Skip to comments.James Pethokoukis: Fix, Donít Flatten, the Tax Code
Posted on 05/28/2013 8:09:44 AM PDT by SeekAndFind
If the sluggish U.S. economy wasnt reason enough for tax reform, the ongoing IRS scandal demonstrates how a devilishly complex tax code enables government mischief.
But the flat tax a longtime policy goal for many on the right isnt the realistic answer to either problem.
Flat-tax advocates see headlines about an out-of-control IRS as a chance to put the idea back on the public-policy radar in way it hasnt been since the 1990s.
This is why you need a flat tax, Wall Street Journal economics writer Stephen Moore told Fox News recently. If you get rid of two-thirds to three-quarters of the deductions and exemptions and carve-outs of the tax system, youre not going to need all these IRS agents . . . snooping into your financial records. Publisher and former Republican presidential candidate Steve Forbes, who made the tax proposal famous in his 1992 presidential-primary bid, said, The power of the IRS derives from the complexity of the tax code. . . . With a simple flat tax you have single rate, deductions for adults and children, and thats it. . . . Simplicity is the best enemy of the abuse of power. For one, a simpler tax system doesnt mean a more pro-growth one. Look at President Barack Obama and congressional Democrats, who would like to eliminate and limit deductions in order to raise effective tax rates, especially by closing loopholes for unpopular industries. Simplicity, by itself, doesnt necessarily provide a path to smaller and less intrusive government. But by eliminating almost all tax exemptions and installing a single rate, flat taxers argue, America would have a code both less susceptible to corruption and more amenable to economic growth.
Its an elegant, compelling model that might work splendidly if you were creating a tax code ex nihilo. Flat-tax fever swept across Eastern and Central Europe after the end of the Cold War, when finally independent nations were rebuilding their own economies, and the model has been quite successful, for the most part.
America, however, is in a much different place. Millions of individuals and businesses have made long-term plans based on expectations that the tax code will remain more or less the same. Half the nation, thanks to all those deductions and credits, pays no income tax. And, perhaps most important, an aging population means that the cost of health-care entitlements will grow rapidly, even if health-care inflation slows.
That all means its unlikely the U.S. can keep spending down at historical levels of 20 percent to 21 percent of GDP while also maintaining a floor for defense spending at 4 percent of output. The best a group of AEI scholars could manage was limiting spending to 23 percent of GDP by 2035 and even that left the debt-to-GDP ratio a third higher than the average between World War II and the Great Recession.
And whenever flat-tax theory has been translated into real-world proposals for the U.S., the results have been problematic. Flat-tax proposals by Newt Gingrich and Rick Perry during the 2012 Republican presidential campaign slashed federal tax revenues by nearly $500 billion to $1 trillion a year, which should give pause to even the most fervent supporters of dynamic scoring. Making such plans revenue-neutral, when top rates would fall on wealthy Americans, would mean raising taxes on someone else such as millions of middle-to-low income Americans. The Heritage Foundation would replace income, payroll, and excise taxes with a 28 percent flat tax. It claims the plan would leave the distribution of the tax burden unchanged, but the proposal would also raise revenue of just 18.5 percent of GDP.
Then theres the uncomfortable political reality that the flat-tax concept has never been popular with voters. A 2011 Wall Street Journal survey found that not even a majority of GOP voters favored the idea. A poll by the Hill the same year found 58 percent of Americans favored a graduated income-tax system, about the same as the Journal poll.
One solution is to take the essentially flat consumption tax devised by economists Robert Hall and Alvin Rabushka and give it a progressive rate structure. Or we could combine a consumption tax with a flat income tax on wealthier Americans, as suggested by Yales Michael Graetz. Both ideas are also flexible enough give needed tax relief to parents. (Call it a human-capital gains tax cut.)
The flat tax embodies pro-growth, supply-side principles that are great starting points for tax reform, but it shouldnt be the destination.
James Pethokoukis, a columnist, blogs for the American Enterprise Institute.
fix?? that seems to be what is attempted every year, and more and more rules, regs and other b.s. is added....
TOO BAD if folks planned on the tax code remaining more or less the same...
start it over.....
