who's a first-time homebuyer. Is the child of a wealthy parent a first-time homebuyer? What about the tainted spouse problem, you know?
KLEINBARDWhen you get divorced, you get remarried. Does the fact that you and your prior spouse with the house (unintelligible) ...
REHMNothing is simple. Nothing.
KLEINBARDNothing is simple (unintelligible) ...
BURMANWell, the other thing is, you don't have to get it perfect. I mean, part of the problem is we want to make sure that -- you know, we have these subsidy programs. We want to make sure that not a single undeserving person gets the break. And the consequences, you make things so complicated that people can't figure it out.
BURMANI mentioned the earned income credit earlier. That's a really effective program that helps low-income people. It's mind numbingly complicated because there's a concern that maybe some daughter of a rich person in Potomac living with her parents will take the credit. And, you know, I think, you know, there's a tradeoff. And the thing that always gets short (word?) is simplicity. Everything else wins out.
REHMWhat about the charitable gift deduction, Alan? What do you think of that?
VIARDI support the charitable deduction. I think that it's a value judgment I suppose as to what role private charities and governments play in societies. But my own view is that it's reasonable to have an incentive for people to give to a wide range of private organizations that can hopefully contribute towards building a better society, that it’s a useful compliment to the work that governments do through public programs.
KLEINBARDYou know, I like the Democratic aspect of the charitable contribution deduction. I like the idea that government isn't deciding what is high culture for us. But the fact is that the charitable contribution deduction in practice is even more pop weighted (sp?) in its benefits than is the home mortgage interest deduction. And the result is a lot of that (unintelligible) projects, the Kleinbard Museum of String (laugh) , you know...
VIARDI love that museum. (laugh)
KLEINBARDWe have a lot of vanity projects. We have a lot of abusive behavior in the charitable contribution arena. It's under (word?) . So the factor, there are a lot of significant problems once you get away from the ideal of helping the local community hospital. I mean, there's Harvard University sitting on its endowment of 15 or $20 billion. Is that really what we ought to be subsidizing?
REHMAll right. Here's an email from Bill in Dallas, Texas who writes, "If corporations are people, the corollary that people are corporations should also be true? But I cannot write off the expense of my teenager's auto insurance and all of his sports and school-related expenses or the cost of his (word?) the way a company could write off the cost of necessary activities of their employees. The dependent deduction does not begin to offset the cost of the dependent child at any age unless the government expects our children to stay home and do nothing." What do you think of that, Leonard?
BURMANWell, the idea that children are part of a business enterprise and paying for your kids is a cost of doing business is novel. I'd never heard that before.
REHMWhat do you think, Alan?
VIARDWell, I think the distinction, of course, is not between corporations and quote unquote "people." The distinction, as Len alluded to, is between business and personal expenses, that if you're doing -- engaging in a business where the income from your activities are -- is going to be taxed then as an obvious corollary to that, of course you can deduct the expenses of generating that income.
VIARDAnd that's true whether you're using a corporation or not. If you're doing it as a sole proprietorship or partnership where there's no corporation involved, you still get a deduction for those business expenses.
REHMOK. I want to get to one of my favorite targets and that's the alternative minimum tax. Ed, it was designed to compensate for some of this complexity. And now it's become even more complicated.
KLEINBARDYeah, the AMT is sort of the canary in the coal mine that tells you that something is deeply flawed with our tax system. The reason we have the AMT at the individual level is largely because of the personal itemized deductions that upper middle class and wealthy Americans like so much. We've mentioned two already, the charitable contribution deduction and home mortgage interest. The state and local taxes are the other big personal itemized deductions.
KLEINBARDIf you imagined a world in which we address the personal itemized deductions, which are running at the rate of, you know, in their entirety as a subsidy program, you know, in the neighborhood of $250 billion a year, if we address those then the AMT largely fades into a significance. One of Len's colleagues and I wrote a paper on this a couple of years ago. And the personal itemized deductions to a very substantial extent is what drives the AMT. And so complexity builds on complexity. (unintelligible) one hand then we say, well, but don't do that too much and try to take back with the other.
