Tax Code, Tax Reform

By Fareed Zakaria, at CNN.com:

Does anyone like our tax code? Who opposes tax reform? What say you?

We’re going to hear a lot of polarized rhetoric over the next few months. The Republicans and Democrats will seem to disagree about everything. But there is one huge and important area where there is a possibility – a possibility – of bipartisan action and that’s tax reform.

Most Americans – Republicans and Democrats – dislike the tax code. They’re right to do so. America has what is arguably the world’s most complex tax code. The federal code plus IRS rulings is now 70,000 pages long. The code itself is 16,000 pages. The statist French, for example, have a tax code of only 1,909 pages – only 12% as long as ours. And then there are countries like Russia, the Czech Republic, Estonia that have innovated and moved to a flat tax, with considerable success.

You have to understand, complexity equals corruption….

The U.S. tax system is not simply corrupt, it is corrupt in a deceptive manner that has degraded the entire system of American government. Congress is able to funnel vast sums of money in perpetuity to its favored funders through the tax code without anyone realizing it.

For those who despair at the role of money in politics, the simplest way to get the corruption out of Washington is to remove the prize that members of Congress give away – preferential tax treatment. A flatter tax code with almost no exemptions does that.

The simplest fix to our tax code would be would be to lower the income tax dramatically, lower the corporate tax, and instead raise revenues through a national sales tax, or a value-added tax (VAT).

The U.S. is the only rich country in the world without a national sales tax. Germany has one at 19%, Britain at 20%, Korea at 10%.

 

 

About Scot McKnight

Scot McKnight is a recognized authority on the New Testament, early Christianity, and the historical Jesus. McKnight, author of more than forty books, is the Professor of New Testament at Northern Seminary in Lombard, IL.

  • http://www.chuckroberts.blogspot.com/ Chuck Roberts

    I have wished for years for a flat tax, since I first heard Malcom Forbes mention it years ago. It seems the most fair way to go. However, it eliminates the powerful wing of tax lawyers, and they are financially very powerful in Washington.

    I don’t know about a national sales tax. Maybe. I was taught years ago that a sales tax amounted to an unfair tax on the poor, since they were the ones who could least afford to have taxes added to products we all need. I don’t really know. I’m not an economist and I don’t pay much attention to politics anymore.

  • http://transformingseminarian.blogspot.com Mark Baker-Wright

    I’m very much against a straight “flat tax” which means that the poor are disproportionately affected (as they already have to spend the bulk of their income on the necessities of life). I’m willing to consider a “flatter” tax as the post suggests, however.

    As far as a national sales tax… Frankly, I’d have to hear more about how it would work, as I have similar concerns about regarding the poor, there, as well. If certain items were exempt (food, clothing), or only items over a certain amount were taxed… I don’t know, but that’s the kind of option I’d be willing to listen to.

  • James

    “You have to understand, complexity equals corruption….”

    I absolutely agree with this statement. I’m all for a flat-tax. I don’t like consumption or VAT taxes, because they are weighted on the spenders, and that means that lower income people are actually hit hardest, paying a far greater percentage of their income (because they already have to spend a far greater percentage–often near 100%–just to stay afloat).

  • James

    @Mark Baker-Wright

    Every flat tax plan I’ve seen exempts (on average, details vary by plan) the first $30,000-$38,000 of income from the tax, thereby leaving families in that bracket unaffected.

  • T

    I’m one of those pesky tax lawyers. The tax code absolutely needs “flattish” reform. The pols love to hate on the tax code, but they also love to give constituents little “perks” through it: a deduction here, a credit there.

    I’m very hesitant to seek any national sales or similar taxes.

  • http://transformingseminarian.blogspot.com Mark Baker-Wright

    James,

    That’s pretty low, but it’s at least a good start into the discussion. I do think that most people (not necessarily those proposing the actual plans. I don’t argue that) don’t realize just how high most people’s taxes would have to be raised in order to achieve any kind of workable “flat tax.”

  • Robert A

    I’m a big fan of a flat tax across the board with minimal deductions (charitable contributions.)

    My only quibble is that I don’t believe anyone who lives below the poverty line should have to pay federal income tax.

