A Wonkish Proposal
Megan McArdle raises an issue that I’ve long wondered about:
I don’t see why brackets top out at a relatively low level of income. Indeed, I don’t see why we have tax brackets. They’re inefficient, and a lot of them have pernicious marginal effects on those near the ceiling. Why not a continuously scaling function from negative (EITC) to some maximum? These days, people use either printed tax tables or tax software to prepare their taxes; this shouldn’t present an undue hardship. Obviously, with my preference for less government, I would recenter the scale so that people making $250,000 a year pay relatively less, and those making $10 million pay relatively more, in order to make the proposal revenue neutral. But the basic concept seems bipartisan.
As a matter of principle, this seems spot-on to me; and as an added bonus, eliminating tax brackets would of course be a terrific way to get rid of various pernicious misunderstandings that attend to the concept of a marginal tax structure in general. Is there any particular reason why such an alternative tax structure would be difficult to implement in practice? And if not, is there any particular reason – aside, of course, from the fact that politics is the place where sane, bipartisan concepts go to die – why a proposal like this one couldn’t gain some legislative traction?
Brackets are a relic of a time when related rates calculations could only be done by very very expensive machine. (Does anyone besides me remember loan look up tables in tiny little books with very small print and very thin pages?)
As they stand, the brackets are relatively narrow, so the curve is already pretty smooth.
Pernicious misunderstandings would persist because people are emotionally invested in the idea that they have been singled out by the tax code for special mistreatment.
But if this is where you want to devote your time and talent, have at it. I sorely love my windmills and never begrudge anyone theirs!
— Tony Comstock · Mar 19, 11:38 AM · #
I’ll admit the bracket system has numerous flaws, but I also think that there is valuable about having a tax system that can, at least in theory, be understood by everyone with a basic education. Perhaps a good compromise would be to keep brackets up to a certain income(250K), then have the rate curve smoothly upward. People with that much money will either be adequately sophisticated, or able to pay for the services of someone who can understand it in their stead.
— salacious · Mar 19, 04:10 PM · #
salacious: Perhaps you’re right, but it’s become rather clear of late that many people _don't_ understand the way that marginal tax rates work, no?
— John Schwenkler · Mar 19, 05:16 PM · #
I’d say eliminate income tax for anyone making under $100k and then go straight to the rate curve at that point, in a gradual enough fashion that those making $101k wouldn’t be unduly hurt. One good thing about this would be the replacement of the current last bracket which is essentially $387k and up with a reasonable rate curve for the bazillionaires out there.
— E.D. Kain · Mar 19, 07:48 PM · #
The idea I’ve occasionally seen floated for a revenue-neutral change in tax policy that I think has (philosophical) merit is to have each tax payer do their own withholdings.
The argument is that writing out those checks every month would make the bite the government takes more vivid to the electorate at large, and I suspect that would be so.
What if any effect that would have on policy is hard to say, but I have to believe it would be a good thing for people to have a better sense of how much of their money goes where.
Practically speaking, it would never work. People would spend their money on beer and cigarettes; and the government would be insolvent inside of two quarters.
Yes, I know, for some of you that’s not a bug, it’s a feature. But I’ve got to tell you, as warlords go, Uncle Sam is really pretty benevolent.
— Tony Comstock · Mar 19, 07:49 PM · #
I’d say eliminate income tax for anyone making under $100k and then go straight to the rate curve at that point, in a gradual enough fashion that those making $101k wouldn’t be unduly hurt.
Wasn’t somebody saying something about many people not having even the barest understanding of how brackets work?
— Tony Comstock · Mar 19, 07:51 PM · #
Yes, you were. And more to the point, having over 80% of households paying no income taxes at all would be very bad for a democracy, unless perhaps there were also an across-the-board consumption tax or something of the like.
— John Schwenkler · Mar 19, 08:38 PM · #
Not to put too fine a point on it, but are we really going to ponder the merit of an income tax proposal that contemplates a $101K earner having less after tax income than a $100K earner?
— Tony Comstock · Mar 20, 12:15 AM · #
“And more to the point, having over 80% of households paying no income taxes at all would be very bad for a democracy, unless perhaps there were also an across-the-board consumption tax or something of the like.”
Everybody pays payroll taxes (or at least everybody who works).
— Dan Miller · Mar 20, 03:42 PM · #
Yes, but that wasn’t my point. (And sorry for the slow response.) E.D. Kain’s suggestion was not to have income taxes kick in until $100k of income – a mark under which 80% of households fall. If he didn’t mean to count payroll taxes under the heading of income tax, though, then your point stands.
— John Schwenkler · Mar 23, 03:13 AM · #