I agree with Mark about converting the estate tax to an inheritance tax. In fact, Mark’s argument is similar to the one made by Mike Graetz and Ian Shapiro in their excellent book, Death by a Thousand Cuts. The advantage of an inheritance tax is that it shifts the framing of the issue from the person who earned the money to the person receiving it. This also puts conservatives in the position of having to defend trust fund babies–Paris Hilton!– rather than virtuous businessmen. By treating money disgorged from estates as ordinary income, this might also have the salutary effect of simplifying the tax system overall, although there may be some important ways that you could game the new system (although so long as the alternative minimum tax stays in place, not many).
Speaking of the AMT, Robert Nelson had an interesting piece in the WaPo on the AMT, basically arguing that it’s not bad tax policy at all, but a stealth flat tax. In effect, the AMT wipes out a great deal of the value of deductions for those in the higher brackets, and with each year that it isn’t changed, more and more middle class people get pulled into the limited-deduction net. Nelson is in favor of the “full Monty” flat tax (that is, a single rate) in addition to having limited or no deductions. (broadening the base). I think almost all the economic advantages of the flat tax are a function of base broadening, and almost none a result of having a progressive rate structure. But I think the political logic works either way. The more (politically salient) middle class voters who have their deductions essentially AMT-ed away, the lower the resistance to doing so formally. The best part of the AMT is that it mainly hits higher earners, so with every year the tax take from upper earners increases. The real danger here is that the still relatively marginal impact of the AMT on the upper middle class will be hijacked by those who really get socked by the AMT, those higher up on the earnings scale (which is exactly what conservatives did with the estate tax).
This is a case where Democrats would do well to take advantage of the creeping flat tax by proposing a radical tax simplication of their own, one which would: eliminate almost all deductions (and if necessary preserve just a few, such as the state and local and mortgage deduction, as limited tax credits); bring back the estate tax as an inheritance tax; create a carbon tax to help deal with global warming without a lot of niggling regulation; attach this to sharply reduced, but progressive tax rates–and critically, make them very noticeably lower for middle class voters (who will be hit in a real way by the elimination of deductions and the carbon tax). This would be a very eye-catching issue for a Democratic presidential candidate (helping to do away with the image of the Dems as being out of big ideas) put the Dems on the side of radical simplification (which is also the side of economic literacy), and force the Republicans to argue directly against progressive rates, without the fig leaf of simplification on their side. Frankly, if I were advising a Democratic candidate, I would tell them to run on this and universal health care and nothing else. It’s even conceiveable that with the elimination of the tax deduction for employer health plans and some of the other deductions, that you could use the tax reform to pay for universal health care (although this might be a stretch, and would also force Congress to reform the health care and tax systems simultaneously, which would be a lot for the Ways and Means and Finance committees to chew). But if the Dems win the House in November, they could spend their first year hashing out the details of this, and then send it across to the Senate and make Republican Senators vote against it, thereby giving every Democratic Senatorial candidate a great issue to run on in 2008. Any takers?