Since several candidates for president have weighed in with portions of their tax plans, I'll toss a few suggestions in as well. The overriding theme of these suggestions is simplification with minimal impact on aggregate taxes collected---revenue neutral in the language politicos like to use.
1. Make health plans fully taxable. Increase the personal exemptions by the average amount presently exempted by health plans being effectively above the line. People with exceptionally high health care costs during a year can continue to use the itemized additional deduction.
Benefits: This has the potential to effectively disentangle health care plans from employment, which will make labor more mobile. Also, it will tend to reduce the complexity of health insurance in general since there will be no temptation to cram things into an insurance paradigm simply because they can then be paid with pre-tax dollars. Insofar as winners/losers, this will benefit the younger versus the older.
2. Make dividends deductible as an expense (like interest is) for corporations that pay them out. Make them fully taxable as ordinary income (also like interest) for those that receive them.
Benefits: Removes the distortion of incentives for corporations and stockholders insofar as how to return money to the shareholders. Dividends are also a lot harder to game than the other ways and tend to keep companies more honest. In addition, because dividends are antithetical to stock options (because granting a dividend of x cents immediately drops the price of the stock by x cents), this will tend to reduce the amount of options companies will have an incentive to grant. Options can create all kinds of perverse incentives, because if you hold an option, you want the price of the stock to be volatile and tend to care most about the highest spike of stock price rather than the long term value. Consider also how this interacts with stock buybacks (another method of returning value to the customer). Do heavily option-loaded executives have a strong incentive to 'buy low' when executing a stock buyback? Or is the incentive rather to attempt to juice the stock price prior to exercise of options?
3. Seriously consider trashing the Mortgage interest deduction and using the average amount to increase the personal exemption. Winners: renters and those who have paid off their houses already---people who don't care: those who don't itemize---losers: those with large mortgage interest payments. This will also deflate the housing market prices somewhat because people won't be paying for houses with artificially cheap dollars anymore. The college loan fiasco should provide an object lesson as to what happens when everyone is bidding with subsidized dollars (hint, the prices inflate far faster than inflation).
4. Get rid of phase outs. If you want to charge people higher tax rates at higher AGI levels, just charge them higher tax rates. Don't create a bunch of knuckles in the marginal tax curve by phasing things out over various 10k and 20k wide bands thereby increasing the complexity of the tax code (and, in particular, increasing the complexity of optimizing one's behavior and timing so as to pay less).
5. Get rid of customer-side tax credits. If you really HAVE to give a tax credit on, say, Toyota Pious V's or holy light bulbs and washing machines, give it to the seller, not the customer. The ultimate effect will be similar but you'll inflict the complexity of compliance and record keeping narrowly instead of widely.
6. Seriously consider getting rid of the deduction for state, local, and other taxes paid. Instead, once again just raise the personal exemptions by whatever that would average out to. In theory at least, people who live in higher tax areas receive higher services in return for their taxes.
7. Seriously consider moving charitable contributions above the line and having the charities automatically furnish the year end statement to the IRS as well as to the taxpayer, much like employers already do. This would probably remove most of both fraud and unnecessary audits (since the IRS could just add the numbers up themselves) from the present itemization process. Charitable mileage deductions could be eliminated at the same time, helping revenue neutrality and reducing the record keeping and audit complexity at the same time. In addition, if items 3, 5, and 6 have been implemented as well, this will remove most of the remaining taxpayers that itemize.
All told I suspect that these changes would at minimum cut the compliance cost in time by average taxpayers at least in half. Turbotax would, of course, be upset, because very few taxpayers would require anything more than Turbotax basic.
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