REHMAnd Len, at what point does the AMT actually kick in and what percentage of taxpayers have to pay it?
BURMANRight now it actually depends on where you live. If you live in a high-tax state like New York or California or District of Columbia, that your taxes are allowed as a deduction against the regular income tax but not against the AMT. I mean, one of the ironic things about the AMT is it was originally targeted at the equivalent of millionaires. And now the people it's most likely to hit are people in high-tax states with lots of kids. Your personal exemptions, the previous caller's question, those aren't allowed against the AMT.
BURMANRight now only about 4 percent of households are subject to the alternative minimum tax. The budget agreement at the end of last year actually patched the AMT so that the threshold was set high enough that not too many people would squawk.
REHMSo the threshold is...
BURMANI don't even remember right now, something like $87,000 for a couple.
VIARDThat's the exemption amount that you can take where the AMT doesn't apply at all.
BURMANRight. I mean, the people it tends to hit starting around $200,000 but, you know, again it varies depending on (unintelligible) ...
REHMSo are we going to see that done away with at some point?
VIARDYou know, it seems unlikely, at this point, that the AMT will be scrapped except maybe if there is some big overall tax reform. Scrapping it on its own doesn't seem likely. Now that we made that agreement a year ago to permanently limit the number of people who are hit by it, it actually takes away a lot of the momentum for eliminating it entirely.
REHMAlan Viard. He's resident scholar at the American Enterprise Institute. And you're listening to "The Diane Rehm Show." And in his budget plan, president Obama proposed expanding the earned income tax credit for adults without children. How would that work?
BURMANWell, right now there's a tiny earned income tax credit for people who don't have child dependents. It phases out at income below $10,000. And it's not -- I think it's only worth a few hundred dollars. The president proposed to increase it and apply it to a higher level of income. I don't remember exactly the amount but it would -- could amount to, you know, $1500 or so in savings for lower-income working people without kids.
BURMANThe idea is that the current EITC is focused on families with children. And if you want to encourage a lot of people who are having trouble getting into the labor market to get working and to build up skills that would help them over the long term providing a subsidy for their earnings as they're getting going, is a good idea. It actually can indirectly help low-income families because a lot of these people without kids are actually noncustodial fathers. They have children and they have a hard time paying child support.
BURMANSo they're having proposals to increase the EITC for them to actually make it easier for them to make their child support payments, stay connected with their families. And that's considered a -- I mean, that would be a really good thing for those (unintelligible) ...
REHMHow much support is there for that, Alan?
VIARDI'm not certain. I support it, let me say that up front, for the base of the reasons that Len has laid out. I think that there will be strong support of the Democratic Party for it. And I believe that it would have some support in the Republican Party. But there wouldn't be unanimity on it. It certainly does seem like a long overdue step. Right now the credit that is available to childless people under EITC is so small. And it really would be desirable to have a more generous credit that would help entice some of them into the workforce.
KLEINBARDYou know, the earned income tax credit is one of the great success stories of American tax policy. It's been copied now all over the world. And the generic term that's used, it really captures it. It's making work pay. And that's a wonderful, wonderful thing the government is able to do in partnership with individuals. It's overcome the barriers to entering the workforce and sticking with the workforce.
KLEINBARDAnd that has tremendously powerful social benefits of the sort that Len has outlined. And therefore, the president's proposal to expand EITC makes a tremendous amount of sense and ought to be something that is supported on a bipartisan basis. But I don't believe that congressman Ryan's budget proposal contemplates anything of the sort.
BURMANThere is some bipartisan support. Marco Rubio has actually proposed a version of this. I don't think he's put out the details. But, you know, the idea of supporting work, it fits in -- if there's a bipartisan overlap in ideas it's providing opportunities, helping people to take care of themselves. And EITC really does that.
VIARDYeah, I think that there is some Republican support, that there is division within the party. It's not clear whether Congressman Ryan's budget, you know, would or would not accommodate any EITC expansion because it doesn't lay out details at that level of specificity. Congressman Camp's tax reform plan, we were talking about earlier, actually curtails the earned income tax credit. So there obviously is some disagreement on exactly the scope of this program. But throughout its history, the EITC has been supported and expanded by members of both parties.
