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Saturday, December 29, 2012

Eliminating deductions and the perils of voting

Rasmussen research reports 54% favor a specific proposal:

54% Favor 20% Cap on Income Tax If Deductions Are Ended

Friday, December 28, 2012

Most voters favor making the first $20,000 someone earns tax free and taxing income greater than $100,000 at a 20% rate in exchange for eliminating all their personal deductions.

A new Rasmussen Reports national telephone survey finds that 68% of Likely U.S. Voters support a proposal that would make the first $20,000 of income earned by anyone tax free. Just 19% are opposed, while 13% more are not sure. (To see survey question wording, click here.)

This is a noble try to figure out what people want / will accept / will tolerate. But it also illustrates some of the difficulties here.  It is hard to figure out whether such a proposal would be good or bad for the respondent. It’s hard for the respondent to figure out what the side effects would be.  [Note it would take a while for economists to try to estimate this.  One thing for sure: the real estate industry would be aghast at eliminating the mortgage interest deduction!]

Following MRA guidelines, Rasmussen provides an easy link to the question wording.  I’m going to microanalyze it below, NOT because I think I’m perfect and they aren’t, but just to bring out a couple of points.

Questions analyzed

First of all, the questions start out by saying these are all simplification proposals. Everybody who’s ever filed the long form is in favor of simplification of the filing process.

1* A proposal has been made to throw out the existing federal income tax code and replace it with a simpler system that has fewer deductions and lower tax rates. Thinking of all the issues facing the nation today, how important is it to replace the existing federal income tax code with something simpler?

So, we’re primed to like all the proposals which are “simpler”.

Next, we have two questions which imply that most of the respondents in the survey would have their taxes either unchanged or lowered. Question 3 has somebody else – somebody else richer – paying. As for question 4, really, at $20,000 now you are paying little income tax – maybe getting Earned Income credit. 

3* A proposal has been made that would reduce the personal income tax deductions for people who make more than $250,000 a year. Personal deductions would be completely eliminated for those who earn more than $400,000 a year. Would you favor or oppose this proposal?

4* A proposal has been made that would make the first $20,000 of income earned by anyone tax free. Would you favor or oppose this proposal?

So now with this positive setup, we have the relevant question:

5* A proposal has been made that would eliminate all tax deductions for upper income Americans and let everyone earn up to $20,000 a year tax free. After that, everyone would pay 10% in taxes on their first $50,000 in taxable income, 15% on income between $50,000 and $100,000, and 20% on all income over $100,000. If it raised the same amount of money as the current tax code, would you favor or oppose this proposal?

Within the confines of an understandable question, there’s only so much detail you can give, and there’s already a lot of detail in this question.  But note that tax deductions would be eliminated for all “upper income Americans”.  This always means people who are making more money than you!

So it’s likely that the respondents are looking at deductions being eliminated for other, richer people who can afford it.

Next, although it clearly says “all deductions”, I’ve found the curious idea in conversation with others that the mortgage interest deduction somehow isn’t seen as a deduction.  Personally, I favor eliminating the mortgage interest deduction because I think it distorts the housing market (making housing overall more expensive, and encouraging debt at a young age).  But maybe, just maybe, it’s because our own mortgage is paid off. Winking smile

9-9-9? Nein!

The worst example of this sort of confusion was the popularity of Herman Cain and his 9-9-9 plan – basically a plan to tax the rich less and the poor more, but definitely simpler.

So what’s the answer?

Yes, the answer probably is a simpler tax code with fewer preferences – to make it easier for people to file their own taxes (saving them money) and most importantly to enhance the perception of fairness in the system, for some definition of fairness.

If you don’t even understand the system, it’s hard to regard it as fair, by any definition.

Economists and politicians need to figure it out, and then sell it to citizens.  Polling is going to be extraordinarily difficult to do validly.