What I object to the most is the intrusiveness of the IRS. Every single financial transaction one makes nowadays is tracked and recorded. If we could even collect the same amount of taxes without this tracking I would prefer that. Which is why I was in favor the Fairtax years ago. It is a consumption-based tax instead of an income-based tax. It is still intrusive in the sense that companies now are the tax collectors instead of the IRS; but they already are in order to collect state sales taxes (even across states now). Which is still better than every single resident. See https://reason.com/2023/01/13/whatever-the-fate-of-the-fair-tax-act-congress-should-still-abolish-the-irs/

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Collecting any kind of tax will intrude to some extent because enforcement requires information. (The only other approach I can see to funding the government is through voluntary contributions, which doesn't seem like something we could depend on!)

More complicated taxes tend to intrude more, so tax simplification should be a goal for that reason, in addition to what I wrote about.

Consumption-based taxes have big disadvantages:

1. Wealthy people generally spend a very small percentage of what they earn, while poor and mid-income people spend a large percentage of what they earn. So, consumption-based taxes lower income people at much higher rates than they tax higher income people.

2. For better or worse, consumer spending drives a large part of our economy. It is a bad idea (economically) to discourage consumption by taxing it at high rates.

Personally, I am WAY more concerned about how much information companies have about me and my buying habits than I am about the IRS. Unless one decides to completely avoid electronic payments means, companies know everything you do. The information about your spending habits is sold to other companies. There's almost no control.

I disagree with most of the statements made in the Reason article you cite. Yes, I'm willing to believe that there have been over history a small number of abuses for political purposes, I'm much more concerned about other issues with the IRS:

1. Lack of enforcement against wealthy people's tax evasion. A big reason for this has been the large budget cuts to the IRS over the last two decades. Wealthy people play complicated games to evade taxes and hire high-priced lawyers to help them. The IRS can't "compete" without adequate budget. See https://www.cbpp.org/research/federal-tax/depletion-of-irs-enforcement-is-undermining-the-tax-code for info on the decline of enforcement against wealthy tax evaders as funding has been cut.

2. On the other hand, the Reason's purported "primarily hassling low-income taxpayers" doesn't make sense. Low-income taxpayers have simple situations: they earn money from their employer, who withholds taxes. Other than such people taking cash payments "under the table" there's just not much to enforce. This is just an argument that anti-tax folks use as a way to reduce IRS funding so that the IRS remains impotent against wealthy people.

3. Lousy customer service for most taxpayers. Again, part of this is because of budget cuts. Part of it is probably due to antiquated technology.

4. Failure to provide free electronic tax filing for most taxpayers. This is primarily due to Congress keeping the IRS out of this game at the behest of lobbyist for paid tax preparation services and anti-tax outfits. See https://www.politico.com/agenda/story/2018/07/18/tax-filing-congress-irs-000683/.

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I teach the tax rules regarding real estate and income and capital gains tax. Even this little section of tax law is confusing for my students who, I believe, represent mainstream Americans in terms of their general education and math abilities.

. The one area of real estate tax law that has changed significantly in the last few years is the limit on deductions for mortgage interest and state and local taxes. The decrease in deductibility of these items presumably hurt those Americans who are borrowing large sums to buy/build their first homes. I believe that this change was targeted to hurt wealthier Americans who live in high-cost areas (New York, California, urban areas such as Chicago, etc.) that tend to lean toward voting Democratic rather than Republican. Am I wrong?

The idea of the flat tax is very appealing to me! Thanks for the overwhelming and astounding research, Lee.

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Thanks; and, you’re welcome!

There was a lot of discussion at the time that the TCJA was passed that the limitations on deductibility of SALT (state and local taxes) was aimed at “punishing” Democratic-leaning areas of the country. I never heard that stated by proponents of TCJA so can’t confirm that as the actual rationale. Some other possible rationales could be:

- Use the extra revenue to fund more-broadly-based tax cuts. This might be a good rationale if it was what was actually done, but the tax cuts in TCJA went primarily to the highest earners.

- The SALT deduction limitations could have been intended to force states to lower their spending, which would appeal to small-government advocates. Again, this is inconsistent with what was actually done because TCJA increased government spending and dramatically increased the federal deficit by delivering large tax cuts without lowering spending.