REHMAlan Viard. He's resident scholar at the American Enterprise Institute. When we come back, we'll open the phones, read your email. I look forward to speaking with you.
REHMAnd welcome back. Time to go to the phones, 800-433-8850. Let's go first to Mark in Traverse City, Mich. Hi. You're on the air.
MARKHi. Thank you for taking my call.
MARKI'd like to preface this with saying I was listening to a report last week about a church in Texas that had $30 million worth of property, jet airplanes, an 18,000 square foot parsonage. And based on that, I wanted to start my own religion and start a volleyball religion and put up a building with volleyball courts, get donations for people that want to come. Obviously, we're not charging. It's donations. I'm just wondering -- tongue-in-cheek, of course -- what are some of the strategies I could use to start my own religion?
REHMOh, what a fun question, and fascinating as well. I do recall the news story about that extraordinary house, airport, all the rest of it. What's your feeling? I mean, can one somehow create that kind of tax-deductible organization, be it volleyball, be it a church, be whatever?
BURMANWell, it's -- this is not actually a hypothetical idea. I mean, the volleyball may be specifically his hypothetical, but the idea of starting a so-called church that can then take advantage of the charitable deduction and the parsonage exclusion, that has been done. And the IRS has audited some of these organizations.
BURMANThere's probably a lot of others out there that aren't audited. I think Ed was right earlier when he said this is under-audited. But the IRS, of course, does have the right to challenge the sincerity of the religious belief. Of course, in our country, government cannot determine the validity or the truth of religious belief, but they can investigate the sincerity of an alleged religious belief. And so that's the angle that the government has to take when it's addressing these organizations.
BURMANOf course, they also try to make sure that there's nothing of what tax lawyers call private inurement, in other words, that none of the resources are being used for the private benefit of the individuals involved. That's another angle that they can take. But there is abuse going on. You know, when Ed said that earlier, he was right.
BURMANAnd I think, to some extent, it's the price we pay for having a charitable deduction. But I think the IRS does need to be vigilant against those abuses.
VIARDThis is a good example of how whenever Congress creates a tax break for something, no matter how well intended, the first thing, there are a bunch of people who try to think of it, well, how can I get -- how can I get…
VIARD…tax savings for doing things I would do anyway? And it's a fundamental conflict in the code. And you're never going to shut it down. And the question is whether the benefits of the charitable deduction are worth the fact that some of it's probably going to go for activities that we probably don't want to support as a society.
REHMAll right. Here is an email -- and I'm not sure who -- let's just say it's from F.D., who says, "Having worked as an unpaid volunteer to do tax filing for whomever walks in, I'm ever more convinced that taxing income is a form of social insanity. It is unfair. It penalizes effort and ambition. It taxes savings. It does not tax the right kinds of economic activity. Far better would it be to tax consumption with basic necessities, food, medicine excepted." What's your thinking, Ed Kleinbard?
KLEINBARDWell, I've a lot of thoughts about this. This is a topic of which economists have written now for several hundred years. And, yes, there is an economic case that would suggest that taxing consumption can be superior to taxing income. But that is often a very overstated case, not on the part of Len or Alan, but on the part of some economists.
KLEINBARDAnd the funny thing is that, in practice, for almost all Americans, there's no difference between a consumption tax and an income tax because people spend everything they earn. The number of Americans who in fact have significant net worth, who have significant savings outside of tax-preferred IRA-type arrangements, which are themselves like consumption taxes -- so people who just have wealth is actually a very small fraction of America.
KLEINBARDAnd the email questioner is making another mistake, a classic mistake, which is to compare our tired, barnacle-encrusted income tax system with an imagined pristine and perfect consumption tax system that will never happen. The famous example in New York State, years ago, they decided, well, we have sales tax. We have to exempt necessities. So we have an exemption for food. Well, what do we do about marshmallows?
KLEINBARDAnd a great debate, back and forth, finally the regulation comes out, and it decrees that regular marshmallows are snacks, not a necessity kind of a food, and therefore subject to sales tax. But small marshmallows are used in Jell-O salad, and therefore they should be exempt.
