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Thursday, November 11, 2010

The Deficit commission Plan -- 2

Another aspect of the plan put forth by the chairmen of the deficit commission is adjustment and simplification of the tax code. The idea is to get rid of all deductions and to lower the marginal rates substantially. This is a great idea. For too long the US has used the tax code as a way to shape behavior rather than to raise taxes. Why should interest paid to buy a house be deductible but interest paid to buy a car is not? Why should people in low tax states pay higher federal taxes than those in high tax states? there is no good reason for any of these questions from a tax standpoint. Instead, the answer comes from a political calculus designed to favor one group or to promote a certain behavior.

One big result of the crazy tax system is the major cost incurred by Americans to file their tax returns. There is a whole industry that has developed designed just to permit the filing of returns. For many people the tax code is just too complicated to master. but this industry produces nothing of value; it just helps the tax system to function. If the tax sstem is simplified a big portion of this industry will be able to be changed so that the assets used can be put to more productive tasks.

There will certainly be many who protest any reduction in the deductions that favor their particular group. Such behavior is inevitable. The benefits of the change far outweigh these objections, however. most important, by removing the distortions of the tax code, the market will be able to function more efficiently. Further, with lower rates, the incentive for work and investment will be increased. Third, the costs imposed by the complicated nature of the code will be removed. Lastly, the growth in the economy will likely be increased as the efficiency and incentives kick in.

All in all, this is a very good idea.

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