A sales tax AND an income tax? No way!
You can’t fix STUPID!
Fixing taxes is like taking drugs from Rock Stars.
Large corporations and businesses like the tax code just fine the way it is. You get the what you lobby for.
You can fix the tax code by nothing short of reducing it to one page. 9% no deductions no exemptions on all earned income. Tax business the same or no tax on business at all. If you couple that with 95% reduction in regulation of business prosperity will explode for everyone. Unfortunately the government will also get much more in revenue. Perhaps we need to make that an initial 9% with a 5% reduction in the rate annually. Make it an Amendment so Congress can’t fiddle with it.
The way to “correct” the tax code would be to change it such that the IRS could not be used as a tool to violate the rights of the citizenry.
Flat tax doesn’t get rid of the IRS.
He's saying this like it's a bad thing. Right now, the top 10% of income earners in the US carry almost 70% of the federal income tax load. The lowest 51% pay nothing. To me, if you don't have anything in the game, you don't get to play. This means 51% of the population shouldn't have the right to vote in federal elections. Raising rates on those 51% doesn't bother me in the least. I think a flat tax of 17% (Friedman's rate) with a $20K personal deduction would work. Saying you can't make this kind of change because businesses have made their plans based on the current tax code is a specious argument at best. Businesses adjust to changing tax codes all the time. With the flat tax, you could file your return on a postcard. As it is now, try calling the IRS to answer a complex tax question...five calls, five different answers. They don't even know the answers. Nope...it's time to scrap the current tax code and I think a flat tax is the best alternative.
Little things like the accelerated depreciation allotment for various industries, like NASCAR tracks, and corporate jet values. These add up, and explain why a flat tax is so despised by the actual lobbyest controlled government of our country.
My suggestion? Any public employee, from dog catcher to senator, who accepts a bribe dies, screaming, for the first offense. (You wouldn't have to do it too many times for even Democrats to get the point...)
There still needs to be a tax collection entity, but the flat tax would massively change it’s scope and purpose. It would need to verify revenue and income sources, and that’s it.
The author NEVER once attempts to define what “fix” means. He probably wants to bring back the 92% maximum income tax rate.
Exactly. It just kills me to hear Obozo say: "The rich fat cats are taking advantages of loopholes in the tax code to get richer." And the bulk of the electorate is so stupid they nod their heads in agreement. Wake up, you idiots! Who do you think wrote those loopholes into the tax code in the first place? Your elected representative did it so they can get your hard-earned money and give it away to some deadbeat in Cleveland who wants a free cell phone. "Splain that to me, Lucy."
As if low income and the middle class hasn't been paying taxes. They are! But with debt. That will have to be paid at some point. A large company and such can simply move to another country. Debt does not trouble them at all. Pile it onto the citizen.
We need a flat tax that gets rid of every deduction for everything.
Put in a basic deduction for the first X amount for poverty level, and everyone pays the same flat rate for anything over that amount.
Married, single, wages, pension, interst earnings, capital gains, all taxed the same flat rate.
Repeal and replace the 16th amendment.
Put the actual % of flat tax in the amendment so it will require another amendment to the constitution to increase it. Everything is taxed, everyone pays the same amount, no exceptions or exemptions. The rich pay more because they will be buying more stuff. Even drug lords have to buy food and clothes, so you get at the massive underground economy.
The taxing of income, savings, profits is also made illegal. Just products and services (not transactions).
A Flat tax with a Cap of 5% on all forms of income.... PERIOD!
Put in a basic deduction for the first X amount for poverty level, and everyone pays the same flat rate for anything over that amount.
Make that deduction based of the GDP as well using a formula. So right now it would basically be forinstance:
The first 25,000 of income if not taxed be they Bill Gates or the school teacher..
Personally I think all federal taxes should be illegal and the federal government should be funded by Tariffs only.
