The Burden Of So Many Brackets

Yesterday Paul Ryan participated in a "roundtable" in New Albany, Ohio, to discuss the need for tax reform. According to Ryan, one reason we need tax reform is that there are too many brackets, and consequently people "don't know what to pay."

Here is my transcription of the "brackets burden" part of Ryan's remarks:

On the individual ... Families are dealing with a tax code that is extremely complicated. There are seven different brackets. They don't know what to pay at any given time. And the compliance costs are just really taking a lot of time and money away from hard working families, and so we want to clean up the individual side of the tax code. We propose to consolidate down to three brackets...

An alternative title to this post might have been, "When smart people say stupid things." Not, mind you, that I generally acknowledge Ryan is smart. His supporters and much of the media think he is, however, and I will grant that point here, momentarily, for the sake of moving along.

So about those brackets. When is the last time you were befuddled by your tax bracket? Did you know there were so many? Do you know which one you are in? Does the proliferation of tax brackets keep you from "knowing what to pay at any given time?"

No. No. And, of course, no.

When I file my tax return (I use Form 1040), I compute my income, reduced by deductions and exemptions, look up the result in the provided tax table, and — voila! — I'm told what to pay. Your tax preparation service or software accomplishes the same thing. There is not a tax bracket to be found, anywhere, while you are figuring out "what to pay."

I highlight this silly and admittedly trivial example because it demonstrates Paul Ryan performing his usual shtick, in which he plays a smart person but talks nonsense, and nobody seems to notice. There is, alas, a dearth of critical thinking skills in these troubled times. The problem is that Ryan is often clueless regarding subjects in which he claims expertise, including the economy and healthcare. He receives far too much undeserved deference from the media and fellow legislators.

Paul Krugman, a longtime critic, says that Ryan "isn’t actually a serious, honest policy expert, but plays one on TV. He rolls up his sleeves! He uses PowerPoint!" And it's true. In the roundtable video linked above, Ryan delivers his condemnation of too many brackets with his sleeves rolled up. Way back in 2010, Krugman called Ryan The Flimflam Man.

(Aside: Do you ever wonder why writers like me say things like "in the video linked above," sending you off looking for the link when they could just reproduce it where you're at, like here? Sloppy editing. Time-strapped bloggers working solo might be excused, but publications like the New York Times and such, with teams of editors, can't.)

Tax reform, properly done, is a good idea. But do not expect a Republican Congress to do it properly, particularly when the effort is led by Paul Ryan.

As for all those brackets, who cares? A bunch more would do no harm, and might help. For the record, I advocate a highly progressive, bracketless system. In my vision, the brackets are replaced by a tax rate represented by a continuous increasing curve, with each extra marginal penny of income taxed at a minutely higher rate than the previous penny, topping out in the range of 50-70 percent for the gazillionaires. It might require some complicated math to figure out "what to pay," but no worries: There will always be someone, or software, or a tax table, to tell you what you owe.

Note that my shocking headline number represents a marginal rate: Because each subsequent small increment of income is taxed higher than the preceding increment along the tax rate curve, it is also true that each preceding increment is taxed at a lower rate. Thus at each point on the curve income ("at the margin") receives a higher tax rate than what preceded it.

For the very highest income taxpayers, the highest rate applies to all income above a certain very high threshold; below that they're taxed according to the "curve" like everybody else. The top rate is just the point where the tax rate curve stops increasing. Thus gazillionaires wouldn't pay an effective rate of 50-70 percent on all their income, so we're not soaking them as much as you might think. (Another way to think about this is the gazillionaire only pays the same amount of tax as you do on his first increment of income up your income.)  But we need to soak them plenty, and I've got nothing against gazillionaires.

Also note that our current bracketed system likewise operates with marginal rates—something a lot of people fail to appreciate. It's just that in that system the "margin" is precisely specified as being the boundaries between brackets. Anyway, a bracketless system, unlike Ryan's proposal, means no bracket games would be played, which eliminates at least one possible financial distortion in the system. Because the gazillionaire (and everybody else) is taxed only the tiniest bit more on his next penny of income than he was on his last, there is no point where it makes sense for him to quit earning income.

Paul Ryan would find my approach appalling, but if he calls me that is what I'll tell him.

Copyright (C) 2017 James Michael Brennan, All Rights Reserved

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