A Tax Proposal

Romney/Ryan are proposing a revamp of the tax code, which certainly resonates with the public as it always has. But their plan largely follows the Reagan template of lowering tax rates with a corresponding elimination of various tax credits and deduction.

No one reveres Ronald Reagan and the revolution he wrought in the 80's more than me. However, this particular line necessarily leaves Romney open to the standard Democrat demagoguery of being simply 'tax cuts for the rich.' I would propose a different approach, one that is transparently progressive, as is required by our particular political era, but also bonafide attractive to every American of every tax bracket.

From a supply side perspective, the tax code as presently constituted is problematic because of the marginal cost of going from one tax bracket to another. To put some imaginary numbers out, if you know that it will cost you $1,000 to go from $2,000 of income to $3,000, then you will not be very motivated to put out the effort required to get that increase.

So all conservatives since Reagan have focused on reducing the number of tax brackets, to decrease the disincentives across the income scales. I suggest, however, the solution is to go in reverse: increase the number of tax brackets and make the tax rates only incrementally larger over each bracket. That way, the movement up the income scales becomes less onerous.

For instance, here is the result of a tax system that increases the tax rate over each $1,000 of additional income after an individual exemption of $25,000.00:

Income:	26,000	27,000	28,000	29,000	30,000	31,000	32,000	33,000	34,000
Taxes:	250	500	750	1,000	1,250	1,500	1,750	2,000	2,250
Rate:	0.96%	1.85%	2.68%	3.45%	4.17%	4.84%	5.47%	6.06%	6.62%

See how that works? This progressive rise in the tax rates would continue until $2,000,000 of income, when the $25,000 exemption would phase out. As per the policy behind the Alternative Minimum Tax, anybody with income above $2,000,000 would be taxed at a 25% rate with no deductions or exemptions.

Politically, I like the clear progressivity of it all, the simplicity, and the tax relief it affords the average - and below average - person.  And by the way, it will produce the same tax revenues we currently receive, and that's using the standard Washington static analysis of the effects of tax rates. You, me, and everybody with any common sense know that tax revenues will increase under a properly constructed system.

But what, you ask, about my children; don't I deserve a tax credit for each of them? Presto! you've got a $25,000 exemption for your first dollars of income.  

Okay, but how about two earner families?  Well, under the old system, for numerous reasons, it seemed like every political season there was a debate about some sort of marriage penalty/benefit problems. Under this system, if your spouse makes less than $25,000 - Poof! she/he pays nothing under this system. It's free cash for you and your family.

So wudda ya think? Should we get Romney to install an Income Tax Czar on January 20th and get this thing going?