The tax system debate, part 2: Senator Ron Wyden's proposal

My first article on this subject used the single-rate flat tax as an example of why there's a stalemate on Capitol Hill that, by default, continues to saddle us with our current 1.4-million word-and-growing tax code.  (It boils down to partisan politics, unsurprisingly.)  Few experts disagree that simplifying the tax code would be one of the best things the federal government could do for our economy.  In spite of that, few politicians support the idea enough to do something substantive about tax simplification, because getting something done would definitely involve conceding some things to the other side.  Can't have that, can we?

Nonetheless, I'll keep plugging away at the economic argument.  Last time, we saw how a single rate flat tax, in conjunction with the current payroll tax structure, creates a bubble in the effective tax rate, leaving the middle-income taxpayers with the highest effective rate of all.  One fix for that, as we saw, would be to reform FICA, the taxation side of the social security system, by lowering the rate and lifting the cap.  That would turn social security benefits from a system based on one's so-called contributions into a system that redistributes FICA taxes from higher income workers to middle and lower income workers—and that could be an insurmountable political problem.  (For example, here's one possible bumpersticker: "Social Security was never meant to be a welfare system"; think how much negative emotion that would stir up.)

A better idea is a dual-rate flat (income) tax, in which the higher rate kicks in when the FICA tax rate drops off (currently at an income of $97,500).  That eliminates the regressivity that always draws out the class warfare arguments, and would avoid the political problem described above, by leaving the SS system's contributions-to-benefits relationship untouched (...SS would just "borrow" from the general fund when the time came).  Here's one scenario showing how the effective tax rate (red) would work out in a 15%/27% dual-rate flat income tax system:

But Senator Ron Wyden (Oregon Democrat) might have a better idea.  He's pushing a tax simplification plan dubbed the "Fair Flat Tax" in spite of long odds, and it's essentially a triple-rate flat tax.  It's similar in principle to the dual-rate tax described above, and it's a compromise between the six-rate rube goldberg system we have today versus the single-rate flat tax that keeps getting nowhere. George Will gave Wyden some important exposure in Newsweek recently.  If tax simplification has a chance, Senator Wyden might be on to something. 

You can read his key principles here; click on the following thumbnail:

...and there's more at this page on his website, including an example of the one-page tax form.   

I could quibble with a point or two in Wyden's proposal, but I won't; overall simplification of the tax code is growth-friendly, and I don't want to get in the way of that. 

I'm not sure I like the name he picked for it, though: "Fair Flat Tax Plan."  To Democrats, "flat" is a code word for "enriching the already rich"; to Republicans, "fair" is a code word for "creeping socialism."  Because of the name alone, a pessimist might conclude that Wyden's idea will be dead on arrival (...and two advantages pessimists have over optimists are that they are disappointed less frequently, and they are pleasantly surprised more frequently). 

Maybe so; but I'm holding out some hope on this one.  Wyden needs a co-sponsor on the Republican side, and he also needs more support from his own party.  I hope you write to your Senators and Representative, as I will.  Maybe we can light a fire under them. 

Comments

[Bob]

Will is not all that optimistic either Steve.

I'm in favor of anything reasonable and prudent that cuts or eliminates bureaucracy. But bureaucracies are strange and self-fulfilling beasts.

I would argue that this is less a Democrat or Republican battle and more of a relinquishment of ANY politicians power.

We can get there but it's going to take some new blood to do so.

[Aaron]

I am sorry I cannot support this plan as it eliminates the foreign income exclusion. Basically, any American working overseas will enjoy paying both full US taxes as well as the local country taxes.

Its a globalized world but Congress thinks everyone works and lives in Mainstreet USA.

Every couple of years Congress makes noises about this exclusion, seeing a nice fat pot of taxable income they think they can get their hands on, and then they are told by US companies that if they do that, essentially they are firing US employees who work overseas and replacing them with cheaper foreigners.

(Note this exclusion only applies to people who live outside the US for 11 months of the year and only excludes the first US$ 80,000. So we are talking American English teachers, engineers, etc.)

p.s. Only the US taxes global income. I don't mind paying above 80,000 I figure that's the tax for the USMC, but if I did get taxed twice I'd have to shut down my business and go back to the states to work as a secretary - they'd be making more money than me after taxes.

[cube]

http://www.gao.gov/media/video/fiscal/windows/amfiscal.wmv

11 min video from the head guy at the GAO. He says that we cannot grow our way out of our medicare, medicad, and social security problem.

[MarkDC]

Wyden's plan is insightful and prudent. Mostly, its not a shame and a farce, like the "Fairtax".

The most important thing about Wydens plan -- it apparently taxes all income types the same way.

Right now, earned income can pay almost 300% higher taxes the unearned income.