This post won’t describe my preferred tax regime. Rather I’ll describe two reforms that would greatly improve economic welfare and leave the distribution of taxes almost unchanged. Both parties should support the plan, although I doubt either actually would.
1. Remove all income tax loopholes. All of them. Reduce tax rates enough so that each income decile pays the same amount as before.
2. Eliminate all capital taxes for people with less that $100,000 in capital income. I.e. on the first $100,000 of passive capital income. Make up the lost revenue (which would be surprisingly little) by modestly raising the Medicare payroll tax on those making more than the Social Security cut-off point (roughly $110,000/year.) The tax cut would mostly benefit the affluent, but some benefits would go to those making less than $110,000 in wage income. All of the tax increase would fall on the affluent. The net effect would probably be to make the system a tiny bit more progressive.
The combined effects of both plans would reduce MTRs for everyone. More importantly, the net effect of these two changes would be that 99% of non-self-employed people would not have to file income tax forms. The IRS would simply withhold the appropriate amount of wage and salary income, and that would be the end of it. For those lucky people (like me!) the income tax would become essentially identical to the payroll tax, except with a more complex rate structure.
This would cause huge numbers of tax-preparers to lose their jobs, freeing up labor for other more useful jobs like gardening and cleaning swimming pools. Also more dog psychologists. It would end my dread of the month of April. It would boost capital formation, for reasons Matt Yglesias discusses in this post. It would also be much fairer, as high savers are currently taxed at much higher rates that spenders with equal lifetime wage incomes (for reasons Yglesias hints at in the preceding post.)
Most people with capital incomes below $100,000 work for a living. The big hedge fund guys would still have to fight it out with the IRS. Is their income a return of capital, or on services rendered?
But please, leave me out of that fight. There’s no reason for the IRS to bother the rest of us.
PS. I don’t have time today to blog on monetary policy, but I’d point you to some excellent David Glasner posts (here and here), criticizing the hard money folks. And Brad DeLong pushes back against an unusually weak argument by John Taylor and Phil Gramm.