Part of the “Fiscal Cliff” Solution: the Best Tax Simplification Proposal

With the 2012 elections over and a political landscape remade, the stage is set for our next U.S. drama, a tussle over how to prevent the budget and economy from tumbling over a "fiscal cliff." From the tone of preliminary discussions, it's looking hopeful that all parties (save a few Tea Party holdouts) have taken their "act-like-an-adult" pills. Investment wizard John Mauldin may turn out to be right, after all - that grownups will act in the nick of time, transforming the deficit from an all-destroying monster into a mere-worrisome beast.

That is, if President Obama can get Congress to swiftly do the very first thing, the immediate top priority: pass legislation guaranteeing tax stability at current levels for the Middle Class, so that markets won't panic on January first. All else can be thrashed out in an "outline" for the next Congress to finalize by March.

That is, if Speaker Boehner can herd enough Republicans into accepting more revenue from the rich. And if their masters on-high grumble but accept what the election's Super-Pac Collapse showed, that the oligarchic putsch is waning. With tax rates near their lowest in 70 years and with Federal revenue as a share of GDP at its lowest since the end of WWII, it's time to ignore those imbeciles maniacally preaching hatred of our own government, blaming it for all things. And time for the uber-rich to accept what the First Estate foolishly refused in 1789 France - that it's time to pay a bit for being members of a civilization.

Oh, but liberals will have to give, as well! This can all happen if the President delivers sincere counter moves on entitlements: the easiest being simply to tell Americans  the truth. "Hey, you live a lot longer than your parents did, so you can work just a tad longer... and 70 is the new 50 anyway." If he does that, in exchange for an end to Bushite supply-side voodoo largesse for aristocrats, then our children will be saved at a single stroke.

The rest of the deficit? Well, as I explained elsewhere, half of the causes of our current mess should dissipate, once the other half come under control, and now that we are safe from our house being ruined again by the same fools who bulldozed it over a cliff from 2001 to 2009.

== The Role of the Tax Code in All This ==

Now, Let's be clear; the deal that emerges may have some twists to it.  Republicans will be seeking a face-saving way to increase inflows from the rich -- an approach validated not only by the electorate but also a report from the Congressional Research Service declaring that Supply Side mythology is, was, and always will be hokum. That incantation worked far too long, hypnotizing a generation on the right, but it's over and good riddance. (Adam Smith himself said that most aristocrats do not invest any sudden largesse into innovative capital. That was a fantasy.)

While admitting the inevitable, GOP politicians are eager not to explicitly violate their "no new taxes" pledge to Grover Norquist, who still has some clout despite his star fading, at long last. Desperate for a fig leaf, Republican legislators tout a semantic distinction between "augmenting revenues" and "raising tax rates."

The leading proposal on the table right now appears to be eliminating the ability of the rich to evade taxes through deductions, a suggestion offered briefly, during the many policy gyres of GOP presidential nominee Mitt Romney.  By eliminating a wide range of deductions, or else capping all deductions at - say - $25,000 per person/year, a large flow of revenue could be tapped while allowing the actual marginal rates of income taxation to remain at Bush Cut levels. (Not enough, according to Treasury Secretary Geithner, but a good start.)

Another approach would be to raise - or even eliminate - the regressive cap on the payroll tax that feeds social security and Medicare. If that were also applied to capital gains and dividend income, so much new revenue would be generated that the rate of the payroll tax would have to be reduced, lest serious damage occur! (That mere fact shows just how skewed our values have become - that honest work is taxed harsher than what Adam Smith derided as "rent-seeking" - the lowest form of economic activity, according to Smith.)

Any of these approaches might work. I am partial to the elimination of whole deductions if only for one reason, that it would contribute to another long term project, simplifying the Tax Code.

As a matter of fact, there is a way to do that, and minimize the amount of kicking or screaming or obstruction.  It seems worth doing on its own merits! Some of you have read my proposal before and I've been encouraged to keep pushing by folks who work in this very field.  It ought to work.

== The Goal of Simplification ==

Just after being elected in 2008, President Obama said he would seek a reform of the U.S. tax code, calling the current system is a "10,000-page monstrosity." But that promise has been made by others before and every proposed change ran up against a wall. Every "simplification" would gore someone's ox. The more code-trimming you do, the more people will scream.

I know a simple way around this. The sheer bulk of the tax code -- its complexity, in numbers of rules, words or exceptions -- could be trimmed without much political pain or obstructionism! Because the method is designed to be mostly politically neutral. It does not aim at some utopian fantasy (like the Flat Taxers rave about.) It gores only a few sacred cows. It would be cheap and easy to implement. Only accountants should hate it for the effects on their lucrative business. Yet, to the best of my knowledge, this method has never been tried, alas.

