The U.S. tax system is a mess. But overhauling it is a daunting task. The last time in happened, in the 80s, it was more of a miracle than anything else: the stars aligned, both sides wanted reform, and the leadership was strong enough to turn aside the special interests. It is these special interests that fight reform: A tax loophole that helps a hundred people to the tune of millions but costs the average taxpayer a buck will be furiously defended by those hundred people, while the vast majority who don’t benefit probably don’t know it exists, let alone feel like fighting against it.
But we can dream, can’t we? Here’s the tax reforms I’d like to see:
- The end of the mortgage interest deduction, student loan interest deduction, and debt-service deductions in general.
- A very short-term (a day, a week, a month), punitive capital gains tax rate to discourage programmatic day trading.
- A small, 0.25% financial transaction tax on stock and derivative purchases, again to discourage gambling.
- Keeping the estate tax, but raising the limits to something higher (say $5 million) and exempting family-owned businesses and farm property, as long as it stays within the family for at least 5 years. Stocks, cash, and other assets would not be exempt.
- The removal of most loopholes, deductions, etc. Even the popular ones.
- The end of the marriage mistreatment. The numbers (deductions, phase-outs, etc.) for married filers would be double that for single filers.
- Raising the rates on the top earners, including the ridiculously low capital gains rates. Warren Buffet famously points out he pays a lower tax rate than his secretary. This needs to end, by treating income as income, regardless of where it is derived from.
- Simplifying the vast array of IRAs, Roths, 401(k)s, 403(b)s, SIMPLE IRAs, and other retirement accounts down to two, portable ones: a “Pay Taxes Now” account, modeled on the current Roth IRA, and a “Pay Taxes Later” account, modeled on the regular IRA.
That list has a lot of stick, so here’s the carrot: the elimination of the corporate income tax. No more would we hear screams about double taxation. No more would businesses try to buy favorable tax treatment. As long as the individuals receiving those dividends and stock options and capital gains paid their fair share, we could make it as budget neutral (or budget positive) as we want.
Our current tax code subsidizes debt and reckless risk-taking in financial markets, as we have all plainly seen in the past few years with the real estate bubble and the financial meltdown. If we discourage gambling on assets, and instead encourage long-term investing and a “buy and hold” strategy, we’ll avoid some of the instability that these bubbles bring.
I know it isn’t happening anytime soon. But I can at least pretend.