Tax reform principles

July 12th, 2013 at 12:00 pm by David Farrar

Former Senator Phil Gramm writes on his principles for tax reform.

First, under no circumstances should Republicans agree to make the system even more progressive than it already is, or to increase the number of people who do not pay income taxes. In 1980, the top 1% and 5% of income earners in America paid 19.1% and 36.9% of total federal income taxes. Today, the top 1% and 5% pay 37.4% and 59.1%. Meanwhile, 41.6% of American earners now pay no federal income taxes.

Sounds like NZ.

Second, government should collect the minimum revenues needed to support and protect a free society and do so in a way that is, as far as possible, neutral in its effect on individual behavior. In its purest form, this means no individual deductions, credits or tax expenditures. No matter how committed Americans may be individually to charitable giving or home ownership, the government should not promote those values through special provisions in the tax code.

Agreed.

Third, Republicans should require all similarly structured firms be treated the same. If sweat equity is taxed as a capital gain for a mechanic who opens a garage with a financial partner, it should be treated the same for a hedge fund or private-equity manager who shares in the gains of his investors.

Likewise a capital gains tax should have no exemptions.

Fourth, business subsidies and credits should be eliminated. Ending subsidies to fund lower tax rates improves the efficiency of capital allocation. The sine qua non of tax reform is a more efficient allocation of investment capital. If the tax breaks that create crony capitalism are allowed to survive, then tax reform failed.

Lower tax rates, not special tax rates.

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40 Responses to “Tax reform principles”

  1. MarkF (102 comments) says:

    Great ideals but it ain’t never going to happen! Virtually all of the American tax payers have structured their finances around the morass of the US Tax Code, there would be civil war if they went to change it. I was talking to my nephew, a US Accountant, about flat rate taxes a couple of years ago and he said it would be great idea but for the reason stated above it would never be implemented. Far too many lost votes in that proposal no matter how eloquently the argument was put.

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  2. leftyliberal (651 comments) says:

    “In 1980, the top 1% and 5% of income earners in America paid 19.1% and 36.9% of total federal income taxes. Today, the top 1% and 5% pay 37.4% and 59.1%.”

    So if the rich wish to pay a lower proportion of taxes, shouldn’t they be arguing to return to the 1980 rates (top rate was 70%) :p

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  3. dime (9,980 comments) says:

    “Great ideals but it ain’t never going to happen!”

    Never is a long time. Its one thing the left have over the right – patience. The activists are so bitter and mentally fucked that they beaver away for a lifetime to get their wins. Its sad but also scary.

    Who would have though the yanks would have been dragged so far to the left?

    There is hope though!

    Dimes theory – the selfish fuckers that make up Generation Y wont put up with paying for lazy aholes! Countries will be dragged kicking and screaming back to the right. Not because its the right thing to do or because of ideology. It will be because they are selfish as fuck :)

    Its the Gen X and the preceding that have messed up the place.

    NZ also has the added bonus of Asian immigration – “what you mean round eye? 10% of my money goes to lazy people who no work? fuck that!”

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  4. dime (9,980 comments) says:

    leftyliberal – how exactly are you liberal? you seem stoked that the US govt targets a very small part of the population and takes their money by force.

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  5. peterwn (3,277 comments) says:

    Two things in the NZ context:
    1. Electricity pricing – artificially lowering electricity prices is like subsidising lower tax rates for industry – overinvestment and sub-optimal use of capital.

    2. There are various groups (and the same faces keep popping up) banging on about inequality (rich/poor divide), ‘social justice’, ‘sharing’, ‘decent living wage’, child ‘poverty’ etc, etc. They see the ‘solution’ to these problems as ‘screw the rich-pricks’ type taxation. They would not care less about anything John Key would do, because they want a Labour / Green (ie communist) government. I doubt these groups would be banging on so much if labour / Greens were in power.

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  6. SW (240 comments) says:

    So in essence, because the top 1%-5% of earners earn such a larger proportion of income comparative to the bottom 99%-95% than 30 years ago, a much lower taxation rate equates to a much higher percentage of overall tax intake…

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  7. dime (9,980 comments) says:

    SW – is that a problem?

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  8. Yoza (1,879 comments) says:

    What we really need is a financial transaction tax to replace GST, apparently it is too difficult to claw back GST on a lot of internet purchases – a financial transaction tax would fix that. A capital gains tax would be an excellent way of bringing New Zealand into line with foreign tax regimes and making housing more affordable.

    And I’m with peterwn, ‘screw the rich pricks’ – the inequality in income needs addressing, we need greater social justice, more sharing, decent living wages and an end to child poverty.

