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Reforming Tax Policy - Again

10/24/07 7:55AM By Dick Mallary
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(HOST) There's a renewed debate about Vermont's tax policies, and it's reminded commentator Dick Mallary of just how complicated the subject of taxes can be.   

(MALLARY) Beware, the tax reformers are at it again in Vermont.  They are trying to raise more money for more spending on schools.  And they want to do it without increasing the burden on those that they have determined are not able to afford more taxes.

Tax policy is an endlessly fascinating subject, but one that is widely misunderstood.

There are several principles that must underlie any sound tax policy.  One of the most important is equity or fairness.

A tax must be fair to all and, ideally, it should be perceived as fair. To most people, a fair tax is a tax that is closely related to a person's ability or capacity to pay it.

Few disagree with this principle, but vast unfairness is caused by the way we define ability to pay.

A major fallacy in the thinking of many an amateur tax reformer is the belief that a person's ability to pay taxes is accurately measured by that person's taxable income, as calculated under the Federal Internal Revenue Code.

This is patently false.  The code considers only certain kinds of income, disregards others, permits deductions of politically favored expenditures and does not consider at all that portion of a person's wealth that does not produce monetary income.  

Let me cite a few examples:

The person whose employer pays for his and his family's health insurance need not consider its value as income for tax purposes.  Yet, the person who buys his own insurance must do it with after-tax dollars.

The person who owns a home receives implicit income in the form of the rental value of the home, but he need not consider it as income for tax purposes.  And, he can deduct his property taxes in determining his taxable income.  Conversely, a renter must pay his rent with after-tax dollars with no deduction.

The person who has inherited or accumulated funds and invested them in municipal bonds need not include any of the interest received as income for tax purposes.

The person with substantial assets in stocks or property need not consider the increase in the value of those assets as income until or unless they are sold.

And the examples go on and on.

The progressive income tax as it is now crafted at the Federal and state levels is a very fair and useful tax as a part - but only as a part  - of a balanced tax system.  Excessive reliance on it, however - and Vermont may well be there already - leads to greater unfairness, as well as making the state economically uncompetitive.

A tax system that is designed to require a fair contribution to the costs of government and government services should properly rely significantly, but only partially on an efficient income tax.  It must also achieve balance by imposing commensurate taxes on consumption and property.

Dick Mallary has served extensively in state government and is a former U-S congressman from Vermont.
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