TaxProf Blog

Editor: Paul L. Caron
Pepperdine University School of Law

A Member of the Law Professor Blogs Network

Wednesday, June 29, 2011

Kleinbard: Machiavelli, Tax Policy, and Deduction Phase-Outs

Edward Kleinbard (USC), Machiavelli on Tax Policy:

Niccolò Machiavelli, that sublime analyst of all political instincts, understood contemporary America perfectly. In his greatest work, The Discourses on the First Ten Books of Titus Livy, Machiavelli wrote that truly admirable men remained constant in temperament through good fortune and bad. By contrast, "Not so do weak men behave; for by good fortune they are buoyed up and intoxicated, and ascribe such success as they meet with, to a virtue they never possessed..."

Those of us who have achieved material success have been fortunate in ways great and small, visible and forgotten. ... The tax system is a window into the soul of our society, because we use tax law as our principal tool of industrial policy, wage support and income redistribution. Our tax structure tells more about what we as a society believe to be fundamentally fair than does any other aspect of government.

If we believe that our material success is ours alone -- a reflection of our personal virtues, or perhaps the special benevolence of some Higher Power -- and not in part the outcome of the unpredictable caprices of fortune, then we intuitively find repugnant the idea that we should be willing to share those gains through the intermediation of the tax system with those to whom fortune's wheel has been less kind. We reflect this in our tax policy by demanding still lower marginal tax rates on high-income taxpayers ...

It is not surprising that the affluent have always slipped into the convenient habit of mistaking good fortune for great virtue, and therefore into believing that higher marginal tax rates were a confiscation of the rewards that come naturally to those imbued with virtue. What is new is that the rich seem to have convinced the poor and middle class to believe this as well. ...

If we could learn to acknowledge the role that the whims of fortune play in all of our lives, then we might perhaps not grasp quite so tightly onto our material success as if it were ours alone. We might be more willing instead to share at least a little bit of our good fortune, not out of pity, but out of gratitude. ...

As I described in a previous contribution, simply allowing the Bush tax cuts to lapse, and weaning ourselves off personal itemized deductions, like the home mortgage interest deduction, would by themselves basically resolve the current budget crisis for the next decade or more, giving us time to develop and phase in better-targeted entitlement programs. Together with some judicious trimming of current spending, these moves would give us the budget headroom to invest collectively in America's future, through public education and infrastructure investment.

Moreover, the elimination of personal itemized deductions follows economic logic. Doing so raises revenues without raising the top marginal tax rates; doing so does not penalize business (small or large), because (with the minor exception of unreimbursed employee expenses, which do not properly belong on the list) the itemized deductions are not expenses of earning an income; and the itemized deductions are the paradigmatic examples of "upside down subsidies" -- they are more valuable the greater your income. These tax subsidies are the perquisites of the affluent, not the genuine middle class.

These two recommendations are not soul-crushing burdens to ask us to bear, nor are they exercises in spiteful class warfare. Instead, they are simple, easily implemented, and sane policies that we know will work. What stands between us and their implementation is not simply political fractiousness, but the pernicious myth that we all deserve everything that happens to us.

Wall Street Journal editorial, A Stealth Tax Hike: The Return of the Deduction Phase-out Gambit:

The White House wants Republicans to agree to tax increases that no one wants to call tax increases, and for an insight into this political method let's focus on one proposal in particular—the phase-out of itemized deductions for upper-income taxpayers. We hope the tea party is paying attention, because this kind of maneuver is why people hate Washington. ...

The political point of this exercise is to raise marginal tax rates without appearing to do so. The top statutory individual rate would remain at 35%, so the politicians could claim they hadn't raised rates. ...

The phase-out gambit is an attempt to shoe-horn more progressivity into the tax code without admitting it, and to do so in such a way that only tax experts will know what's going on.

One goal of the tax reform that Republicans and Mr. Obama keep talking about is to simplify the tax code, but deduction phase-outs make the code far more complicated. Phase-outs make it impossible for taxpayers to add up their income, look at the tax tables, and know what they owe. The IRS taxpayer advocate service and even the head of the ABA tax section urged their repeal in the 1990s.

Democrats keep telling us Americans support raising taxes. If that's true, the least they can do is try to raise them honestly.

http://taxprof.typepad.com/taxprof_blog/2011/06/kleinbard-.html

Tax | Permalink

TrackBack URL for this entry:

http://www.typepad.com/services/trackback/6a00d8341c4eab53ef01538f869eae970b

Listed below are links to weblogs that reference Kleinbard: Machiavelli, Tax Policy, and Deduction Phase-Outs:

Comments

invest collectively in America's future, through public education and infrastructure investment.

Honestly - don't we spend somewhere between $750 billion to a trillion a year & they're still dumber than 1 rock?


DC spends about $25K/yr per student, don't they?

How much? How much per head will be enough?


Head Start is a failure. Kansas City, MO jacked up property taxes & the school system still couldn't get accredited after 15 years.

Posted by: Sandy P. | Jun 29, 2011 3:04:31 PM

Kleinbard is wrong. Phase-outs of itemized deductions and exemptions for dependents and the like undermine equitable income taxation. His plea for "giving us time to develop and phase in better-targeted entitlement programs" is reminiscent of the Soviet Union.

Put simply, Kleinbard poses a class warfare vision of tax reform. Unlike most tax lawyers and CPAs who opine on such matters, I busted my knuckles as a carpenter and filed a Schedule C for over 10 years. That Kleinbard would so lecture -- and implicitly pity -- folks who earn their living day-to-day is truly offensive.

Posted by: Richard G. Jacobus | Jun 29, 2011 4:45:24 PM

Prof. Kleinbad states that, except for unreimbursed employee business expenses, the personal itemized ddeductions are ot connected to the earningof income. He seems to have overlooked sections 212(1) and (2) that provide deductions for the production and collection of income and the maintenance of income producing property. Except for expenses connected to rental and royaltyproperty, those are miscellaneous itemized deductions.
Prof. Kleinbad chracterizes itemized deuctions as uside down subsidies. That charcterizzation s based on the premise that deductions for such items as medical expenses, charitable contributions and casualtylosses have no place in apure income tax system and are merely subsidies. There are many who hold that view, but there also are many who hold a contrary view that those deductions are proper allowances for an income tax system and are not erely subsidies. There is consdierable writings on this subject, and it is unfortunate that Prof. Kleinbad did ot see fit to mention that there is a body of writing that contradicts his premise.
He prefaces his proposal with his observation that the earning of income is not necessarily attributable tomerit but is more a product of good fortune. Consequently, he posits tht those who arn thir income should not feel some right to retain it, but rather should welcome its redistribution to others who are at least as worthy to have it. On the other hand, why are the persons who lack the good fortune to earn what i do more worthy of my earnings than i am? I do not see where comparitive virtue has much to do with the issue.Prof. kleinbad doesn't seem to care much for capitalism, but those who believe in that syestem have s differnt take on the subject

Posted by: Douglas Kahn | Jun 29, 2011 6:25:43 PM

Throughout history, poverty is the normal condition of man. Advances which permit this norm to be exceeded — here and there, now and then — are the work of an extremely small minority, frequently despised, often condemned, and almost always opposed by all right-thinking people. Whenever this tiny minority is kept from creating, or (as sometimes happens) is driven out of a society, the people then slip back into abject poverty.

This is known as “bad luck.”

— Robert Heilein

Posted by: Sandy P. | Jun 29, 2011 11:19:12 PM