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  9. PaulL (5,987 comments) says:

    @Yoza, like the way that houses are affordable in Australia, who have a capital gains tax? Do you actually think before you write this stuff?

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  10. MarkF (102 comments) says:

    Dime
    “Who would have though the yanks would have been dragged so far to the left?”
    The answer is SLOWLY.

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  11. dime (9,980 comments) says:

    Mark – that was my point. never is a long time…

    yoza – LMAO @ child poverty. you are clueless.

    we need greater social justice – WTF is this social justice you speak of? Are we going to force everyone to work? that would be some sweet justice.

    more sharing – lmao sharing? is that what you call it when you take other peoples shit by force? how much have you SHARED this year? outside of standard taxation?

    decent living wages – we have those.

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  12. SW (240 comments) says:

    dime – thats a value judgment isn’t it.

    I know DPF is big fan of arguing it doesn’t matter how the pie is divided – what should be the focus is growing the pie. I can see the attraction of that – does it matter if the top 1% of people have 90% of the pie when the pie has grown so large that 10% of the pie means quite a good life for the remaining 90%?

    But I challenge anyone to argue that that is reality in NZ today. Has the past 30 years shown a relentlessly growing pie that has lifted everybodies standard of living? Or has a bigger proportion of the pie simply been shifted to a smaller proportion of people (for whatever reason)? And like you ask Dime, if so, is that a problem?

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  13. Griff (7,818 comments) says:

    It not a drag to the left its the crony capitalism and distortions in tax and subsidies that their tax system represents.
    Stupid distortions like allowing huge trucks to dominate the personal transport fleet due to industry demanded exemptions from better car fuel economy. This has allowed the car industry to continue making profit form selling utter rubbish dinosaur trucks with little export potential or long term viability. The same with their agriculture they pay subsidies and protect inefficient methods of farming.

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  14. simonway (387 comments) says:

    under no circumstances should Republicans agree to… increase the number of people who do not pay income taxes.

    So Gramm would be opposed to, say, lifting the tax thresholds for the lowest few tax brackets, which would give everyone a tax cut, simply on the basis that poor people would be allowed to keep more of the money that they earn. Typical right-wing politics of spite.

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  15. dime (9,980 comments) says:

    “Typical right-wing politics of spite.”

    lol yeah, thats what the right is known for. spitefully forcing high taxation on people. idiot.

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  16. radvad (767 comments) says:

    “Social justice”

    For anything to be just it must be just for ALL players involved. How is taking resources from those who work and giving it, no strings attached, to those who do nothing, justice for the former? What is worse is there is not even any gratitude for it, only complaining that it is not enough.
    Social justice? bah humbug.

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  17. Paryphanta (9 comments) says:

    Former Senator Phil Gramm is following the Republican practice of deceptively stating that “41.6% of American earners now pay no federal income taxes”. What they deliberately leave out is Social Security Tax (SST). If this is added in, then the statistics change dramatically. SST consists of payments towards Social Security (NZ Super equivalent) and Medicare for those in retirement. The tax applies up to a maximum (different for each purpose) so is a regressive tax as high earners exceed the maximum.

    This means that it affects the progressiveness of the Federal Tax system as well as the distribution.

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  18. Data (22 comments) says:

    Simonway has a good point, raising the tax threshold effectively gives everyone a tax cut. Raising it would result in less people paying tax, but also a tax cut for the remaining taxpayers. Yet Phil Gramm, and presumably Dime, would be opposed to this sort of tax cut. Doesn’t really make sense.

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  19. dc (144 comments) says:

    Phil Gramm, seriously? Lest we forget, his reforms tend to have awful consequences:

    25 People to Blame for the Financial Crisis
    As chairman of the Senate Banking Committee from 1995 through 2000, Gramm was Washington’s most prominent and outspoken champion of financial deregulation. He played a leading role in writing and pushing through Congress the 1999 repeal of the Depression-era Glass-Steagall Act, which separated commercial banks from Wall Street. He also inserted a key provision into the 2000 Commodity Futures Modernization Act that exempted over-the-counter derivatives like credit-default swaps from regulation by the Commodity Futures Trading Commission. Credit-default swaps took down AIG, which has cost the U.S. $150 billion thus far.

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  20. Rick Rowling (813 comments) says:

    on the basis that poor people would be allowed to keep more of the money that they earn

    If you’re poor in New Zealand, you’re not a net tax payer.

