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.

The "No-Losers" Tax Simplification Proposal

Let's take a pause for a flight of fantasy, and imagine that we still had an America where political negotiation was possible, and people might listen to a "positive sum" proposal... one in which (at least in theory) almost everybody ought to be able to win. Yes, it is as far-fetched as a sci fi novel! But bear with me as I talk about a way that the tax code might be simplified, without getting snared in the morass of the (insane/stupid) Left-Right Political Axis.

========

President Obama said he would seek a reform of the U.S. tax code, calling the current tax system is a "10,000-page monstrosity." But that promise has been made by others before. Whenever somebody proposes tax simplification, we run up against the fact that every “simplification” would gore somebody’s ox. The more code-trimming you do, the more people will scream.

In fact, I know a simple way the sheer bulk of the tax code - its complexity, in numbers of rules, words or exceptions - could be trimmed by perhaps 70% or more, 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. And almost guaranteed to work! (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, or even proposed. Alas.

How can I promise such a thing? First let's note something interesting.

There is nothing on Earth like the US tax code. It is an extremely complex system that nobody understands well. But it is unique among all the complex things in the world, in that it's complexity is perfectly replicated by the MATHEMATICAL MODEL of the system. Because the mathematical model is the system.

Hence, 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 some 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, what inevitably happens is that, as soon as word gets out, her proposal soon faces a firestorm from constituents or powerful interests who will fight like hell to keep from losing millions.

Hence, although American corn-ahol subsidies are propelling high food prices and hunger around the world, nothing is done to end the wasteful programs 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 somebody else's back.

So how would my suggestion get past this? A key innovation would be to program in *boundary conditions to the experiment*. The paramount condition would be “no losers.”

Let the program find the simplest version of a refined tax code that leaves all 100 taxpayer clades 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 this 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 scream. 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 their bottom line is completely unchanged. And that is the secret trick to this approach. To remove enough heat so that a critical mass of reasonable people may calmly re-assess, negotiate, and accept pragmatic change that's good for all.

Will "no-losers" really leave everybody unaffected? Nope. One hundred sample-type American taxpayers won't cover everybody, especially at the upper end. Some in the aristocracy have arranged for tax laws to be enacted specifically to benefit them. They will hit the roof when simplification zeroes out those special exemptions (while leaving the typical 100 types alone). 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 for patriotism.

Will this method solve all tax-related problems? Of course not! Complexity isn't 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...

But, by starting with “no-losers,” you can use politically neutral optimization routines to find a much simpler system, trimming and slimming the machinery to use the fewest moving parts, in order to achieve the exact same output it is performing right now. Then, and only then, will it make sense to argue about steering the vehicle in new directions.

Honestly, can you think of ANY other way that simplification might plausibly ever happen? Beside armwaving fantasies that will never get past angry interest groups. If so, I'd love to hear it.

==========

... Ah well, I wrote all of the above back when it was at least possible to imagine negotiated positive sum politics. But let's be plain. That is not the case today, amid the outright treason called "culture war," which has so desperately weakened the United States of America. We must face the fact that normal politics is dead. There is only one analogy for the state of simplistic, imbecilic rage that we are currently experiencing.

We are in Civil War part III.

Disparities of taxation and wealth? Time to choose between ideology and civilization

The never-ending tide of troglodytic microcephaly from Republican candidates has the older, mainstream conservative intelligencia wringing its hands in near-despair. What kind of Twilight Zone do we live in, when GOP icon Alan Greenspan gives his highest presidential rating to Bill Clinton and by-far lowest rating ever to George W. Bush?

A veritable flood of former Republican standard bearers, like Paul Craig Roberts (the “father of Reaganomics”) have deserted, along with large swathes of the professional caste, from intelligence and military officers to scientists. Heck, rumors have it that the state of Arizona draws half its power from coils placed around the spinning in Barry Goldwater's grave.

Now, Bush family friend and renowned economic forecaster John Mauldin has weighed in.

"Far too many in both parties tell a frustrated America what it wants to hear, rather than the economic reality. The Republicans have some of the worst offenders."

John goes on with a riff about Mike Huckabee's "Fair Tax". Here's an excerpt:

"Fair Tax proponents want a 23% sales tax to replace every type of government tax. No more income, corporate, social security, or Medicare taxes. And everyone gets a $5,000 or so "prebate" which covers the taxes up to the poverty level. What could be simpler or more fair?

"First of all, the 23% they talk about is really 30%. Under the proposal, if an item sells for $100, then $23 of that would go to the government (said to be tax-inclusive). That means the item really costs $77 and the tax is an additional $23 or about 30% (said to be the tax-exclusive rate). Add an average 7% for state sales tax and we are now up to 37%. But wait, it gets worse.”