(Note: an earlier version of this article ran some years ago and is still available at my web site.)

== How can I promise such a thing? ==

There is nothing on Earth like the U.S. tax code, an extremely complex system that no one understands well. But unique in that it's complexity is perfectly replicated by the MATHEMATICAL MODEL of the system. Because the mathematical model is the system.

One could put the entire US tax code into a spare computer somewhere, try a myriad inputs and tweak every parameter to see how outputs change. There are agencies who already do this, daily, in response to congressional queries. Alterations of the model must be tested under a wide range of boundary conditions (sample taxpayers). But if you are thorough, the results of the model will be the results of the system.

Now. I'm told (by people who know about such things) that it should be easy enough to create a program that will take the tax code and cybernetically experiment with zeroing-out dozens, hundreds of provisions while sliding others upward and then showing, on a spreadsheet, how these simplifications would affect, say, one-hundred representative types of taxpayers. As I've said, this is done all the time. A member of Congress has some particular tax breaks she despises and asks the CBO for figures on the effect, should those breaks be eliminated. Alas, as soon as word gets out, her proposal faces a firestorm from powerful interests fighting like hell to keep from losing millions.

Hence, although American corn-ahol subsidies propel high food prices and hunger around the world while doing little for the environment, nothing is done to end the wasteful program that costs more net energy than it delivers. There are thousands of other special interest groups that each wish the budget to be balanced... on someone else's back. How to get past this?

A key innovation: program in boundary conditions to the experiment, so there are no losers.

Let the program seek and find the simplest version of a refined tax code that leaves all 100 taxpayer clades largely unhurt. If one group loses a favorite tax dodge, the system would seek a rebalancing of others to compensate. No mere human being could accomplish this, but I have been assured by experts that a computer could do it in a snap.

Here's the key point: If such an iterative search finds a new, much simpler tax structure that leaves none of the 100 groups more than 5% worse off than they currently are, then who is going to scream?

Oh, well, I suppose a lot of people will. Cheaters will holler of course, and those who benefit from the cloud of obscurity allowed by an overly complex tax code. Even if farmers are guaranteed adjustments in other areas, they will reflexively protest over the end of Roosevelt-era subsidies. In fact, everybody will complain! But...

...but a lot of the HEAT will be taken out of their complaints, if they see that their own bottom line is completely unchanged. And that is the secret. To remove enough heat so that people can calmly re-assess, negotiate, and accept pragmatic simplification that's good for all.

== Will "no-losers" really leave everyone unaffected? ==

Nope. One hundred sample-type American taxpayers won't cover everyone, especially at the upper end. Some in the aristocracy have tax laws that were enacted specifically to benefit them! They will hit the roof. But if enough of the rich are included in "no-losers" they might tip the balance, canceling out the final obstructors, for the sake of a new simplicity. And a new patriotism.

Will this method solve all tax-related problems? Of course not! Complexity is not the only thing wrong with the Tax Code. After simplification must come some genuine tax policy shifts that do advantage some and disadvantage others. Like all of you, I have my favorite injustices I'd love to see redressed, behaviors disincentivized, business ventures stimulated... and so on.

But, by starting with "no-losers," you can use politically neutral optimization routines to find a much simpler system. Industrial concerns like auto companies already do this sort of thing, trimming and slimming machinery to use the fewest parts, while achieving similar output. We could similarly refine the machine that is the Tax Code. Then, and only then, will it make sense to argue about steering the vehicle in new directions.

Sign the #NoLosersTax petition to have the CBO perform an open, computerized, impartial mathematical model of the tax code, with 100-500 example tax payers, and zeroing out provisions, or changing credits and exemptions, and establishing boundary conditions, the most paramount being "No Losers!", to attempt to find a simplified tax code that would not impact any tax payer (below $200,000/yr earnings) more than 5%. Then make the results public.

Romney's "13%" solution

Mitt Willard Romney now informs us that he did pay taxes during the last ten years.

Thus he attempts to staunch - despite his own refusal to provide proof in the form of tax returns - the assertion of critics like Democratic senator Harry Reid that Romney paid no taxes at all, across some of that decade. “Every year, I’ve paid at least 13 percent,” Romney said, apparently referring to his effective federal income tax rate. 

Now let's do the unusual and actually parse it out. There are more aspects to all of this than you could shake a schtick at:

#1 First off -- please read between the lines.  In effect, Mitt Romney is only saying "for the years in question, I paid at least 13% on the final NET taxable income that appeared on line 43 of my form 1040." He said nothing about how large or small that final net taxable income was. Nor how much tax he actually paid.   All that his recent statement claims is that the amounts weren't zero, in years when he made between twenty and forty million dollars in gross income.

