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Pesky Brother-in-Law: Christmas Edition

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Hear those jingle bells in the distance? It's a sleigh coming up the drive, led by that chubby, jolly, old... conservative brother-in-law.

What with Christmas upon us and the family coming around, it's time for the next edition of what to do when that pesky brother-in-law, or aunt, or whomever, hits you with so many Fox canards that you can't even enjoy your new iPod.

[Earlier editions: here, here, and here.]

I like those flat tax plans from Perry, Gingrich, and the rest of them... those guys really get what wrong with our crazy tax system!

Response: Yeah, those plans do sound simpler than the current mess, that's for sure -- but I'm afraid they're not as simple as you might think. Or as fair. (Dramatic pause, as your audience looks up expectantly from their figgy pudding.)

First off, if we really want everyone to pay one tax rate and we set that rate so as not to lose a lot of revenue, a lot of people's taxes could go up. Remember old Herman Cain's 9-9-9 plan... sounds pretty flat, right? Well, over 80% of taxpayers faced higher payments under his flat tax plan. And the ones with the biggest breaks on these flat plans are the richest taxpayers. Rick Perry's flat tax lowers tax payments for multi-millionaires by a cool $1.5 mil.

Now look, we all know every tax change is going to have winners and losers, but I don't think most people want to whack the middle class so the rich can do a lot better.

What's that? You're willing to trade a little more on your tax bill for simplicity?

I hear you but here's the problem. Flat taxes can end up being more complicated than they sound. They often work like national sales taxes -- like in Europe, just a straight 20%, say, on what you buy. But in those cases, they usually exclude basic necessities so now you have to keep track of that, and fight over what get exempted.

Next, to make sure you avoid the Cain problem of some people paying more, both Perry and Gingrich proposed that you could either pay the flat tax or stick with the current system. So, guess what? Now you get to figure out your tax bill both ways so that you can figure out which is cheaper. That sure doesn't sound simpler to me.

Anyway, you know what makes the system we have complicated? It's not the different rates. If that's all it was you could just look your income up in a set of tax tables, find your liability, and be done with it in literally seconds. And that would be true whether we have one rate or a hundred rates.

What complicates things are all the exemptions, credits, and special privileges for different types of income. For a lot of people, you pay a higher rate for money you earn teaching children, like Aunt Debbie does, than for money you make when you sell a stock. That's both unfair and too complicated.

So I say let's add simplicity and fairness by just taxing every dollar as a dollar no matter who earned it on which day of the week. And keep the progressive rates in place, so everyone can pay their fair share.

You liberals love Social Security, but everyone knows it's a dinosaur program, about to go extinct. None of you kids are ever gonna see a dime from it, so you might as well drop it.

Response: That's a mistake a lot of people make, bro, but it's simply not true. In fact, the folks who keep the books on this point out that for about the next 25 years, Social Security can pay full benefits. After that, it will be able to pay 75% of scheduled benefits. And by the way, even with that reduction, those benefits will be higher than they are today (that's because they're scheduled to go up over time, so even with the reduction, they'll be higher than today's).

Still, you've got a point--there's not enough retirement security in America. The real dinosaur in the room, unfortunately, is the guaranteed pension. Fewer and fewer jobs provide that anymore -- it's all 401(k)'s, where you get to bet your future on the stock market-good luck with that these days (note heads nodding in affirmation). In fact, if you think about it, the only guaranteed pension you can depend on is... wait for it... (dramatic pause)... Social Security! And believe it or not, a lot of conservatives want to turn Social Security into a stock market plan-(shake head despondently, with pity for those who don't get what a bad idea this is...).

So we've got to mend it so that it can pay full benefits, not just 75% over the long-term horizon. One thing to keep in mind is that the funding shortfall of the program is just about equal to the high end part of the Bush tax cuts--the part that just goes to households about $250K and that's supposed to expire at the end of 2012. So fixing the program in perpetuity shouldn't be that hard a lift.

And there's other stuff we could do. Did folks know that the tax to fund the program only hits salaries up to $110,000? That means that if you make a million bucks, about 90% of your salary is tax free when it comes to the payroll tax that funds Soc Sec. That ain't right.

So rest assured, with some smart, fair tweaks, the program will be around for many Christmas's to come. The bigger concern is that Social Security on its own won't provide enough income to provide a comfortable retirement for a lot of folks. But it's still a solid foundation for folks to build upon, one that we should be sure to make more solid for generations to come.

This post originally appeared at Jared Bernstein's On The Economy blog.