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  21. simian (29 comments) says:

    Saying that the top 1% pay 37.4% of the tax doesn’t mean anything! It only matters if they have less than 37.4% of the income’ because if they have more than that of the income then they don’t pay their fair share. For example if they have 50% of the income then they should be paying 50% of the tax . As whenever this stat is mentioned they never state what the income %is i would assume it’s not in their favour

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  22. dime (9,980 comments) says:

    Data – im happy with that sort of tax cut, as long as we scrap welfare for families.

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  23. Data (22 comments) says:

    Dime, government expenditure would certainly have to come down. Working for Families could be one way. After all the threshold increase should leave low income families better off (and high income families better off too, although slightly less so).

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  24. dime (9,980 comments) says:

    simian – Dime earns over 2 hundy. i pay shit loads of tax. too much.

    my outgoings are huge. take today for instance, im pricing up a dac/amp/speakers for my computer room. im looking at about $2500 :D dont even get me started on the swimming pool im putting in.

    seriously though, i dont like paying for losers. half the dudes i went to school with out west didnt work until they were 30+. some of the girls have never worked. but apparently its not FAIR that i have more money than them.

    fuck em!

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  25. KiwiGreg (3,255 comments) says:

    “Simonway has a good point, raising the tax threshold effectively gives everyone a tax cut.”

    No, those below the threshold get nothing. “It’s only tax cuts for the rich!!!*)

    * because they’re the only ones paying tax….

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  26. Data (22 comments) says:

    KiwiGreg, fair point. If you were already below the threshold, then I guess all you get is the satisfaction that the economy is slightly more efficient. If you paid $100 tax a week, however, and the threshold moved passed you, then you would get a $100 tax cut.

    Even if you pay no tax, however, your job is, hopefully, contributing to the economy, including the income of people paying tax and the businesses paying tax.

    It is a bit misleading to imply a worker below the threshold is not contributing to society. The reason a business owner can pay so much in tax is because, in part, of their workers.

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  27. Ryan Sproull (7,205 comments) says:

    For anything to be just it must be just for ALL players involved. How is taking resources from those who work and giving it, no strings attached, to those who do nothing, justice for the former? What is worse is there is not even any gratitude for it, only complaining that it is not enough.

    Are you talking about landlords here? Or children who inherit property or shares from their parents?

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  28. labrator (1,850 comments) says:

    It is a bit misleading to imply a worker below the threshold is not contributing to society. The reason a business owner can pay so much in tax is because, in part, of their workers.

    It’s a bit misleading to imply a machine is not contributing to society. The reason a business owner can pay so much in tax is because, in part, of their machines.

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  29. Data (22 comments) says:

    Yes, machines make a huge contribution to our current standard of living and the economy. I must admit, I find your comment and the underlying attitude towards employees a bit worrying, I really hope you are not an employer.

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  30. Weihana (4,557 comments) says:

    peterwn (2,285) Says:
    July 12th, 2013 at 12:53 pm

    …Labour / Green (ie communist) government….

    Hello planet conservative, this is Earth calling! Have you found reality yet? :)

    Y’know I do remember not that long ago we had a left government. Despite the shrieking of the political right (of which I was a member at the time) I don’t remember the gulags, I don’t remember the mass starvation, and I don’t remember anything resembling North Korea. But that doesn’t stop the perpetually bewildered from using references to imply that 1999-2008 was some sort of Hellish nightmare representing some of the worst types of government the world has seen.

    The hyperbole from the right is so over the top it is tiresome and why increasingly conservatives are viewed as living in some sort of time warp apart from the reality that normal people inhabit.

    To put it simply, it’s like a lefty claiming that living under John Key is like living in a fascist dictatorship: it’s just not even slightly true.

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  31. Fentex (986 comments) says:

    It always sounds good and promising when someone expresses the opinion that there ought be no favouritism and unneeded subsidies in a taxation system, that they support equal treatment and want minimally distorting practices that are efficient and easy to administer contributing to lower rates for all.

    Yet somehow the lower rates on higher earners are always the first thing that is implemented, it’s seldom the unwarranted subsidies that are removed first.

    If Gramm wants people to believe his expressed intentions first he should work to eliminate corporate subsidies and uneven treatment of interests, especially those he has past championed for his donors, then he could proceed to argue for flatter taxation with more credibility than he currently has.