Bruce Bartlett writes this week in the Wall Street Journal: "A 2000 estimate by Congress's Joint Committee on Taxation found the tax inclusive rate would have to be 36% and the tax-exclusive rate would be 57%. In 2005, the U.S. Treasury Department calculated that a tax exclusive rate of 34% would be needed just to replace the income tax, leaving the payroll tax in place. But if evasion were high then the rate might have to rise to 49%. If the Fair Tax were only able to cover the limited sales tax base of a typical state, then a rate of 64% would be required (89% with high evasion)."

Mauldin: "Further, this is a tax hike on the middle class. If you make less than $15,000 you win. If you make more than $200,000 you win, because you actually save more and spend less of your income. This is a nice populist proposal which sounds good but is economically challenged. It only works on someone who has not read about the problems. Let me give you two links if you want to read more. One is to Bartlett's article and the other is to the people at Fact Check.org.

"The call by Huckabee and others to deport 12,000,000 illegal immigrants is simply economic suicide. It would create a depression (not just a minor recession) in short order. Let's reduce productivity by 10 15%. Let's reduce consumer spending by 7-8%. Shut down hundreds of thousands of businesses who could not get workers they need. Who will pick the crops? Or do any of a hundred jobs that Americans don't want to do? It would drive up labor costs and create inflation. It would be a disaster of Biblical proportions. Now, I am all for controlling the border. I want to know who is coming in. But we have to deal with reality, and the reality is that we need those workers who are here. The economy simply will not function without them."


HOW IS ALL THIS RELEVANT?

Why am I quoting all this from John Mauldin? Because it is vital for us to remember that not all of our conservative neighbors have gone stark, jibbering mad. Some are merely in a deep state of denial. Able to criticize bits and pieces of what has happened to their movement - as John does, above - though without (alas) allowing themselves to see the big picture. How the neocons, who hijacked conservatism, have relentlessly and deliberately reversed nearly every prudent principle that it used to stand for.

(In fact, I agree with John that IRS rules should be slashed and simplified. The problem is that every interest group lays down a ferocious veto, whenever their favorite offsets are under threat. There IS a solution! It is called "No Losers"... in which the tax code is slimmed by computer algorithm, seeking the minimum number of rules, under special, pre-set boundary conditions that follow a simple rule. For the 100 most common or representative tax profiles, the simplification algorithm makes no change in NET tax paid.

(Thus, everybody winds up paying the same, even if their favorite deduction goes away. It sounds magical, but, believe it or not, this really can be done! At very low expense, this experiment could at least present a proposed reform under which nobody’s ox is gored and the number of rules shrinks. Well, tax accountants would hate it. But that's for another time.)

In fairness, let's hear John out when he criticizes one of the catechisms of the left... that the rich aren't paying their fair share, since the Bush tax cuts. "They want to "tax the rich" and make more for middle class tax cuts. Sounds nice, but let's look at the facts. The bottom half of taxpayers only pay 3% of the total income taxes collected, which is 1% less than before the Bush tax cuts. 44% of the US population, or 122 million people, pays no income tax at all.

"The richest 1% of the country pay 39% of all taxes ($365,000 income and up), which is 3% more than before the Bush tax cuts, under the Clinton tax policy. The top 5% ($145,000) pay 60% of all taxes (up 5% from 1999); and the top 25%, with income over $62,000, pays paid 86% of all taxes. It seems to me that the rich are paying their fair share. Every category is paying more now than under Clinton, except the bottom 75%."

This notion that the rich are paying more nowadays - even after receiving fantastic tax cutes (during time of war) - sounds odd...

...and it turns out that it is. I hate to say it, but John is being just a bit disingenuous here. The middle class is paying less tax and the rich are paying more... because of a vast swing in actual wealth -- including income-generating property -- from the middle to the top.

This flow has accelerated so fast that the super-rich are, indeed, paying more net taxes, despite their low tax rates.


TIME TO CHOOSE... BETWEEN IDEOLOGY AND CIVILIZATION

Another way to put this would be to ask “How much tax is paid on the top 1% (by accumulated dollar value) of wealth, rather than the top 1% (by population) of wealth owners. That tax has inarguably gone down. Way down. Resulting in yet further wealth transfer in that same direction, so that more percentage points of overall wealth are owned by that top 1% of owners.

Thus, John manages to make a truly terrifying vicious spiral -- threatening a new age of feudal style aristocratism -- sound benign. He should know better.

In other words, the very same facts that he uses to deflect criticism of the Bush Tax Cuts actually show just how far those cuts have skewed the system in favor of those who are raking it in. Without comparing these stats of gross tax payments to the growing disparity in actual wealth, they are deeply misleading. In fact, if you seek the one common thread, among every Republican candidate’s tax proposals, it is this. All of them seek ways to accelerate further transfer of wealth percentage shares into the hands of the top 1% of individual owners.

