Los Angeles. -- Simplifying the tax code is desirable for lots of reasons, but one of the most important is that it would help to disabuse politicians of the idea that your money is really their money.
Labor Secretary Robert Reich evidently holds to this notion. Last month, while inveighing against tax breaks for business, he called them "corporate welfare."
Whatever you may think of the corporate income tax, or the multitude of provisions which lighten its burden (and I wouldn't have much good to say for either), it is not any kind of "welfare" when a taxpayer is permitted to keep more of the money he, she or it has earned.
People of the Reichian persuasion tend to call the tax breaks built into the individual income-tax code "tax expenditures." That's like saying the government is entitled to your income, but, if it graciously allows you to keep a bit, you should be humbly grateful that it has decided to pay you your own money.
How much money? In 1992, about $400 billion more would have been collected in federal income taxes if every dollar of income were taxed. Nearly half of that amount is accounted for by personal exemptions and standard deductions -- everybody gets those, just for existing. The rest is the social-engineering half, which reserves tax breaks for certain kinds of behavior. Among the largest are:
* $79 billion in deductions for pension contributions and earnings;
* $63 billion for employer-paid health insurance that's not included in income;
* $43 billion in deductions for mortgage interest;
* $36 billion in deductions for state and local taxes;
* $24 billion for exempt Social Security benefits;
* $17 billion in deductions for charitable contributions.
There are arguments for and against all of these things, taken one at a time. But looked at as a whole,the system doesn't make sense. It creates a vast number of winners and losers who waste their time and energy worrying more about the tax consequences of their actions than about whether what they're planning makes economic sense.
And if you worry about the social justice of the tax code, you should realize that the winners are generally a lot more affluent than the losers.
Take the mortgage-interest deduction, for instance. Almost 99 percent of that $49 billion goes to families earning more than $20,000 a year -- that is, in the top half of the income distribution. Families who rent, obviously, get no benefit at all, and neither do families who own a home but don't itemize deductions. The benefits increase as families claim more deductions, as their income goes up and as they buy bigger houses with bigger mortgages. Where's the justice in that?
Things aren't as bad as they used to be. When the top marginal tax rate was 91 percent, millionaires were paying off their mansions at a dime on the dollar while poor families struggled to pay rent. But it's still a very regressive part of the tax code, and there's no defense for it except that voters would scream bloody murder if it were taken away.
I'd scream, too, if eliminating the mortgage deduction meant the federal government would get a $49 billion windfall to waste. But if the total amount raised by the income tax stayed the same, with lower overall rates in exchange for fewer tax breaks, that's a trade-off I would willingly make in the interests of a more efficient economy (and a less dreadful tax-preparation season).
Most people would be better off with a simpler system, with few or no deductions -- and the ones who wouldn't could well afford it.
Rep. Richard Armey, R-Texas, has floated a flat-tax proposal, which is gaining a lot more respectful attention now than it did before the Republicans took control of Congress.
His proposal is for a flat tax of 17 percent, but whatever the actual number was, as long as it didn't drain more money from the economy than the current unwieldy system it would be an improvement. Mr. Armey's plan would also establish much larger personal exemptions that would remove well more than half of all families from the income-tax system entirely. (Payroll taxes would continue to be the greatest burden on low-income families.)
It's probably too much to hope that Congress could get from here to there all at once, but it's the right direction to be going.
The flat-tax philosophy assumes that the purpose of a tax is to raise money for things that the government has to do. It has been compared to plucking a goose -- the idea is to extract the maximum in feathers with the minimum of hissing. At 17 percent, or whatever the percentage would have to be, hissing is scarcely worth the trouble.
It's absolutely clear, from the evidence of the last decade, that lower tax rates make the tax system more progressive -- not less. In its November report, the Washington-based Tax Foundation examines Internal Revenue Service data showing that, from 1982 to 1992, the share of income taxes paid by the bottom half of American taxpayers decreased from 7.3 percent to 5.1 percent, while the share paid by the top 1 percent went up, from 19.0 percent to 27.4 percent.
The bottom half paid 4.4 percent of their income in taxes; the top 1 percent, 24.8 percent. Remember that the next time you hear President Clinton talking about the rich not paying their fair share. Just how big a share does he think is "fair"?
Sure, the much maligned "rich" pay more taxes now because they allow themselves to have more income, but why should I mind that, as long as their goosedown is softening my tax bill?
Why should anybody mind that?
Linda Seebach is the Opinions page editor for the Los Angeles Daily News.