Everyone's Got a Tax Plan - I'm Voting For the Guy With the Best Death Plan

Is it just me, or does Charlie Rangel’s Tax Reduction and Reform Act of 2007 seem like real small-ball to you, too?

So far as I can tell, the entire point is to increase progressivity by making sure the AMT hits only the top 10% of taxpaying families, and by fiddling with a variety of deductions. Now, I’ve talked up AMT reform before myself, but I’m fully aware that the real reason the AMT angers people is that they didn’t expect to have to pay it. They thought they understood how their taxes worked, and then it turns out that there’s this whole other tax system out there that could snag them. But the AMT itself is actually quite simple, and the rate isn’t crazily high. It is a whole lot closer to the glorious flat tax system that brings smiles to Steve Forbes’ dreams than the rest of the code. So AMT reform is substantially a political gimmick; the real meat is simply an increase in progressivity.

Now, I am a very far cry from a supply-sider. But I do think we could, if we tried, come up with a tax reform that would be a bit more interesting in terms of improving economic incentives and reducing the drag of tax-avoidance. And I’m inclined to think that, generally, these should be the goals of tax reform, and that not increasing (or, if possible, reducing) inequality should be a constraint rather than a primary objective.

In that spirit, herewith the Millman Tax Reform Sketch of 2007:


Eliminate the payroll tax. It’s a tax on employment, and we want to encourage employment. It’s a tax on legal employment, and we want to encourage legal residents and discourage hiring illegals. It’s a regressive tax that’s used to fund general federal revenues, although we pretend it’s only used to pay Social Security benefits. And because of that pretense, the persistence of the payroll tax makes it extremely difficult to means-test Social Security benefits.

Eliminate the corporate income tax. Corporations are not people. Taxing corporations and taxing dividends and capital gains is double-taxation of capital, which reduces economic growth. But taxing capital gains and dividends is easy, while taxing corporate income is extremely complicated. The dead loss associated with corporate avoidance of the corporate income tax is enormous. Corporations can move income much more easily than people can, so a high corporate tax rate will do much more to make a jurisdiction uncompetitive than will a high personal income tax rate. And we have among the highest corporate tax rates in the world.

Eliminate the estate tax. I understand the social motivation for retaining the estate tax. But it’s an extraordinarily inefficient revenue-raiser. Indeed, the dead loss in uneconomic activity to avoid the estate tax probably exceeds the revenue raised.


Tax all capital gains and dividends as ordinary income. Now that we’ve eliminated the corporate income tax, we can tax distributions from corporations to individuals the same we that we tax distributions from partnerships.

Tax all inherited property as ordinary income upon liquidation, with a basis of zero. If we step down the basis to zero, and tax inherited property as ordinary income, we’ll achieve whatever social objectives are intended by an estate tax with a vastly smaller dead loss.

Establish a value-added tax. The United States is the only major industrialized country without a value-added tax. I’d rather we were the only major industrialized country without a payroll tax. Both taxes are regressive, but the payroll tax is a tax on work, while a value-added tax is a tax on spending. A value-added tax is the most efficient revenue-raiser out there, meaning that the cost to the overall economy of each dollar raised is less than for any other major tax. It does not discriminate between capital and labor (as does the payroll tax) – it doesn’t even discriminate between legally and illegally obtained income. The major liberal objection to a value-added tax is that it is regressive. But if we were using it to replace another regressive tax, or balanced its implementation with other progressive actions, that objection should be able to be overcome (besides which, I don’t think we should make a shibboleth of a particular degree of progressivity in the code; we should be focused on the social consequences of the code as a whole, not whether a particular individual change makes the code itself more or less progressive). The major conservative objection to the value-added tax is that it is a stealth tax, one that can be raised quietly without strong objections because everyone in the economic food chain just passes the bill along until it reaches the ultimate consumer. But I think this objection slights the profoundly anti-tax culture of America. And, moreover, it’s a lot less stealthy than the payroll tax, which is taken out of your paycheck before you even get it.

There are other tax reforms that I could get behind – increasing the child tax credit, expanding the applicability of deferred-tax vehicles for savings for retirement or education, capping the mortgage and state income tax deductions – but I’m inclined to the view that the six changes above would do an awful lot to improve the efficiency of our tax system, and would not make it radically more or less progressive. Which, in my own humble opinion, is what we should be striving for.