Reducing the tax rates is probably one of the most studied of all economic policy tools. Every time taxes have been reduced significant on both personal and corporate incomes (e.g., the Kennedy and Reagan tax cuts), economic growth has exploded. Internationally, look at the fastest growing economy in the world right now. It's not China or India, it's the one with the 1) lowest personal income tax rates, 2) the lowest corporate tax rates, and 3) the one that has the lowest ratio of government spending to GDP. The country: Chile. True, companies can move to avoid taxes...why do you think so many US companies are building plants abroad? However, the reverse is also true: Lower corporate and personal income taxes in the US and you would see foreign companies flood the US with new jobs. The Dems, however, don't want this, as it would make the 51% less dependent on their largess.
There are very few people in Congress I trust. They got us where we are and I do not believe they will correct anything — they want the money they get for “fixing” the Code.
The rich pay more because they will be buying more stuff.
which is not a flat tax argument, but a Fair Tax argument and the two are vastly different. One is a consumption tax, the other is an income tax. The Fair Tax scares me because it also includes a "prebate", which amounts to a payment to low income people. Now we're right back where we were: Politicians can play with the prebate and buy votes. Not good. Forget the Fair Tax and stick with a flat tax on income, not consumption.
Why? I have no problem with the Federal gov't providing "social overhead capital" (e.g., a standing military, a legal system, public roads, etc.) and the funds necessary to run those actions by the federal gov't. This could not be funded by tariffs. What I object to is the invasive nature of the federal gov't that isn't even remotely part of the Constitution, no matter how convoluted your thinking might be (e.g., EPA, SBA, Sally Mae, etc.)
A few years ago I heard a (UK) Conservative Party candidate for office telling the voters how much better his party would run the National Health Service than the Liberal Party had done. That is not the mindset we need with our tax system. As much as I respect JimmyP, we need to have the most simple, most flat tax that we can fund essential government functions with.
The Tax System serves TWO purposes: the fist is to fund the essential (and not the frivolous) government services. The second is to make the cost of government visible to every citizen, even citizens who are disabled or otherwise are net recipients of tax monies.
Out tax system is a giant FAIL that is imposed on us for the power it gives Washington more than the money it collects. After all, government has given itself the power to print and borrow all the money it needs. Why have taxes when you have the printing press? But that is an outrage for a different thread.
That gets adjusted for inflation.
The current tax code is over 77,000 pages and requires a fork lift (or two) to move a hard copy. No single individual actually knows the contents of entire code. Even IRS personnel can’t correctly fill out a tax return every time.
A monstrosity like that can’t be mended. It needs to be ended. The flat tax, or better yet, the Fair Tax is what we need.
Whatever plan eliminates the IRS....I good with.
The Fair Tax!
17% with that deduction is little high IMHO.
You may be right, but it's a starting point for debate. Perhaps a deduction that starts at $11,500 for individuals and is scaled to family size would work (e.g., an additional deduction of, say, $3500, for each additional family member up to a max of 10 people), but then you start injecting a progressive tax structure because of the deductions. Still, it would be a hell of a lot less complex than the current system.
Agreed. Was just a little shocked when my napkin math showed me paying more, not less. :-)
Publisher and former Republican presidential candidate Steve Forbes, who made the tax proposal famous in his 1992 presidential-primary bid, said, The power of the IRS derives from the complexity of the tax code. . . . With a simple flat tax you have single rate, deductions for adults and children, and thats it. . . . Simplicity is the best enemy of the abuse of power.And the useful idiot tries a phony comparison:
For one, a simpler tax system doesnt mean a more pro-growth one. Look at President Barack Obama and congressional Democrats, who would like to eliminate and limit deductions in order to raise effective tax rates, especially by closing loopholes for unpopular industries.Flat tax rate, high personal exemption ($30K sounds about right), elimination of most federal excise taxes with implementation of a fixed, low, federal sales tax (retail), and a single excise tax on both imports and exports of petroleum products, PLUS gutting of the EPA's czarlike powers, as well as total, unconditional repeal of Obamacare, getting control over our borders, and expulsion of all illegals, would fix, flatten, and simplify. Over time employment would rise, the trade deficit would fall, the federal deficit would fall, petroleum imports would decline, domestic petroleum production would rise, terrorism would decline (OPEC finances and controls most of it), Islamicization would decline (same reason), and the creeping federal intrusion into our lives would decline.