recursion

I was talking with my friend Ben Moore today about taxes and it inspired me to put down some thoughts on taxes. Ben's a libertarian and I'm a liberal, so we have a friendly on-going debate on the way things ought to be.

First of all, everyone ought to pay some taxes. It's important that everyone be invested in the way government spends our money.

The tax system should be progressive. (Currently, the income tax is progressive, but other taxes are regressive, leading to an overall mostly flat tax rate, but with the very wealthy paying somewhat less than the upper middle class.)

I believe this for a few reasons:

• Vast income inequality is dangerous for democracy. I have no problem with being rich (who doesn't want to be rich?) But money is power, and there is more income inequality in the US now than any time since the gilded age. Progressive tax policy reduces income inequality.
• The rich benefit more from the stable society government provides. The rich are able to be rich because of the framework of laws and stability that the government ensures. They should help pay for that more.
• The marginal utility of a dollar is less the richer you are. What is an extra dollar to Bill Gates? Nothing! To a middle class family, it matters a lot more. If you have $10 million/year, paying 40% in taxes (this about is 20 percentage points more than currently) will still allow you to live a great life. If you have $40,000/year paying 20% in taxes (about the current rate) is a real burden.

It should be government policy to prevent the establishment of an American aristocracy. This goes along with my points about income inequality (above). The estate tax is essential to prevent a permanent class of ultra-rich who have done nothing for their money.

Tax credits only help people who pay lots of taxes. Tax credits for buying the right kind of car, offsetting the cost of health care, and other worthy things sound like great ideas, but they really only help those who pay lots of income taxes. For the poor and lower middle class, you can only reduce your income taxes to $0. If politicians were serious about this, they'd make them grants.

Taxes can incentivize behaviors we want to encourage. A tax on gas helps pay for roads, and discourages driving. A carbon tax would make all kinds of environmental improvements cost effective and decrease the amount of CO2 we produce. Consumption taxes are regressive, but I think that's OK as long as the overall system is progressive.

Finally, the tax system is too complicated. It's mostly the fault of the weird tax credits (see above). I really think the tax system should be streamlined and made more progressive. There's no reason why the IRS can't just send you a bill (or a rebate!) at the end of the year. You could do your own taxes if you wanted, but most people don't need to.