Negative Approach

One has to wonder what made Senators Ron Wyden (D-Ore.) and Judd Gregg (R-N.H.) so eager to introduce their new tax reform plan last week. The problem is not with the plan itself, which is fine policy-wise. It simplifies the personal income tax into three rates—15 percent, 25 percent, and 35 percent—and eliminating most deductions while tripling the standard deduction, which has the potential to make the tax more progressive, as many deductions are only claimed by filers well-off enough to hire accountants or to have the spare time to file long returns themselves.

The problem is that this has been tried before. In 1986, Senator Bill Bradley (D-N.J.) and Congressman Dick Gephardt (D-Mont.) wrote and President Reagan signed a similar proposal, which paid for a sharp cut in the top income tax bracket by radically reducing the number of deductions and tax incentives. While by no means perfect, it was a worthwhile measure that ended numerous special interest carve-outs in the tax code. Or rather, delayed them. Within a few years of passage, many of the same incentives returned due to aggressive corporate pressure, and eventually we arrived at our current code, which is complicated enough to spur simplification efforts like Wyden and Gregg’s. Do today’s reformers really expect a more permanent fate for their effort?

The reasons for the 1986 bill’s successful dismemberment are clear enough. While there is broad popular support for a simpler tax code, that support can only be mobilized every so often. Big efforts can gain momentum, but there cannot be major pushback every time a company wants a tax credit thrown its way. With those dynamics as much in place as they were in 1986, simplifying the tax code remains a Sisyphean enterprise unlikely to reap lasting rewards.

What would provide reforms with some degree of permanence is the inclusion of provisions to make the tax code fairer. Attempts to expand the welfare state are instructive here. Before passage, programs like Medicare or Social Security are hugely controversial, but once implemented become untouchable. By providing consistent and noticeable services to voters, they build up a base of supporters ready to react when the programs are threatened. While this is occasionally detrimental—witness the backlash to the health care reform bill’s Medicare changes—it does guard against threats that the program will be rolled back. There is no reason tax reformers cannot make sure changes last through the same method. By structuring the tax system so that it provides more obvious benefits to taxpayers, reformers can make it harder, though not impossible, for special interest to touch.

The best way to do this would be through a negative income tax. Made famous by the libertarian economist Milton Friedman but supported by economists and thinkers on the left as well, a negative income tax typically works by implementing a flat income tax and then transferring a set amount of money to the taxpayer. For example, suppose the tax rate were 25 percent, and the cash transfer $10,000. A family of four with a head of household working full-time at the minimum wage ($14,500 a year) would pay 25 percent ($3,625) in taxes, but receive $10,000 as well, leaving them at $20,875—not middle-class, but solidly better off. Affluent taxpayers would pay almost the full rate, the middle class would pay a significantly lower effective rate, and the poor would actually gain money.

The U.S. currently implement a variant of the negative income tax called the Earned Income Tax Credit, which is credit to low-income workers that can be claimed even if those workers owe no taxes. While a tremendously successful antipoverty program, the EITC still has its flaws. Twenty five percent of eligible families do not claim it, a problem the direct distribution of cash in a negative income tax would solve. Also, the EITC’s monetary value lowers the more income a recipient earns, which can function as a disincentive for recipients to work. A negative income tax would grant the same amount of money to all taxpayers, meaning it is always in a person’s monetary interest to work more.

Upon implementation, special interests would strive to carve out deductions and loopholes in a negative income tax. But by providing real relief to poor and middle-income Americans, the tax would build a political base protecting it far stronger than the current tax code has. Even if that does not prevent lobbyists from amending the tax, it should still be enough to ensure that the monetary benefits of the tax are kept intact. For those of us interested in combating poverty and raising middle class incomes, that ought to be worth it.

Dylan R. Matthews '12, a Crimson editorial editor, is a social studies concentrator in Kirkland House. His column appears on alternate Wednesdays.