Couldn't agree more. We need tax reform, not software. The returns should be file automatically, if we disagree we can fill out paperwork with what we should be getting.
Roughly 7% of the US population is self-employed (a little over 10 million people).
It's not clear to me what "the returns should be file[d] automatically" means for this group of people.
In addition, there are many non-employment based events in the US tax code that change your tax liability. Last year I received a roughly US$3k tax credit because I installed a 6.6kW solar PV array on my house. There are dozens or even hundreds of cases like this in the US tax code.
> It's not clear to me what "the returns should be file[d] automatically" means for [the self-employed].
The employer files the income forms and handles withholding. If you're self-employed, that means you are responsible for that part. And of course anyone with more complex taxes (e.g. non-W2 income) would still need to file, though they could start with the pre-filled forms.
> Last year I received a roughly US$3k tax credit because I installed a 6.6kW solar PV array on my house. There are dozens or even hundreds of cases like this in the US tax code.
Yes, and all those special cases should be removed as part of the reform. If they want to hand out money as an incentive for installing a PV system (for example) then they should make that a separate application and payment, since this has nothing to do with collecting taxes. For business income you can subtract legitimate business expenses (since this is about income, not gross revenues), for capital gains you obviously subtract the cost basis, and for personal income you subtract the official poverty level for your household. (If there are multiple filers for one household then they split the deduction.) If the sum is less than zero then you simply pay no taxes—there are no refunds. That's it. No special surtaxes or exclusions. Apply a flat percentage to the total and you're done.
I agree absolutely [0]. This would fundamentally upend American policy making, but that's OK. Our elected representatives would have to decide to actively people money for doing things they want to promote rather, which would improve the transparency of legislative goal setting.
[0] I don't agree about the flat percentage. The USA has had a progressive tax structure in various ways since its founding, and given the concept of marginal utility, I stronly believe that this is the right way to tax income.
> The USA has had a progressive tax structure in various ways since its founding…
The system I described is still modestly "progressive" in the sense that those with more earnings pay a larger percentage than those with less, due to subtracting the poverty level. (Up to the poverty level, nothing is taxed; at 2X the poverty level, only half your total earnings are taxed; etc.) It starts at 0% and asymptotically approaches the flat rate as earnings increase. To be sure, it's not quite so heavily biased as the current tax tables, but then we also have this principle that the law is supposed to apply equally to everyone and not discriminate on the basis of wealth or status, in either direction. The current political environment targeting a small number of individuals for special taxes or punitive rates based on either their income or wealth practically amounts to a bill of attainder–which would obviously be unconstitutional, and for good reason.
The concept of marginal utility says that taking different amounts from people with different levels of income/wealth is treating them the same.
To a person who earns $10k/yr, $1k is huge (whether it is extra income or owed tax). To a person who earns $1M/yr, $1k is basically pocket change. The utility of that marginal $1k varies for them both. Ergo, to treat them equally, we tax them differently.
> The concept of marginal utility says that taking different amounts from people with different levels of income/wealth is treating them the same.
Marginal utility says that—most of the time–the utility of one more of an item to the owner is less than or equal to the utility of each item they already possess. (The exception would be where you need multiple items to do anything useful, but this is generally treated as a different kind of good rather than another of the same.) The concept of marginal utility says nothing about the relative utility of the same amount of money to different people. Utility is subjective, and there is no coherent concept of utility which applies across multiple individuals. It makes zero sense to say that some set amount of money is worth objectively more or less to different individuals based solely on how much they already own, much less on their earnings for a single year.
> To a person who earns $[X]/yr…
And here we have another issue: the assumption that earning some amount in one year—which is all the tax rules consider—is equivalent to earning that amount every year. Receiving ten years worth of income as a lump sum of $1M up front vs. $100k each year should not affect your tax rate, but in practice it does, which has various perverse implications. The law is biased in favor of regular, even income (W-2s), and against situations where you may earn a lot in one year and very little in others (e.g. running a small business).
> It makes zero sense to say that some set amount of money is worth objectively more or less ...
I think this is nonsense. We can't put a precise worth on it for different people, sure. But I think it's indisputable that there's a curve, we know it's rough shape, and that it's a reflection of marginal utility. The lack of labels or positions on the axes doesn't make that graph useless.
> The concept of marginal utility says nothing about the relative utility of the same amount of money to different people.
>The linchpin of The Uneasy Case is its rejection of the principle that income has diminishing marginal utility.' Diminishing marginal utility of income (DMUI) means that the greater a taxpayer's income, the less an additional dollar of income is worth to him. If DMUI holds, the government exacts a lesser sacrifice from a higher-income taxpayer, with each dollar taxed, than from a lower-income taxpayer. Moreover, any redistribution of income from a higher-income tax- payer to a lower-income taxpayer tends to increase aggregate welfare: The lower-income taxpayer derives greater utility from each dollar gained than 4 the higher-income taxpayer derives from each dollar surrendered.
Now, to be fair, there are arguments against the DMUI case for progressive taxation. For example, here's Donald Boudreaux writing for the American Institute of Economic Research:
The fact that it's a terrible argument doesn't diminish the fact that it clearly recognizes that there is a case to be made for progressive taxation based on DMUI.