KLEINBARDFinal point, in order to make a consumption tax work, you need basically the same kind of tax filing system because we rely on the information provided by the tax filing system to address family size and our interest in a progressive structure. So for all those reasons, the idea that we can simply move to a simple consumption tax is a greatly overstated one.
VIARDWell, I am a fan of consumption taxation, but I do agree with a few of Ed's points. I mean, some of the gains from consumption taxation are overstated by some of its supporters. The email, for example, which makes a lot of valid statements, says that they want to tax consumption instead of income so that effort isn't taxed. But, in fact, consumption, income taxes both do have a tax penalty on work. And that's really unavoidable, I think, under any kind of sensible tax system that's based on ability to pay.
VIARDBut what you would get rid of is the tax penalty on saving. I think that would be important for driving long-run economic growth. And, you know, Ed is right, that for a lot of Americans, there's not much difference between income and consumption taxation, but there are -- a lot of the savings are done by households for whom there is a big difference there. And so I think we would get some growth benefits if we did to go to consumption taxation.
VIARDI agree that we wouldn't want to try to exempt, like, particular necessities because you would get into the marshmallow problem. And that's actually been replicated in European countries as well, that you have this issue of what is food and what is a necessity and what isn't.
VIARDBut you could have households file tax returns where they would compute their income minus their saving. And then you could tax that progressively. And there's actually another way to do progressive consumption taxation, too. But you don't have to have that kind of system where you're trying to sort out specific necessities.
REHMHere's an email from Denise, who says, "I think childless people should not be punished by paying higher tax rates. My husband and I are childless by choice, but we are punished and must pay for others who reproduce, often irresponsibly. Get rid of the child credits." Len?
BURMANWell, there are a fair number of child subsidies in the code, child credits, personal exemptions. Denise and her husband are taxed at the same rate schedule as the rest of us are. These are just special tax provisions, and they reflect, I think, a general social perception that families with children maybe need some help paying for necessities. It's -- you know, the political winds actually might be going in the opposite direction.
BURMANDave Camp's proposal would have actually had bigger subsidies for families with many children then are under the current code. Sen. Lee of Utah has a proposal for really very large tax credits for children and would actually tilt the balance in the opposite direction of what Denise is calling for.
REHMIt depends on where you sit as to how you see it. Let's go to Burt in Northville, Mich. Hi, you're on the air.
BURTHi, Diane. I'm a longtime fan. Please don't ever retire.
BURTI have a proposal, and I just wondered if your experts would comment on it. Tax legislation seems to be more about policy than about collecting money. And I think it should be the reverse. So my proposal would be tax on gross -- for individuals, tax on gross income, eliminate all deductions, exemptions, credits and everything else with the exception of charitable contributions, limited to 10 percent of gross income. And only one-tenth of that or 1 percent of gross income can be deducted without documentation established by the government as it is now.
BURTAnd, secondly, have everybody pay, no matter how little you make, because everybody needs to participate in a system. And maybe have a 5 percent tax for people in poverty level and two more tiers for people, say, middle income and then the higher, you know, one more tier for people in the higher income. And that way you're just collecting money, and you're not making policy. It's simple. The entire tax code could be on pamphlet. And we would be done with it. So I'd like to hear what your guests have to say about that.
REHMSo would I. Thanks for calling. Ed, what do you think?
KLEINBARDFirst, it's not inappropriate for Congress to make policy. The only question is, is it inappropriate for Congress to make policies through the tax code? And the caller is absolutely right that there's an awful lot of -- for the reasons we've already identified -- overwrought policies baked into the tax code. Many of them under-examined, many of them poorly targeted. But the fact is that there are some cases where policies delivered through the tax code -- like the earned income tax credit -- is the efficient way to deliver that.
KLEINBARDSecond, I'm going to make a friendly amendment to what the caller said and interpret his remarks, as referring to adjusted gross income, that is, you know, so that business expenses are deductible. My take on all that, that's the direction at which the '86 act went, that's the general direction that Dave Camp went. When I teach Tax 1, the introductory income tax course, at the law school, the first day, I pass out a corporate tax form.
