mad anthony

Rants, politics, and thoughts on politics, technology, life,
and stuff from a generally politically conservative Baltimoron.

Sunday, January 06, 2008

Hey tax system.. I hate you, don't ever change...

Back when I was in college, I thought that a total reform of the tax system was a great idea. I would read Amnity Shales The Greedy Hand or listen to Steve Forbes and think how much better we would be with a flat tax, without all those crazy deductions that all those special interests have gotten into the tax system.

But now that I have an income that exceeds four figures and a household budget that goes to expenses other than Schaffer Light and plastic handles of vodka, I no longer think that a wholesale reform of our income tax system is a good idea, no matter how unfair our current system is.

That is what makes me nervous about Huckabee's fair tax proposal - you can read good analysis from James Taranto of the Wall Street Journal and The Atlantic's Megan McCardle.

But beyond the specifics of Huck's plan, there are problems with any major change of the tax system, be it the VAT-like fair tax, the Steve Forbes flat tax, or anything else that gets rid of the current structure and starts from the ground up.

Any tax system will reward some people and punish others. The problem with rewriting the tax law is that it arbitrarily punishes groups of people for making decisions that were entirely rational at the time that they were made - decisions like how to invest, to save money, to buy a house.

The idea of getting rid of the mortgage interest deduction is, of course, one that especially hits close to home. You could argue that it's unfair to subsidize homeowners just for buying a house, and the recent volatility in the housing market suggests that maybe the last thing people need is more incentives to buy a house. But the fact is that lots of people made the decision to buy a house based at least partly on the existance of the income tax credit - they included it in their budgets and their rent-vs-buy calculations before they decided to buy a money pit, I mean, buy a house. And I know the fair-tax crowd will argue that it doesn't matter if mad anthony gets his tax rebate, because he'll save so much money under the Fair Tax proposal (which is doubtful, because mad anthony loves buying stuff), but it matters because it will affect housing prices. If you don't get extra money for owning a house, then houses become less valuable, and people (like me) who bought houses suddenly find their biggest asset is worth even less. And a tax proposal that takes a big bite out of the value of houses couldn't come at a worse time in terms of housing prices.

There are a ton of other examples - housing just comes to mind because it's a subject that's always on my mind. The fact is that people make decisions on how they spend and save money based on the rational expectation that the tax code will remain pretty much the same. Markets function best when there is stability, and ripping apart the tax system is the exact opposite of stability. Even if we'd better off under some other tax system in the long run, the short-term effects would be so serious as to make it not worth it.


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