Sunday, September 30, 2012

No simplicity, no transparency no nakedness

Election season is not the happiest time of the year. I will not be watching the debate this Wednesday evening and I am not keen to see whether the astute businessman or the cerebral law professor is the better China-basher-mercantalist-nativist.

This morning's NY Times includes a federal income tax reform proposal by Richard Thaler, "For the Wealthy, a 28 Percent Solution."  He suggests that all income over $1 million be subject to a flat 28 percent tax rate with no deductions or exemptions.  The messy code would remain in place for those earning more. Thaler writes that this is in the spirit of “lowest possible tax rates on the broadest base.”

But we also hear about the current 66,000 page IRS code which costs Americans several hundred billion dollars of annual effort to cope with.  Why this mess?  Why are real reforms a long shot?

I can think of three reasons.  First, it is impossible to get anything near a consensus on what a  "fair" tax code and tax burden would be.  Second, targeted rates and favors pass for policy making (as in "energy policy," "trade policy," "housing policy," etc.).  Third, complexity is a convenient place for politicians to hide.  Simplicity and transparency are akin to nakedness.  We did not get to where we are by accident or oversight.