KLEINBARDAnd everybody gets very upset that either they or I have signed up for the wrong course. But then I explain the reason I pass out the corporate tax form is because it's so much simpler than the personal income tax form. It's so much simpler on its face because it is, as the caller said, it's what your gross income, minus what are your business expenses, a handful of very small credits and whatever, mail a check.
KLEINBARDAnd that, in its essence, would be a system that is divorced from policy, but then the policy just has to shift somewhere else because we have a social -- we have a society. And we have goals as a country, as a society, and relations to each other that have to be articulated through some mechanism.
BURMANCould I just -- I'd actually like to comment on the idea that everyone should be paying some tax. I mean, for one thing, everyone does pay tax, especially when you include state and local taxes, as Ed had mentioned earlier. Payroll taxes are bigger than income taxes for most people. But the other thing is that low-income people are really having trouble getting by.
BURMANAnd the idea that you'd add a 5 percent income tax on top of the burden of trying to get by on a minimum wage salary and supporting a family, you know, particularly in a country that's as rich as ours and with such an unequal distribution of income, just seems wrong.
REHMAnd you're listening to "The Diane Rehm Show." And here's an email from Sarah, who's here in Washington, who says, "As a self-employed person, I wholeheartedly agree with your guest comment that we have the worst of all possible worlds. The burden for someone like myself is so acute it's impossible for me to do my own taxes. I have to pay someone a lot to do it, even as I make a fairly meager income."
REHMShe says, "I want a tax code that fits on one page, single-sided, 8.5 x 11, normal margins. I want the IRS to have a staff of 20 people. And I want the tax preparation field to go the way of the rotary phone." How can this come to be? Will it come to be? Are we moving towards something that's simpler and better? Len?
BURMANWe're definitely not moving in that direction now. Her concerns are really legitimate. And there have been -- the tax code's never going to fit -- particularly for self-employed people -- on a postcard. And you don't want only 20 IRS. You need people at the IRS, at least to answer questions. But the other thing is that self-employed people often -- I'm sure that Sarah is honest, but 50 percent of self-employed people actually misreport their income to the IRS.
BURMANFifty percent. The level of noncompliance is very high. If you ever wondered why, when you hire a painter, they prefer for you to pay in cash rather than with checks, it's because probably they're not reporting all their income to the Internal Revenue Service. There have been proposals to simplify things for self-employed people, though.
BURMANPresident Bush actually empaneled a tax reform commission, a bipartisan commission, which had this great idea to sort of set up a special checking account which would just automatically account for your expenses. And you could just deduct it on your tax return. The thing that was sad was that when President Bush's commission put together this very good set of proposals, he pretended it was maybe his father or some other President Bush who had asked for it. He completely forgot about it.
REHMSo where are we going, nowhere, Alan?
VIARDIt doesn't look like there's going to be tax reform in the near future. We know it won't happen this year. And I have to think that the prospects are pretty bleak for the next two years as well. I guess the only thing that maybe is a glimmer hope is just that you never really know when it's going to happen. When tax reform comes about, it probably will be something of a surprise. I mean, the last time we did a really big tax reform was in 1986, but nobody really expected that to happen.
VIARDThe process actually almost died several times along the way, and fluke events somehow brought it back to life. And in the end, it happened, and nobody really had anticipated it. And the odd thing is that, even after it came to pass, it's still kind of hard going back to figure out why it did happen then. So, you know, the possibility that lightning could strike again and we could get a reform, I guess there's always a, you know, glimmer of hope out there.
REHMAlan Viard of the American Enterprise Institute. Edward Kleinbard, professor of law at the University of Southern California School of Law, he's author of a forthcoming book titled, "We Are Better than This: How Government Should Spend Our Money."
REHMAnd Leonard Burman, co-founder and director of the Urban-Brookings Tax Policy Center at The Urban Institute, he's also a professor at Syracuse University. Thank you all. I wish you had a solution, but I can just thank you for talking about possibilities. Thanks for being here.
REHMAnd thanks for listening, all. I'm Diane Rehm.
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