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  32. huckleberryfinsbrother (25 comments) says:

    Capital Gains NZ
    Over the last decade or so the sympathy for a Capital gains tax [CGT] seems to have grown.
    But so often CGT is brought out for an airing without any consideration of the nuts and bolts involved.
    Now this is just my opinion.
    The first thing we can be sure of is that an all encompassing CGT, including all houses, all farms and so on will lead to a dismissal of the offending Government for a decade. And possibly constitutional challenges…
    I would take a hefty bet that when and if CGT does come family homes will be excluded.
    Now if you make something taxable at sale, we need to know what the Gain is , and that means what is the
    starting value. ? Is this Registered valuation.? Lets take say 20 houses all over New Zealand and compare the ratio of selling price to Registered valuation. Its all over the place.

    Also if an asset is taxable as final value, then the owners will take the right to place them in the yearly income expenditure return.
    Trusts and Companies like me will declare losses of $20,000. If you think that’s is silly do your own journal ledger and allow
    expenditure for you maintenance each week.
    Rodney Hide and others have been warning us about this until they are nearly blind in the face.

    And if we really want to, we can go even further we come across the ludicrous Gareth Morgan capital tax, a colossal
    Socialist redistribution tax. Go here to see the madness
    http://garethmorgantax.blogspot.co.nz/
    and here just some private thoughts and an article by Hide
    http://paulscottcapitalgainstaxnz.blogspot.co.nz/

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  33. dime (9,980 comments) says:

    weihana has a point. no lefty ever suggests national is on the far far right.. or are far right extremists etc

    the greens are socialists. the only reason they arent communists is because they dont have the support.

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  34. Weihana (4,557 comments) says:

    Data (21) Says:
    July 12th, 2013 at 3:54 pm

    Yes, machines make a huge contribution to our current standard of living and the economy.

    Machines haven’t even gotten started yet. From driver-less cars, to small-scale manufacturing robots like Baxter, to natural language analytic computers like Watson, your job is going bye-bye sooner or later. The list of things only humans can do is dwindling. The question is: who’s going to own these machines and how are people going to purchase the things they make?

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  35. Ryan Sproull (7,205 comments) says:

    Machines haven’t even gotten started yet. From driver-less cars, to small-scale manufacturing robots like Baxter, to natural language analytic computers like Watson, your job is going bye-bye sooner or later. The list of things only humans can do is dwindling. The question is: who’s going to own these machines and how are people going to purchase the things they make?

    I think it’s a mistake to push this scenario out into the future. It’s already happened, and your question has already been answered.

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  36. Weihana (4,557 comments) says:

    Ryan Sproull (5,695) Says:
    July 12th, 2013 at 5:05 pm

    I think it’s a mistake to push this scenario out into the future. It’s already happened, and your question has already been answered.

    It hasn’t happened. It is a mistake to think all machines are created equal.

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  37. Ryan Sproull (7,205 comments) says:

    It hasn’t happened. It is a mistake to think all machines are created equal.

    It has happened in form, but not to that degree. The scenario you’re describing isn’t as revolutionary as it sounds – it’s an exaggeration of what is already the case.

    Technology makes labour exponentially more effective and valuable, while its outputs are directed by markets that are dominated by those with the money to buy them. Over time, a greater proportion of labour, amplified by technology, is applied to creating luxury goods rather than necessities, because the alternative would be to proportionally reduce the number of hours in the average working week as technology increases.

    ATMs put bank tellers out of business. They weren’t told, “Machines do your job now, so relax or do whatever you like.” They were told, “Machines do your job now: find a new job.”

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  38. Jeff83 (745 comments) says:

    Fifth. if they can’t afford to eat, they sharn’t eat. Providing food stamps distorts the market so that people who deserve to die as they are less productive members of society dont’.

    Do you know the thing that really annoys about the above. The ‘top’ 1% have seen their lot improve beyond their wildest dreams over the last 40 years, so much so they now own 34.6% of the US’s total wealth (up from 19.9% in the 1979). However paying half that percentage as a proportion of the total US tax bill is seen as outrageous.

    If you are going to have a system which allows the centralisation of wealth, you need to have a progressive tax system so that the rest continues to work. However the opposite has occured by federal income taxes being less less progressive.

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  39. Weihana (4,557 comments) says:

    Ryan,

    I agree that people are expected to find alternative work when their jobs become obsolete. However whether they will always be able to find alternatives is another matter entirely.

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  40. BlairM (2,341 comments) says:

    So Gramm would be opposed to, say, lifting the tax thresholds for the lowest few tax brackets, which would give everyone a tax cut, simply on the basis that poor people would be allowed to keep more of the money that they earn. Typical right-wing politics of spite.

    What bullshit. I am a huge advocate of tax free thresholds for income tax, but to lift the threshold in the United States, when it is already very generous, would be madness, at least in terms of balancing the books. It’s not politics of spite, it’s just that it’s already happening, and you don’t need to raise it yet further.

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