By Dan Pilla
The American Taxpayer Relief Act of 2012 is yet another major tax reform bill that doesn’t really do much to reform taxes. True, some of the key provisions of the Bush-era tax cuts are now permanent (to the extent that any tax provision is ever permanent today). However, the Act still leaves in place far too many temporary provisions. These have the effect of swinging American taxpayers around by the tail from year to year without much hope of the system ever settling down.
Congress now promises to deal with tax reform as a major stand-alone project over the next few months. But the problem is that for the most part, Congress’s driving principle in tax reform is limited solely to answering the question, how do we raise more money? Congress does not truly address the real problems with the tax code, the key ones being the complexity of the code and the myriad of arbitrary thresholds for tax rates, phase ins, phase outs, filing status amounts, etc., etc.
The Act itself offers yet another perfect example of these arbitrary thresholds which have absolutely nothing to do with any economic, moral or constitutional principles of taxation. Consider that under the law, for a married couple filing joint tax returns: a) the new 39.5% income tax bracket begins at $450,000, b) the phase out of personal exemptions and itemized deductions begins at $300,000, and c) the 3.8% Medicare surtax kicks in at $250,000 as does the higher Medicare tax on wage income.
This is the perfect picture of irrational tax policy. Sure, congressional aids and Treasury Department officials will tell you that the numbers are based upon the projected increase in revenue attributable to the various elements of the bill. Income tax rates set at X% will yield Y dollars of revenue. Thus, to produce tax revenue targeted at a special amount, we must adjust the various rates according.
But this too is non-sense because the planners consistently fail to consider the impact that higher tax rates or targeted tax hits have on the behavior of persons who fall into the higher brackets. The reality is (and honest policy analysts know this) you don’t raise revenue by raising tax rates. You raise revenue by broadening the tax base. Otherwise you simply encourage people to discontinue whatever activity happens to be the target of the higher tax. Thus, the projected revenue is rarely if ever realized. For more on this, see my 10 Principles of Federal Tax Policy. www.heartland.org.
Of course these same people also insist that the primary idea of such variations in the tax code are introduced in order to make tax policy “more fair.” But the term “fair” is defined as that which is impartial, honest, free of self-interest, prejudice or favoritism. We certainly cannot say that about our tax system. The very fact that our income tax system is founded on the idea of graduated tax rates specifically intended to impose progressively greater burdens on one segment of society for the express benefit of another means that the system is, at it’s core, fundamentally unfair.
Thus what you are left with is purely arbitrary tax policy. What we see coming from Congress amounts to little more than throwing darts at a wall covered with numbers. There is no economic, moral or constitutional basis for what they do. Adam Smith pointed out in The Wealth of Nations that when tax policy loses its proportionality, it becomes arbitrary. That is precisely where we are today. Our tax policy is entirely devoid of economic substance, moral authority and constitutional foundation. By definition, it is arbitrary.
Congress needs to recognize the vivid truth that the income tax experiment is a colossal failure and must start over.