Back in 1986, President Ronald Reagan teamed up with House Speaker Tip O'Neil and they did something amazing together: They simplified the tax code. But they didn't just simplify it. Fewer and lower brackets is nice and all, but the really important thing they accomplished was to de-corrupt the tax code. Loopholes, shelters, perverse incentives, stupid deductions -- mostly gone. It was a wonderful, beautiful thing. Government was (mostly) out of the business of corrupting the economy, business, and people through the tax code.
Then rates went up under Bush. They went up again under Clinton. Then down under the next Bush. But forget the bouncy rates. All these guys went to Congress to reintroduce loopholes, shelters, perverse incentives, stupid deductions -- and as a result, we once again have an amazingly corrupt tax code.
But Brett Arends spent some time -- nearly a whole morning! -- cleaning it back up. Here's what he came up with:
I figure a good tax code should be simple, efficient and fair. So I wondered if we could just combine a national sales tax, which is simple and efficient, with a drastically simplified but progressive income tax, which would be fair.
Scrap the regressive payroll tax. Scrap the regressive corporation tax, too: Instead tax the business owners, and treat all investment income and capital gains as income. No loopholes. No breaks. Easy.
The IRS says 2011 taxes total about $2.3 trillion. A 10% national sales tax would bring in about $1.1 trillion, or nearly half of what we need. That would ensure everybody pays something, and it would be relatively easy to collect.
What about income taxes? I played with three tax rates: 0%, 25%, and 40%. (Notice I have shunned the cowardly "39.6%," as well).
Single filers would pay zero percent up to about $50,000 in income, then 25% up to $200,000, and 40% on everything over that. For joint filers, I just doubled the limits: zero percent up to $100,000, then 25% up to $400,000, and 40% above that.
Based on the IRS numbers for 2009, the most recent available, this would have raised just over $1 trillion that year compared to the $915 billion that income taxes actually brought in. In 2011, when the economy was stronger, you have to figure it would be well over $1.1 trillion.
Which means, of course, that we are at our goal: $2.3 trillion.
I remain wary of any plan that taxes income and spending. I'd rather go with the Fair Tax. But Arends has given us an great election year starting point. And most importantly, he's come up with a way to de-corrupt the tax code.