Yes, some of the dems’ suggested means of reversing this trend are questionable, in their own right. I am far less interested in solutions that are confiscatory than those aimed at regulating and counterbalancing activities that are - in themselves - criminally stupid, market-warping acts of collusion by a narrow clade of golf buddies. Simply prevent outrageous thievery and re-introduce market forces at the top! That ought to solve the problem. Certainly defenders of idealised markets tell us so!

For example, try breaking up interlocking directorates (Republican Teddy Roosevelt could have told you that!) Or adjusting the rules of compensation for CEOs, directors, etc, so that their rewards come largely from ten-year company stock options! That would reshape the playing field so that managers’ best interests coincided with society’s. Oh, and those who run a company into the ground would not flutter away with 8-figure buyouts. The market for managerial talent would remain flat and fair. It would just remove the incentive for 10,000 golf buddies to conspire together to rob us all.

(Does nobody ever examine the fundamental premise-assumption underlying these godawful CEO compensation deals? The capitalist premise is that such vast payouts should attract brilliant people from other fields, until competition drives the pay levels back down!

(In effect, the golf buddies are telling us that they are mutant-level talents, like top basketball stars, worth any price, so the rules of supply/demand will never apply to them! Funny thing though. Their system to decide all this is a classic circle-jerk.)

We need to ponder whether it actually "defends market capitalism" when these wealth flows so severely alter our social structure that they threaten to entrench a quasi-feudal aristocracy. Don't forget who Adam Smith called the true and worst enemies of markets! In his day, socialism and bureaucratic regulation were FAR from the top enemies of market enterprise! Indeed, throughout human history, market enterprise had one major enemy. Conspiratorial oligarchy.

Those who style themselves as defenders of liberty and markets need to step back. They need to remember that the masters of Guided Allocation of Resources (GAR) are enemies of freedom, of every kind. We don’t need their clique to guide us. Or any clique. What we need is our Enlightenment back.


=== More political misc ====

See a bitter, but illuminating, ex-insider’s view of what’s become of TV news by veteran reporter/producer John Hockenberry, in MIT Technology Review. Especially depressing is the part where he tells of tryig to interview members of the bin Laden family, only to be thwarted from above.

Have I been crazy to suggest that there’s a lot more going on in the R’oil Desert Kingdom than the Bush Administration wants us to learn? You really, really need to read “Confessions Of A Terrorist,” which exposes one of the biggest smoking guns ever. Or at least, since scores of potential material witnesses, from the home country of most of the 9/11 hijackers, were whisked out of the US on luxury charters, without ever being questioned, on the same day that Americans were forbidden to fly.

Following up this article, I’d be interested if anybody has read Gerald Posner’s Why America Slept (Random House), is a lean, lucid retelling of how the CIA, FBI and U.S. leaders missed a decade's worth of clues and opportunities that if heeded, Posner argues, might have forestalled the 9/11 terrorist attacks. My interest is very narrow and specific, whether Posner mentions anything about FBI agents or others being re-assigned away from counter-terror duties, during the first eight months of the Bush Administration, in order to go skeleton hunting for dirt about the Clintons. So far, my sources on this are anecdotal, not statistical. If the numbers were as high as I suspect, it could be the biggest scandal of this entire, sordid period.

Finally, here are a few more points to add at the addendum following my main article: Ostrich Papers: How It Will Take All Decent Americans to Restore Decency to America...

* What if, in the middle of a declared state of dire emergency and an ongoing war -- one that was using up all American ground forces and devastating the budget -- a Democratic President (say, FDR) were to regularly walk away from his job and take more days off than any other in history? Even exceeding the earlier record set by Ronald Reagan? And setting this milestone with a whole year left before his term ran out? Would you Have let Bill Clinton get away with hurling our forces into harm’s way, then turning away to kick back with cronies for weeks at a stretch, on their new, mega-ranches?

Over the past few months, two of the most high-profile inspectors general in government have faced public firing squads. As the Washington Post on its front page on Friday, Stuart Bowen, the inspector general tasked with investigating Iraq reconstruction, now faces an investigation himself. Several government agencies are examining charges that his office was involved in massive mismanagement and waste, the very sins he had been tasked with uncovering in Iraq. Most puzzlingly, over twenty-five of his employees earned more than General David Petraeus did last year. This article in the New Republic is naturally tilted-against the Bush Administration. But then, so are the facts.

Who was speaking about inspectors general two years ago? See my article: Free the Inspectors General. Amazing that such a simple and blatantly sensible suggestion gets no notice, alas.

--See more on the Economy: Past, Present and Future

David Brin
http://www.davidbrin.com