Bottom line is that I can’t answer your direct question. But the fact that other sensible rationales are wrong lends some credence to your thinking.

That said, let’s look at the the three major personal real estate tax breaks in effect after TCJA: mortgage interest deduction for owner-occupied residences (TCJA limited to $750K of mortgage), state and local tax deduction (TCJA limited to $10K), and exclusion of capital gains on sale of principle residence.

In 2019 (so, post TCJA), these resulted in tax expenditures of $28B, $22B, and $35B, respectively. So, we gave tax breaks totaling $63B to homeowners and another $22B to people who paid some combination of property and state/local income taxes. Eighty-four percent of the benefit of the mortgage interest deduction went to people in the highest 80% of income and 78% of the benefit of the state/local tax deduction went to people in the highest 80% of income. The benefit of the exclusion of capital gains on sale of principal residences was a bit more broadly distributed, with 44% going to the top 80% and 26% to the 60-79% income group.

These tax breaks help primarily the highest earners, so are part of what makes the tax system less progressive. We’ve chosen to spend more than $63B on directly helping high earners with housing. In comparison, we spent $51B in 2019 on directly helping low-income people with housing. It is not clear why it is good policy to spend more on helping high earners with housing than helping low earners.

More generally, most income tax deductions help high earners much more than low earners. For that reason, I would prefer that we totally eliminate the SALT deduction rather than remove or lift the limits that TCJA imposed. The question is if we do that, will the additional tax revenues go to other tax cuts for the wealthy, or to lower overall tax rates, or to reduce the deficit, or to what?

Data sources:

- Direct housing support for low-income people: https://www.urban.org/policy-centers/cross-center-initiatives/state-and-local-finance-initiative/state-and-local-backgrounders/housing-and-community-development-expenditures

- Tax expenditures: https://www.cbo.gov/publication/57585

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This is a great history of the income tax system evolution. In the 1961-2 college year I took a year of economics. The professor was very good on the math of markets, money supply and the value of a progressive tax system. It was more fair because high earners were making more use of public economic infrastructure, leveled after tax income and was an automatic counter recession lever. I remember how good our economy seemed to be. In fact it was.

Probably only 1% of voters have followed and understood what has been happening. Another few percent think they understand, but don’t. Be assured the top %0.01 of earners understand and they have %90 on the influence on congress, through our unlimited anonymous, campaign finance laws that do not call them out and embarrass them. Every member of congress is in the 1% that understand, and don’t complain.

A good place to start wound be campaign finance reform. However, these same people control congress.

I would want total transparency on who gives and how much and how spent. The system where senators and congress members become instant millionaires, upon retirement, because the personally get all unspent campaign funds needs to end.

We should go back to a meaningful presidential check off campaign fund. Monet left over from retiring politicians should go into the fund, not their pocket.

We have not even talked about how scaring the middle class with the words “death tax” that the inheritance tax is effectively gone, as well as capital gains on assets going to those in a will. Billionaires will have trust fund generations that never need to work forever.

The framers, in the Federalist, were in great fear of either a new aristocracy forming, or a take over by the mob. They lived in a period of competitively flat income distribution. Most people were farmers or artisans making similar income and accumulated wealth. They would not have dreamed of a super wealthy aristocracy manipulating the mob, becoming the new aristocracy, to get us to where we are. This is not the top 1% who are two professionals house holds, making less than a Million a year. The aristocracy are the people who write $200,000 checks casually many times per year on political causes and country club memberships. Yearly income from working or a trust fund of $10M and up.

They have firm control of tens of millions of duped voters and most of congress.

I am not optimistic.

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Thanks Bill. The changes in our economics in the last 50 or so years are shocking. Our tax system, our deregulatory zeal, suppression of labor, capture of our political system by big money, and control of the media by corporations and wealthy individuals have all helped to create a large underclass of people who are barely scraping by, a shrinking middle class, and growing upper class, and a small number of people holding unimaginable wealth. This development has to be reversed or our democracy will fail.

Regarding relative income equality at the founding, and how quickly that changed, I found this article useful: https://www.theatlantic.com/business/archive/2016/04/does-income-inequality-really-violate-us-principles/479577/.

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