Tuesday, May 03, 2011

FICA as flat tax

Karl Smith has a clever idea here (and more here): transition (more) toward a flat payroll tax by (1) uncapping the SS tax, (2) raising SS tax rates, and (3) cutting income tax rate. (The Medicare tax has already been uncapped.)

Now begin my criticisms. Smith argues that it's politically expedient to wait for SS taxes to produce a budget surplus before cutting income taxes, but that could result in an indefinitely long interim period of significantly top higher marginal rates. Would this be worth it in the long run? Even if the income tax really did wither away, what's to stop SS rates from being progressivized? For Medicare tax rates, this has has already begun (read the last two sentences of footnote c).

In the near-term, it actually looks more politically feasible to do (1), (2), and (3) simultaneously. For Obama to maintain at least the appearance of no tax increases for those making under 250K, he cannot allow (1) or (2) to happen without compensating income tax reductions (at least for incomes under 250K). The problem with this scheme is that these income tax reductions might get phased out above 250K, resulting in high marginal rates.

This is all rather pie-in-the-sky, but there is an important underlying fact that motivates people to come up with these schemes: the median voter doesn't know calculus. In particular, (s)he doesn't know what d(tax)/d(income) is, nor how d(tax)/d(income) differs from tax/income.

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