The key point here seems to be that even though DMUI is true, we don't know the actual numbers, and thus we should not act on it.
As for your remarks about $1M in 1yr vs $100k for 10yrs ... well, sure the tax code is necessarily imperfect. Optimize it for people with one income patterns and you've made it worse for people with a different income pattern. Such is life ... perfection is not an option here.
> We can't put a precise worth on it for different people, sure. But I think it's indisputable that there's a curve, we know it's rough shape, and that it's a reflection of marginal utility.
There is indeed a curve, and we do know its rough shape (it's nonincreasing). But that curve is for one individual. Utility is not an objective measure. Every individual has their own "unit" of utility and there is no conversion factor which would allow utility to be summed or compared across multiple individuals.
This is heresy to utilitarians, to be sure. How are you supposed to implement policies which ensure the greatest benefit for the greatest number if you can't calculate a collective utility score? That doesn't bother me, though, since I'm not a utilitarian. So far as I'm concerned the utilitarians are just implementing policies based on their own preferences and ignoring what anyone else actually wants.
> Diminishing marginal utility of income (DMUI) means that the greater a taxpayer's income, the less an additional dollar of income is worth to him.
This is a fairly standard description of the concept of marginal utility, aside from the fact that it's confusing income and wealth. (The greater one's wealth the less each additional dollar is worth. Income is irrelevant except as a poor proxy for wealth.)
Note that it only talks about one person. As I acquire more wealth I'm less and less willing to put in the same effort / pay the same cost to acquire each additional dollar. No issues there, this is not particularly controversial.
> If DMUI holds, the government exacts a lesser sacrifice from a higher-income taxpayer, with each dollar taxed, than from a lower-income taxpayer.
And here they make an extraordinary leap from talking about one individual's marginal utility to comparing the "sacrifice" (lost utility) of multiple individuals. They're making the assumption that all individuals have exactly the same utility scale, which is manifestly false. Everyone has their own utility scale, which varies over time and is in general unknowable, even to them, except as it is partially revealed through their actions. It can readily be observed, however, that a dollar of additional income does not have the same utility to two different people with the same wealth: For any given level of wealth, some pursue higher-paying work while others don't consider it worth the effort. Taking some amount of money from the first group represents a larger sacrifice than taking the same amount from the second group, even though their wealth is the same. Since you can't even say that equal wealth results in equal marginal utility, how can you claim that lower or higher wealth (much less income) necessarily implies higher or lower marginal utility? There is absolutely no reason why one person with $1M cannot get the same marginal utility out of an additional dollar—by whatever objective measure you care to name—as someone else with a net worth of $10k.
> … well, sure the tax code is necessarily imperfect.
I'm not asking for perfection. I'm just asking that the law, which is supposed to be just, not discriminate against people based on irrelevant factors such as annual income. The fact that a progressive tax system based on annual income imposes different levels of taxation on two people with the same earnings merely because one received their pay in a lump sum while the other received it in installments is a strong hint that the system is based on unsound principles.
You're continuing to make out that DMUI is some novel concept that I've just introduced.
This is a standard, widespread concept in economics, even among people who disagree that it should be the basis of the tax code. I am unable to find any mainstream or heterodox economist who disagrees that DMUI is real. The disagreements are about what the implications for taxation (among other things) ought to be.
> I am unable to find any mainstream or heterodox economist who disagrees that DMUI is real.
I agree that DMUI is real. As I've said multiple times. But in attempting to use it as a basis to argue that there is a net increase in value or utility from taking some amount of money from a wealthier individual and giving it to another, less wealthy individual, it's being misapplied.
Attempting to aggregate a subjective, ordinal concept like utility across a group of individuals is, unfortunately, not novel either, but it is incoherent. You're not going to find any political (i.e. mainstream) economists admitting to that, of course, because it undermines the logical basis for their entire profession. However, even mainstream economics these days acknowledges that value is subjective, and the fact that it depends on aggregating metrics which cannot be quantified objectively is a common objection to utilitarian philosophy.
The idea that marginal utility is specific to the individual is hardly novel either. As Herbert Davenport put it in The Economics of Enterprise[0] back in 1913:
> As the human being changes, the utility changes — may become greater or may disappear entirely. [p. 87]
> All utility is relative to the individual. — The foregoing discussion should, by implication, have made it clear that utility and marginal utility and relative marginal utility have to do solely with the particular individual as an account of the way in which he arrives at his purely personal and individual decision to become a purchaser at not more than a particular price — to enter his own demand as one among the great total of demands. Strictly speaking, there is no such thing as the comparison of the utility to one person with the utility to another. Men differ in desires and in the degree and manner in which things appeal or appear to offer service. [p. 97]
Or as Ludwig von Mises explained in The Theory of Money and Credit (1953) on the subject of "Total Value"[1]:
> Value can rightly be spoken of only with regard to specific acts of appraisal. It exists in such connexions only; there is no value outside the process of valuation. There is no such thing as abstract value. Total value can be spoken of only with reference to a particular instance of an individual or other valuing ‘subject’ having to choose between the total available quantities of certain economic goods.