Consider, carefully. It's not 13% of his gross income, but of the final net taxable income after most income has been removed by shelters and dodges. Thirteen percent… on what was LEFT after sheltering most of it from ever appearing on line 43… and this should impress us?

In a Washington Post article, Ezra Klein lays this out carefully: '“Adjusted gross income” (AGI) is pretty close to what you think about when you think about income. “Taxable income” is what you’re left with after accounting for deductions like the home mortgage interest deduction.'  (Or the myriad other deductions and shelters available to the uber-rich.)

'Daniel Shaviro, a professor of tax policy at NYU, made the same point. “The key question here is 13.9 % of what. We know he paid zero tax at the capital gains rate in 2009, since he had loss carryovers for 2010.  So he may have had ridiculously low adjusted gross income (AGI), relative to his economic income for the year.”

Yes it is obscure... and yet important.  Let's hope the real lesson of all this comes across.

#2. Mitt Romney did provide 20 years of tax returns to John McCain, back in 2008, when he was being considered for the VP slot. If McCain deserved to see them at that time, as Romney's prospective 'boss,' then what are we? Chopped liver?  Aren't we the real bosses, deserving all information about the executive we're meant to hire? Similarly, Romney demanded tax returns from his prospective vice presidential candidates.

On this aspect, blogmunity member L. Lyons proposed: "Four years ago in the depths of the largest recession since the '30's John McCain and his campaign team vetted Mitt Romney as a potential VP candidate. Part of the vetting was to look at 20 years of IRS returns. Remember this was in 2008 with the economy nearly in freefall. They looked at Romney's tax returns, and chose Sarah Palin."

#3. In any event,  Mitt Romney knew he would face this issue in 2012. Indeed, he's been running for president for most of the last two decades.  And the GOP tradition held once again - that the nomination always goes (in order of priority) to (i) a sitting GOP president, (ii) a sitting GOP vice president, or - barring those being available - the fellow whose turn it is.  That is what has happened every single election year since 1960.  Barring situations (i) and (ii), the nominee the fellow who came in second for the nomination last time.

Hence, Mitt knew the nomination would likely fall in his lap in 2012 - as it has - so why did he not get ready, so that at least 4 years of tax records would be pristine and ready for public scrutiny?  Isn't the presidency worth sacrificing some tasty tax dodges? Given all that, if there are any embarrassments in those returns, what does that say about the intelligence and foresight of a man who is urging us to "make me commander in chief"?

Frankly, I'd prefer the notion of a Dan Rather Gotcha to the idea that we'd let anywhere near the presidency a man too stupid to clean up his finances before running for the top job.

#4.   Is Mitt simply delaying in order to get nominated, and then let whatever S#!^! hit the fan? Less than 2 weeks and counting, then at least he gets to be in history books, even if the party dumps him (unlikely) in October.  Ah, but follow that musing for a bit! Suppose six-term Congressman Paul Ryan inherited the top slot, simply because one man picked him for ticket-balancing reasons? What would that say about our crazy party system?

Heck, what does it say that a party would aim to vest full executive power over Pax Americana in a pair of men with zero foreign policy experience whatsoever and a combined total of less than twenty years in public office? And zero at a top national level?

#5. Going back to Harry Reid, the most senior Mormon official in the United States, who hopes to stay that way. I have one piece of advice for Reid that he should carefully consider. I suspect the possibility of a Dan Rather lure… Harry Reid has pounced on an apparent weakness (claiming a Bain investor told him that Romney paid no taxes for ten years.) But remember the Swift Boaters. Reid may have been fed a "reliable" rumor deliberately, in order to draw him onto a branch that could be cut  off.  You can be sure that tactic will be used at some point, even if it wasn't on this occasion. Double check your sources. And don't be too shocked if, suddenly, at an opportune moment, Mitt opens up a dozen tax returns and there's nothing noteworthy. I don't deem it likely, but it's better  than scenario #3 (above)..

And finally:  From the same article we offered in lead-off position, lower down. “We pay our taxes,” Ann Romney said. “We are absolutely — beyond paying our taxes, we also give 10 percent of our income to charity, so that you know, we have no issues that way and the only reason we don’t disclose any more is, you know, we just become a bigger target.”

Hm. As faithful and obedient Mormons, they are  obliged to tithe 10% of their income to their church.  It is pretty much automatic. That is the "charity" of which Mrs. Romney speaks… and it implies that this very very rich couple doesn't give hardly anything beyond that. Nothing at all to what the rest of us would call voluntary generosity.

What? I am hoping she rounded-down! But why would she?  Jumping jiminy, even the Koch brothers give something to acceptably rightist charitable causes.

In fact, let's withhold judgement as this is damnation on very slim evidence (then show us the returns!) But on the face of it, this sniffs like aristocrats who cannot be bothered to pay back or pay forward, lifting even a finger to help their nation, or to make a better world.