What Kind of a Tax System Should We Have?

Speaking of waste, Megan McArdle restates her case for eliminating the tax on corporations:

One of the first blog posts I ever wrote was on why we should eliminate the corporate income tax. This is not because I just looooooooove corporations, or wish to put more money into the hands of rich people–on the contrary, I want to pair an elimination of the tax with an end to the special low tax rates for dividends and capital gains, and maybe even an increase in rates for higher brackets if that’s necessary to keep the thing revenue neutral. Which would actually be considerably more progressive than the current system.

Rather, I think the thing’s horribly inefficient–companies and rich people spend an exorbitant amount of time arranging their affairs to be lower-taxed, rather than more productive. Taxing capital once, when it hits a person, as ordinary income, would in one fell swoop eliminate most of the tax-avoidance activity that goes on in this country. It’s also not necessarily as progressive as its proponents think, and well, you can read all my other reasons for disliking it here.

I agree with Megan: we should eliminate the corporate income tax. At the very least it would reduce “tax-avoidance activity” which in my view is just waste. IMO the main purposes of the corporate income tax are to enable politicians to signal that they’re on the side of the little while equipping them with a club to wield that enables them to attract campaign contributions, either to reduce the tax liabilities of contributing companies or to increase the tax liabilities of upstart competitors of contributing companies.

I don’t think that eliminating the corporate income tax and replacing it with changes to the personal income tax would remove money from politics but I sure think it would change where the battles are fought.

Meanwhile, Christina and David Romer have published a paper (hat tip: James Kwak that suggests that, at least for those in the upper brackets, the incentive effects (i.e. working harder and earning more) of a lower tax rate aren’t as significant as the avoidance effects (i.e. paying their accountants and lawyers more). As Dr. Kwak points out, that suggests that a more efficient system would have fewer exclusions and deductions. I agree with that.

Putting it all together we would have a tax system that abolished the corporate income tax, increased the personal tax rates to make up for the lost revenue, and has few or no exclusions and deductions.

I don’t think a balanced budget is necessary (or even desireable) but we aren’t remotely near that now. We’re not even in the same area code as that. I think we’d be better off in which revenues were within 2 or 3% of GDP of expenditures and we borrowed (or just spent) the rest into existence.

So what rates would we have for personal income taxes? I have no idea. Whatever would pay the federal government’s bills and keep revenues and expenditures within shouting distance.

Of course, I’d drastically reduce federal expenditures as well but that’s a different subject (and one I’ve written on at some length).