It is the wrong argument to debate raising tax rates on the rich or any other group, without first dealing with an easier and potentially quite fruitful area of Federal Government targeted hand-outs.  I define tax code handouts as any credit, subsidy, deduction, lowered rate or exemption that would alter the tax due for singled-out groups, industries or even individual companies.  Individual and corporate tax favoritism.

We seem to be coming close to the issue of tax reform, and several important potential reform line items will be considered by the Super-Committee.  But it is just as likely that none will be addressed.  There will not be a systematic examination of all favoritism.  I think the fundamentals need to be revisited, and recognize that Congress is the root source of much of the problem, through “legalized” unconstitutional mistreatment of broad groups of taxpaying U.S. citizens.  We need the real elimination of all forms of favoritism, regardless of good intention or source.

The Federal Government tax code is not the place to subsidize industries, technologies or even individual companies.  Why favor luxury jet manufacturers with tax credits and favorable tax treatment for business expenses?  Over teachers?  Plumbing supply distributors?  Since Congress is clearly not expert in reading business plans or conducting economic forecasting the basis for many of these decisions is potent blend of unsupported pseudo-economic thinking mixed with pure politics.

The tax code is not the place to assess the relative value or success of technology or economy segments.  Tax hand-outs make management lazy.  Favoritism in tax code treatment often supports the wrong side (through bad luck and bad decision-making).  Because subsidies and other handouts never become obsolete, they actually retard innovation.

The basic premise of the tax code, as defined originally and in part in the Constitution, is for equitable tax treatment of all citizens.  The favoritism for one group, industry or company violates fair taxation for the rest of us.  It’s an equity argument – it is unfair to the bulk of the country.

It is unfair taxation to benefit one group or individual corporation, effectively forcing higher taxes on the rest.  Probably unconstitutional, a violation of Article I, Sections 2 and 9, insofar as it violates the principle of equality in the allocation of representation and taxes.  While you can argue whether progressive taxation is also a violation of this principle, favoritism to any small group is the more egregious violation.  And it is certainly un-American, breaking the founding principles of our citizens-based Federal Government.

I’d like to see a tax bill that is focused on just two simple ideas first.

1.  Lining Up and Ending Tax Code Hand-outs

Create a commission with the purpose to unwind Federal Government tax code hand-outs.  I’d like to see a public website, organized by hand-outs, identifying the industry and individual companies, estimated volume of business affected, number of companies, and estimated employees.

How much is this?  It’s a shocking number to be sure.  Not certain that anyone really knows how much.

A public list of several hundred of these inequities would spur a different kind of dialogue and create some interesting mechanisms based in transparency, social networking, and shared research.  Such a tool would offer policymakers fascinating new forms of connecting to the full stream of opinions, interest groups, and lobbies.  But perhaps with a chance to re-establish the real size and energy of different groups.  T he decisions taken using this kind of support tool would possibly be somewhat better guided by facts and perspective.

I’d like to see three waves of tax reform, with commitments for each round (maybe one per year).  The easy stuff first, and to work out the dynamics and build momentum.  An agenda issued early for the next rounds, to solicit comment and debate in a structured way.

We should be looking at the most crass of individual give-aways to tough question affecting tens of millions of individual tax payers.  Tough questions also must be addressed – for example, the mortgage interest tax deduction, affecting taxpayers with more than 100 million outstanding residential property mortgages.  This deduction is unfair to renters, and warps property market pricing, and is a supporting cause of the recent mortgage market melt-down.  The Federal Government is not in the business of advocating home ownership and paying people to do so.

2.  Federal Government Investment Fund

Should the Federal Government directly support development?  Is solar energy technology better than  cleaner coal?  I think the answer is no, the Federal Government through Congressional largesse should not be making these  decisions with the endless series of individual, targeted bills, in a politically leaning and financially swayable swirl of debate and bargain-making.

How about creating a singular Federal Government Business/Technology Investment Fund?   Take a portion of all the billions in targeted handouts and create a loans pool, with maybe three levels of interest subsidization?  Any new technology company individually can apply for loans and are granted based on a transparent application, scoring and approval process.  The better ideas get ranked and funded over the lesser ones.  Much like is performed based on reasoned scientific judgment within NIH.

Many incumbents for funding will inevitably become refunded, but in an equitable way where there is an explicit evaluation and Federal Government expectation of return, both in economic impact by the successful loans, and in the repayment of the loans themselves.

By approaching funding this way, we do more than just surface and balance the process, and squeeze out the most egregious, obsolete and unfounded of propositions.  But there is an opportunity for a fundamental shift from hand-out to loans.  We also change the trajectory of Federal Government budgeting, because this portion of budgeting is removed entirely to a separate, visible, self replenishing pool.  The creation of a growing $50 – 100 billion pool will remove hundreds of billions from the budget over the next ten years.  It will get us all closer to getting to a more cleanly constructed Federal Government and the true expenditures.

Why loans?  Because hand-outs of cash obscure the proper testing of the new idea to economic realities.  Someone that needs to plan to pay back a loan is a much bigger believer in their new idea.  There’s a transfer of responsibility and an explicit agreement.  I’d rather fund the new idea guy stepping forward putting themselves on the line than some whole set of companies in an industry with no accountability for the Federal Government largesse.

I don’t like stepping across the line in having the Federal Government take equity positions in these new firms, as this is another form masking the true economic circumstances.  And it blurs the line necessary in the future for proper regulatory oversight, or even potentially criminal investigation.

The giveaways need to go away, but we do need to provide for some level of Federal Government development catalyst.  The vast majority would agree the correct level is not zero.  In the future, the political debate will be over the level of pool investment, and potentially so far as the structure of interest subsidies.  Hopefully it’s over how to use the surplus created through the Investment Fund success.  Not over specific industries and business ideas.

Finally, and Only Finally, Tax Rate Reform

Or which may not be needed (much) in the end.  The time to debate what the equitable tax rate levels are is after the success of creating a fair tax code that is simpler, and more equitable for all citizens and corporations.

Besides setting rates, there are other areas that should be accomplished including solving tax overlap –eliminating all forms of double taxation, from payroll taxes to dividends. And estate tax.  This is also not always factored in when considering marginal tax rates.

Once all groups return substantially closer to paying actual tax rates being debated can we even assess whether the rates need to go up or down?  Once the hand-outs are vetted out of the figures, we can truly assess who would be affected (or even whether anyone needs to be affected) no matter the tax tier.