Accountant John O. Fox is one of those brave professionals who isn't afraid of putting himself out of business. He believes that America's tax code is too complex and favors some taxpayers unfairly over others, such as those who own homes over renters, or those who receive capital gains over those who work. Tax deductions mostly benefit high-income taxpayers in the highest brackets, rather than the working poor who would benefit most from relief. Since nearly half of all income escapes taxation today, a simplified tax code could tax both regular income and capital gains on a single, progressive scale at drastically reduced rates, while still yielding the same revenue to the government.
Title: If Americans Understood the Income Tax, Uncovering our Most Expensive Ignorance.
Author: John O. Fox
Publisher: Westview Press
ISBN: 0-8133-9795-2
Year: 2001
Libraries: TCPL
If Americans really understood the income tax is limited in scope, considering only the personal income tax rather than the tax on corporations. It doesn't ask if the government should be larger or smaller, or if tax revenue should increase or decrease -- but rather considers different ways that the government could collect the same revenue. It also doesn't consider some of the more radical tax proposals that have been discussed, such as a national sales tax or a tax on wealth. Within it's domain, however, Fox's book does an excellent job of explaining a complex subject for people who aren't experts on economics or tax law.
Fox believes that the income tax should be progressive, because people who have higher incomes can afford to pay a higher rate of tax. Unfortunately, most tax deductions favor the well-to-do, undoing the effect of progressive tax-rates. For instance, people with high incomes can deduct interest payments on an expensive house from a 39% tax bracket while the working poor might live in a rental property without any subsidy. Similarly, poor people don't get to sock away money in tax-advantaged 401k or IRA plans for retirement or receive a lush benefit package as would college professors. In the few cases where the government does want to subsidize certain activites through the tax code, it might do better to do this through tax credits, which treat all taxpayers equally by refunding a constant of money directly from a taxpayer regardless of their bracket -- refundable tax credits, better yet, can give a subsidy even to those Americans too poor to receive any subsidy at all.
Fox's book is full of specific numbers and statistics, and introduces enough concepts from economics to explain what we know about the effects of taxation on people's economic behavior. It reviews the history of the US tax code and uses specific case studies to show how some taxpayers benefit from the current tax code while others suffer. It explains the techniques that are needed to consider the effect that tax expenditures (attempts to subsidize behaviors through tax credits and deductions) have on the tax code. It also addresses many of the issues that are commonly discussed on Capitol Hill, such as the debate over tax rates for capital gains and the relative merits of flat versus progressive tax rates. (Fox comes out in favor of a progressive tax, although he points out that the flat tax has one interesting benefit: progressive taxes inevitably help some married couples with a "marriage bonus" while hurting others wiht a "marriage penality". Flat rates, on the other hand, treats married and unmarried couples equally.)
In one section, Fox makes a devastating criticism of the Armey-Shelby "Flat tax" proposal. Although many have been deceived into thinking that the flat tax was simply a tax code with flat rates, in reality, the proposed flat tax would actually be a tax on consumption that would punish the poor, those with little income to save, and the aged who would be living on the savings accumulated over their lifetime. Although a flat tax could be simpler than the current income tax, a simplified income tax could have most of the benefits of the flat tax while reducing the tax burden on the poor and ensuring that taxes are paid by those most able to pay.
Comprehensive and comprehensible, What if Americans Really Understood the Income Tax? is a great starting place for anyone who's thinking about tax policy.
