Romney Ryan Tax Debate: How the Middle Class Could Actually Benefit From a Complicated Tax Code

Politicians of all stripes say that we need to simplify the tax code. Each have their own reasons, many of which revolve around the perceived unfairness regarding how income from wages is taxed, versus income from investments or business enterprises. Instead, I think we need to complicate it,but in a way that benefits middle and lower income wage earners rather than high income earners currently reaping most of the benefits.

A recent NPR story which sought to discover some common ground between economists of differing political persuasions yielded several results regarding the tax code. Each of the economists interviewed agreed that two provisions of the tax code needed to be changed immediately – the mortgage interest deduction, which they felt should be removed, and the corporate tax rate, which was recommended to be dropped to 0%. 

For a politician, even suggesting the implementation of either of these measures would amount to political suicide. With that in mind, I offer a pair of more flexible alternatives that achieve many of the same ends,yet do not carry the burden of political harakiri.

Instead of eliminating the mortgage interest deduction, which the group of economists says unnecessarily removes dollars from federal coffers and unfairly favors wealthy home owners, I suggest putting it in brackets. This would mean that we keep the deduction, but only for homes that fall within a certain value range. For example, those who own homes that are worth 30% more than the median national average for home values would lose the deduction. Homeowners whose homes are worth less than this value would get to keep the deduction. The federal government would put out an official benchmark value each year and leave homeowners to determine which source they want to use to assess the value of their homes. State or county property tax assessment records would be a convenient source.

Such a measure ensures that middle and lower income homeowners, many of whom rely on the mortgage interest deduction to significantly lower their tax burden, don’t get kicked in the teeth by a complete elimination of the deduction. At the same time those who can afford to pay a little extra in tax, namely those who can afford luxury homes, do. The federal government gets to see its tax revenues rise, and middle income homeowners, by and large, get to keep one of the largest deductions available to them.

The economists' argument against corporate taxes reasons that imposing taxes on economy boosting, job creating, activities discourages those activities. They suggest instead to allow corporations to keep those funds so that they can be reinvested in product development and basic research. Broadly, this approach benefits only the corporations. The federal government loses revenue and employees are minimally affected.

Instead of simply allowing corporations to keep the money to use as they please, the tax code should be re-written to allow corporations to keep the money but with some stipulations on its use. The tax code can be updated to maintain that corporations will still have to set aside an amount of money equivalent to what they would pay in taxes, and instead use that money to increase employee pay and benefits. It could also potentially be used charitably, or to research innovations that will do more than simply benefit the bottom line. 

If the people (aka the government) are going to lose direct access to this source of revenue, then the people (aka citizens) should get some return. This option really is a win-win for business.  If the intended tax revenue is returned to employees in the form of higher wages and benefits, then corporations end up with happier, more productive employees. It follows that greater profits will create a more engaged workface with better moral. 

As profits increase, so do pay and benefits. It’s a reinforcing feedback loop. If funds are reinvested in the community in the form of charitable giving or research that positively impacts the community, then the corporation gains the goodwill of the community. And the government wins either way. If the corporation simply elects to pay the tax, they get the revenue. If the corporation elects to pay its employees more, the government receives a gain in income tax collected.Finally, if the corporation elects to benefit its community charitably, then governments have to pay out less for services.

Of course for any of this to work, someone, will have to work out all of the numbers and formulae required to implement this policy.

Politics doesn’t have to be a zero sum game. Politicians can and should tackle difficult issues like tax reform by recognizing that everyone can win if we maintain our focus on doing what is best for the majority of the people. Since there is such diversity within that majority, we need to have flexible — meaning more complicated but ultimately more beneficial — options for the functions of government. With flexibility there is no need for any politician to risk their job, rich individuals and corporations can still make and keep unseemly amounts of money without steamrolling the poor and the middle class, and government can still function to provide the services that we all rely upon.

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Nate Abrams

I'm a systems guy, which means that I look at almost everything in terms of interconnections, feedback loops, architecture and scale. In other words, I look for the big picture and the deeply buried reasons for why things are the way they are.

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