Why Do We Still Have Tax Brackets?

It must be the warm summer that has made me wonder about silly things like: why do we still have these tables of brackets that determine how much income tax we’re supposed to pay?

I can understand there was a time, many decades ago, that the government wanted to keep things simple so each person could easily determine the tax rate that would apply.  And I know that the continued use of tax brackets is not the biggest problem around,  However, tax brackets are just another symptom of government’s failure to see the widespread deployment of technology in the general public and its failure to use basic technology for simple improvements that are appropriate in this century.

There are some problems that brackets cause.   Politicians, like Steve Forbes and Rick Perry, who advocate a single flat tax rate often start with the argument that their approach would be so simple people could just send in a postcard.  Putting aside the merits or demerits of a flat tax, there is, of course, something really backward about telling people to use a postcard.  From 2000 to 2010, postcard usage dropped by half, an even greater drop than in first class envelope mail.

There are also those who observe people trying to game the system by adjusting their income so they don’t get into a higher bracket.  Those who argue for lower taxes in the higher brackets implicitly say that people will work less if it means an obvious jump in tax rates by shifting into a higher bracket.  Similarly, US News published a story earlier this year on “How to Avoid a High Tax Bracket in Retirement”.

With the current set of progressive tax rates, your percentage of tax goes up as your income goes up.  There is nothing in today’s world that requires the use of brackets in a progressive tax system.  Indeed, a system based on a formula instead would eliminate the negative impacts of bracket-avoiding behavior that critics of progressive taxation point to.

There are a few possible formulas that might work.  The most complex would be a logarithmic or exponential curve, which is nevertheless easily computed by a computer.  If you want to make it even simpler, another formula would set the percentage tax rate as a percentage of income.  (Remember school math?  TaxRate = m * Income where m is some small fraction.)

No matter the formula, computers can handle it.  The IRS could make a formula available on line or over the phone – just enter your taxable income and it will tell you what you owe.  It can be built into the calculator function of cell phones.  We no longer have to assume we live a world limited to paper-based tables.

While we’re at the effort to bring government into the modern technological era, why do we still have fixed budgets?  This budget reform from the 1920s was also developed in a world that did not have the ability to dynamically make calculations.  So every year, government officials make their best guess on the condition of the economy, the demand from an unknown number of potentially needy citizens and other factors that determine the ebb and flow of public finances.  Since the budget process is lengthy, they make this guess well ahead of time so they could be trying to predict the future more than 18 months ahead of time.

A rolling budget would work better by automatically adjusting each month to the flow of revenue and the demands on government programs – and all you need is a big spreadsheet on a not-so-big computer.  However, the budget makers would have to decide what their priorities are.  For example, for every percentage of unemployment, we need to put aside $X billion dollars for unemployment insurance payments.  It would take work to do this for each of the promises the government makes – although maybe not as much work as trying to guess the future.  

(Of course, the real obstacle to a rolling budget model is that policy makers would be forced to make more explicit their priorities.)

I could go on, but you get the idea.  It’s about time that government not only buys technology (which it does, sometimes, in large volumes), but also brings that technology into its thinking.

© 2012 Norman Jacknis


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