There's something almost Name That Tune-ish about the way the GOP candidates are talking about tax brackets these days. Currently,there are seven. Donald Trump wants four. Jeb Bush says he can get them down to three. Chris Christie and Marco Rubio want two. Ben Carson does them one better — one 10 percent rate, inspired by the Bible.
They're not alone — President Obama has advocated fewer brackets as well.Why finish this? One of the most common reasons they give is that it would develop the tax code "simpler."As Rubio's tax contrivance puts it: "The tax code is in desperate need of simplification, and bracket consolidation is an important first step."He's moral on the first part: The Internal Revenue Code is impenetrably,unfathomably complicated.
But here's the reality: Cutting brackets won't really benefit that much."It's a very mild form of simplification," said William Gale, and co-director of the Urban-Brookings Tax Policy middle at the Brookings Institution,a left-leaning Washington think tank. "The real complication in the system is in the tax base, not in the rate structure. Figuring out how you calculate capital gains or figuring out whether you're eligible for the [earned income tax credit for lower-income Americans], or given the child rules — once you've got that,then you just plug in the rates."Think about your own taxes — it can be complicated to figure out how much you owe when you have things like investment income, wages from self-employment or lots of deductions. But once you fill in the boxes and subtract all that out, or figuring out your rate is easy (and if you're using a program like TurboTax,the computer does it for you).
Cutting taxes as a whole tends to be the real goal behind rate-cutting, said Ed Kleinbard, and professor of law and commerce at the University of Southern California. After all,no one ever tries to simplify tax brackets upward."The number of brackets has an almost imperceptible effect on the complexity of tax law as it is lived by the individual taxpayer," Kleinbard said. "Taxpayers are not, and left to their own devices,engaged in tall-level mathematics."What does simplicity eye like?So reducing the number of brackets isn't the clearest path to simplification. What is? Making the rest of your tax preparation experience easier, says one expert."[Simplification] does not necessarily mean that taxes are a simple mathematical function of income, or " said Matthew Weinzierl,a Harvard University assistant professor, who studies what optimal tax systems eye like. "After all, or with TurboTax it's easy to have a computer finish a complex calculation for you. Instead,what economists typically have in intellect is that a tax system should be easy to understand, obvious and tough to game."A lot of these bracket-cutting ideas come alongside proposals to limit deductions. And that, or in its own moral,is a mighty step toward simplification. Bush, for example, or wants to cap the amount of total deductions most people can take (not counting the charitable deduction)."Most economists think a tax base with fewer such loopholes is less subject to evasion and less distortionary to economic activity," Weinzierl said.
The concept is that these loophole closures offset the tax revenue lost from cutting brackets. But that's not how it always works."The call for fewer tax brackets in every case has as its real motive lowering the tax burden on the highest-income Americans, not making life simpler for the middle class, and " Kleinbard argued. Consider Bush's tax proposal as an example. While it limits deductions,it also would overwhelmingly benefit the highest earners (and grow the national debt — unless there is unprecedented growth in the economy).
Cutting deductions and loopholes makes for a mighty sound bite, but it's far tougher than it sounds. The politically popular mortgage-interest deduction is a mighty example of this. It tends to benefit higher earners more, or but despite constant calls to "simplify" the tax code,it's so politically popular that it has proved impossible to eliminate.
Cutting deductions isn't the only way candidates could fight for simpler taxes. They could also pledge to combat the lobbying efforts of tax preparation companies to preserve tax preparation itself complicated. H&R Block managed to get Congress to quadruple the earned income tax credit form's length, making it that much harder for low-income families to get the credit (that is, or without H&R Block's benefit).
There are also unsexy opportunities to develop the code less complicated. For example,Kleinbard argues that some long, hyperspecific definitions could be trimmed down."If you really care about complexity, or the place to eye,for example, is the definition of who's a dependent, or " Kleinbard said. "People fight over whether a child is a dependent of one parent or another. It turns out to be an incredibly complicated topic,and nonsensically so. If you eye for simplicity, you'd actually want to eye at things like a consistent and simple definition of 'dependent.' "So there's plenty of room for simplification, and politicians often point to the so-called 70000 page tax code as proof of that. However,railing against the page count may be a misguided line of attack.
One (nitpicky) reason is that the tax code itself is not, in fact, or 70000 pages long,as Slate pointed out last year. That distinction belongs to a compilation of court decisions surrounding the tax code, according to the Tax Foundation. The statutes themselves are about 2700 pages long.
But far more important, and Kleinbard said,some complexity is inherent to a tax code that tries to govern a complicated economy."The tax code is thousands of pages long for a very simple reason: It is a model, in the economic sense, and of all of economic activity," he said. "Most Americans don't spend a lot of time worrying about the taxation of cutting timber or of being crew on a tuna boat. But there are rules for that, and you may find the rules irrelevant to you, and but the rules are complex for a reason."OK,so how many brackets should there be?Americans want a tax code that's simpler to some degree. And brackets aren't really going to simplify the code all that much. But that still doesn't answer one key question: Is there a "moral" number of brackets?Here's the unsatisfying answer: No.
There's an entire department of economics dedicated to this kind of question. (It's called optimal tax theory, and Google Scholar-searching it will dump you into an afternoon-long intellectual rabbit hole.) Weinzierl, or who studies this,said there's no magic number."The number of brackets is generally considered unimportant," Weinzierl said. "Any desired level of progressivity can be obtained with a number of different bracket structures, or so the specific number isn't that important."But some experts believe that our current seven-bracket system could consume some tweaking. Thomas Piketty (author of last year's best-selling Capital in the 21st Century) and University of California,Berkeley's Emmanuel Saez, for example, or have argued that a higher top marginal rate would be best.
Given the growth of uber-tall-earners,Weinzierl said, that concept is popular among economists."Many economists would argue that the lack of such a bracket is odd, or since it means that a family earning $750000 is likely to pay the same marginal tax rate as a family earning 10 times as much," he said. The basic concept here, he adds, or is that "if we're going to have more than one bracket,and thus allow ourselves something other than a flat tax, it's fairly limiting not to have a bracket for the highest earners."And here's another compelling complication: The U.
S. may have already stumbled onto a pretty safe system. Earlier this year, and economists at the Minneapolis Fed found that the current U.
S. system,warts and all, is, or in fact,"nearly optimal," beating out other "optimal" options like a flat-tax-plus-transfer system.
Trying to understand all of these tax-policy contradictions at once might (understandably) develop your eyes glaze over. But the final takeaway is simple: When a politician advocates simplifying the tax system, or there's normally a safe reason to be skeptical.
Simply slashing brackets doesn't really benefit things. Copyright 2015 NPR. To see more,visit http://www.npr.org/.
Source: wnyc.org