Tax Analysts Blog

Do You Care About Good Tax Policy?

Posted on May 25, 2016

Let's be honest. Most people don't. In fact, most people don't think about taxes beyond complaining about them once in a while. Most tax lawyers and accountants don't think much about the principles of sound tax policy. Politicians certainly don't think about principles much. Oh, a few do once in a while, but most politicians are thinking about reelection or running for higher office. A politician's idea of tax policy means either lowering taxes on people who will vote for them or raising taxes to pay for services for people who will vote for them. Sorry to be so cynical.

There are a few organizations that actually care about sound tax policy. The Tax Foundation is one. You should read its recent report on Iowa. Actually, political leaders in Iowa should read the report. I realize that some of my liberal (and pro-government) friends may be skeptical, but I know that the people who run the foundation always put principles first. That's why they are worth listening to.

In the Iowa report, the foundation makes several recommendations that are difficult to refute, including: lowering the very high personal income rate from 8.98 percent to 5.15 percent; reducing the number of brackets from nine to one; and maintaining the standards deductions (and in one scenario even increasing them dramatically), which can be paid for by repealing the deduction for federal taxes (which is a very odd and nonsensical deduction). This all makes sense. States are terrible vehicles for redistributing wealth. The high personal income tax makes the state less competitive, and the ridiculous number of brackets makes the system more complicated.

The foundation also recommends repealing both the individual and corporate alternative minimum taxes. Only a handful of states impose AMTs. There is good reason. They are awful policy choices, as they complicate compliance and administration. Moreover, like the minimums at the federal level, they are nonsensical. We make policy choices to give away tax breaks and then say, "Well, those tax breaks aren't important enough to give to everybody." Oh, and the taxes raise almost no money in Iowa.

Also, the foundation suggests lowering the ridiculously high corporate income tax rate. Here is where I disagree with the foundation. The tax should be repealed because it is an awful way to raise money, but that is too radical for most people. The foundation says the state should lower the rate to a flat 6.5 percent rate (although other scenarios recommended 3.9 percent). The state should restore the three-year net operating loss carryback. To help pay for this, the foundation recommends ending the deduction for federal taxes and, more importantly, ending all business tax credits. That recommendation alone makes this reform proposal worthwhile.

Further, the foundation proposes repealing the estate tax. I'm all for that, as really rich people figure ways around it. The tax rarely falls on the old-moneyed classes but, rather, burdens those people who did well but not well enough to hire the best lawyers and accountants.

However, the single most important recommendation the foundation made is for the exclusion of business inputs from the sales tax. Taxing business inputs is one of the greatest fiscal policy failures in the states. It remains a cynical, corrupt way to fund government. If we cared about the principles of sound tax policy, we would collectively be ashamed. Actually, if we cared, we would not tax business inputs.

In any event, the report is available on the foundation's website. It is well worth reading -- if you care about sound tax policy.

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