In an earlier post I presented an idea for an extremely flat tax. Writing that post reminded me of my opinions about raising taxes on the rich. This topic may be a bit outdated, but my purpose is not to make any relavent political statements. Rather, I’m just sharing a random–randomly old, perhaps–thought. I don’t really keep up with all the latest policy issues out of Washington. I find that the Pacific Ocean makes a great buffer. I can go on with my life without constantly becoming upset by the most recent questionable thing our wise leaders have decided to do.

I understand the point of view that people who have more should pay more in taxes, not just nominally more but a larger percentage of their total wealth or income. In this way the rich can help the poor. But what’s the best way to get a little extra oil from those whales politicians and the media love to demonize?

Why not levy higher taxes upon high income individuals (those earning over $250K a year)? Well, we’ve all heard the over-quoted example of a working married couple, firefighter and teacher, living in New York earning this much. And this is a problem because the firefighter-teacher couple shouldn’t fall into the “rich” category.

So how about raising the capital gains tax? All rich people own some kind of stocks or other investments, so let’s get them that way, right? While it’s true that most rich undoubtedly have investments, so do normal hardworking folk (not to imply that the rich don’t work hard, many have worked extremely hard to amass their fortunes, especially the world’s richest billionaires). Most regular people put their savings or retirement in stocks, bonds, or other investments. Some have these savings in defined contribution plans, others choose to keep them in regular brokerage or other accounts. And so when we raise the capital gains tax, everyone who gets capital gains, including your hardworking grandfather who bought Phillip Morris stock years ago and now has a nice sum of money for his retirement, pays more. Again, as with the higher income taxes, we’re forcing people who aren’t rich to pay extra.

The problem seems to be that we’ve not clearly defined who is and is not rich. When most people think of “rich” they think of someone living in a posh apartment or luxurious mansion, someone driving an imported luxury automobile, someone earning a CEO’s salary. It becomes clear–at least to me–that “rich” means having a lot of money AND a high income (possibly from working, but also possibly from investment returns).

If we want to make the rich pay more taxes, then let’s do just that. Make a special tax for people who have a high net worth AND earn a large income. TWO conditions (not one) qualify you to pay more taxes. This will probably eliminate the firefighter-teacher couple and your hardworking grandfather from the higher taxes. Those who think this is too complicated should note that the current tax code is already infinitely complex. Infinity plus 10,395 is still infinity.

Here’s an idea I’ve been repeatedly presenting to myself ever since Obama first said that we should raise taxes on the rich (over a year ago at this point?). I suppose I’ve become tired of saying it to myself, so I’m writing it here. This is not meant as a criticism of the current administration’s policies, but rather as a criticism of the overall complexity and political nature of our tax system.

Tax season, it’s horrible not only because you potentially pay money to the government, but because you have to labor for hours (or days) figuring out whether or not you have to pay. Getting it done professionally costs money. Doing it yourself costs time. The complexity of the tax code is like an extra tax on the entire country, except the government receives absolutely no revenues. In fact, it’s quite the opposite. The government must employ more people who spend more time performing audits to see if you’ve paid correctly.

Taxes are also very political. Don’t like something the public does? Tax it and people will do it less. Want to help out your friends in a certain industry? Lower their taxes (or make their taxes negative, that’s called a subsidy for those who aren’t economically inclined). Support (don’t support) homosexual marriage? Give them (prevent them from getting) the same tax benefits as heterosexual couples. Don’t like the rich and want to collect more money from them? Raise income taxes in the highest bracket or increase capital gains taxes. I can keep going, but I think everyone gets the picture.

Now, imagine a flat tax. Everyone pays the same percentage of their total earnings–not just salaries but also investment returns, real estate, etc. Let’s take it one step further. Businesses and individuals pay the same percentage of their total earnings. Now we’re going to take this flat tax to the extreme. Taxes (positive and negative) on earnings are the only taxes. That means no subsidies, no new home buyer credit, no tax breaks for married couples…..only taxes on earnings.

Maybe at this point people are thinking that this sounds like a horrible idea. Everyone has to pay more without the tax breaks and subsidies. Society will collapse without the government financially backing the institution of marriage. This isn’t necessarily true.

First, it’s easy to file tax returns under the extreme flat tax. There’s no need to think about capital gains versus income. There’s no reason to try to get yourself into a lower tax bracket. Your tax form is now one page. Second, without all the tax breaks and subsidies, the government should be able to lower the overall tax rate. So you’ll get less tax breaks, but you’ll pay less to begin with. As for marriage, if it’s truly beneficial, people will continue to do it. In essence people can decide for themselves what makes sense for them. Third, there are no politics. Washington can only increase or decrease the tax rate. They can’t target certain areas of the population that deserve to pay more. They can’t decide if homosexual marriage is equal to or worse than heterosexual marriage. On the flip side, no one can complain about getting less benefits than anyone else. Fourth, I think this is the most equitable tax code. Warren Buffett, who previously said that his tax rate is less than his secretary’s rate, now has exactly the same rate.

The government mainly influences (sometimes in a good way) the economy through regulation, taxes, and spending. This idea effectively removes one of their major tools. For this and some other practical reasons the extreme flat tax will never be employed.

For people who are wondering about Social Security and Medicare, these would fall under spending. If the government really wants to support something, they can enact spending programs (paid for by taxes, of course). My point is that tax rates, tax breaks, and subsidies simply indicate complexity and politics.