Iraq gets what America lacks - a fair tax system
By executive order of Coalition Provisional Authority Order Number 27, Iraqis now enjoy a fairer income-tax system than the American troops who occupy the country.

"The highest individual and corporate income tax rates for 2004 and subsequent years shall not exceed 15 percent," [L. Paul Bremer, the U.S. administrator] wrote in Coalition Provisional Authority Order Number 37, "Tax Strategy for 2003," issued last month.

The tax rate takes effect in January.

Update: Despite pushes by several prominent politicians and organizations in America to establish a flat-tax system here, the idea has hardly got off the ground. The article cited blames both parties for being to wedded to the home-mortgage deductions and the deductions for charitable contributions.

Obviously, I have a vested interest in the latter myself, since contributions to churches are deductible. But dadgummit, "flat-rate" means flat rate. If the system is ever implemented here (fat chance, I know) then its only hope to survive is to have no exceptions.

That means that both mortgage and charitable deductions have to go. Actually, I have little reason to be very sorry to see the charitable deduction go. After all, the average rate of giving to churches by Americans is very low, about 2-3 percent at best in oldline churches, maybe a little higher (but only a little) in evangelical ones. It frankly begs credulity that an income-tax deductions is driving such giving. (In fact, it begs credulity that anything is driving such a giving rate, but that’s a topic for another rant.)

So: the charitable-giving deduction? Away with it.

As for the mortgage-interest deduction, that needs to go too, and I own my home and benefit from it. The main objection to its elimination is that home values would plummet if the deduction is removed.

But what that really says is that the presumed tax savings are really ephemeral because the deduction is inflating home prices. So you have to pay more than the home is worth because of the deduction. That means that the deduction is skewing prices and hiding the true value of homes, and that alone is sufficient reason to eliminate it, IMO.

However, various studies (link, link, link, for example) show that eliminating the interest deduction would have very little effect on home values, and the effect would be temporary. Most taxpayers are not in the highest tax brackets, so their deductions are relatively modest.

Moreover, normal swings in the housing market are likely to swamp the effects of tax code changes. ... when marginal tax rates were decreased in the early and mid-1980s, reducing the benefit of the mortgage interest deduction, housing prices actually rose.

Moreover, a flat tax is inherently progressive. Every plan seriously proposed by figures such as Richard Armey and Phil Gramm sets an income floor below which no tax is collected. The floor varies from plan to plan, but let’s use $20,000 for simplicity’s sake.

A person earning $30,000 pays tax only on the amount above the $20,000 floor, or only on $10,000. Another way of looking at it is this: He pays tax on only one-third of his income.

A person earning $100,000 pays tax on $80,000, or four-fifths of his income. Earn $200,000 and you’ll be taxed on 9/10 of your income.

But your marginal rate never rises. There is no disincentive - no punishment - for earning more money.

by Donald Sensing, 11/2/2003 07:49:18 PM. Permalink |