    A national consumption tax would have an adverse economic effect. People would refrain from acting economically and a significant black market would quickly emerge that is counterproductive for a strengthened economy. That said a national consumption tax would definitely harm poor families more than rich ones.

  • http://deadheroesdontsave.com MikeB

    I would be thrilled with a flat tax, even a modest progressive one with no exemptions. A simple postcard to enter in income * %rate = amount owed and done. I would probably pay more than I do now but I think everyone would have a better understanding on how code works and see the impact more directly. Also when done right, everyone earning a paycheck would pay something. ie) no 0% rate. This might increase interest in politics.

    I don’t know if we will see it since the power described in the OP will likely stifle any real progress on reform.

    I am generally against a VAT without a repeal of the 13th amendment since the future would likely be a VAT plus a big complex tax code in the future as we continue to spend more than we have. Also VAT would seem to hit the poorer more as a % of income paid in taxes and may limit economic growth. ie) buy less since it is more expensive = less demand.

    MikeB

  • Paul

    T,

    Can you explain your opposition to a national sales tax? Is it similar to what others have said about unfairly hurting the poor? I’m just curious your opinion as you seem rather balanced in opinions and you work in the tax system.

  • http://transformingseminarian.blogspot.com Mark Baker-Wright

    Paul,

    I can speak to my own opposition to a national sales tax (although, as I said, I’m willing to hear proposals). Put most bluntly, “money’s gotta circulate.” For an economy to be healthy, people need to be buying and selling things. In general, the more money moves, the better for everyone. A sales tax discourages the movement of money, and thus has a depressing effect on the economy.

    Ultimately, I don’t think this argument is absolute. A government NEEDS to raise money for appropriate government services (leaving the debate of what constitutes “appropriate” for another thread). A sales tax is indeed one potential way for this to happen. But I would argue that such an option should be considered VERY carefully before implemented.

  • T

    Paul,

    My concerns are:

    1. Sales taxes do tend to be regressive (hit the poor hardest) for a variety of reasons.

    2. Given our system and history, I have no confidence that adding a federal sales tax would mean that the income tax would go away. Only a constitutional amendment would secure that, and that ain’t happenin’. If (and it’s a big ‘if’) we can muster enough national will for serious tax reform, it would be better to simplify the income tax that we already have rather than just give Congress another way to tax. They can complicate that one too given time and opportunity.

    3. I am concerned about privacy. Private and public powers are already gathering information about everyone in mind-boggling ways and depths. There are two issues at least: what they have the power to collect, and what they have the right to collect. I’d prefer not to have all our purchases become a matter that the Federal government is required/authorized to gather information about.

  • http://LostCodex.com DRT

    Flatish is right.

    I believe the VAT is precisely the wrong thing to do. Why would we want to tax the people who are creating (by definition) that highest added value? That makes no sense to me.

    But, I am in favor of business getting taxed, on profits. Research deductions, investments deductions are all good. But the companies making profits need to pay taxes.

  • AHH

    Simplification is a good goal, but the devil is in the details. Propose taking away the home mortgage interest deduction, and watch the construction and real estate industries scream. The influential oil lobby would never let the oil depletion allowance go away. Taxing capital gains and dividends like other income would raise taxes on the wealthy, which the Republicans would never allow.

    An important thing to look at for any proposal is how it affects the distribution of the overall tax burden among the poor, middle class, and wealthy, and also the deficit. For example, the Bush cuts cut taxes a lot for the wealthy and a little for others and raised the deficit a lot. The proposed flat or flatter tax proposals from Republicans have the effect of lowering taxes for the wealthy while raising them for the poor and/or increasing the deficit.

  • Kyle J

    A few points:

    1) A flat tax and tax simplification really don’t have to go hand in hand. It’s not the multiple tax rates that create corruption/confusion in the system. It’s the multitude of credits and exemptions. You could have a much simpler system that maintained a progressive rate structure (what I would favor).

    2) While there are certainly a lot of loopholes geared toward upper-income taxpayers that should be looked at and eliminated, the big revenue items are middle class breaks: mortgage interest deduction, exclusion of employer-provided insurance.

    3) You won’t have any consensus on doing real tax reform until you have a consensus on whether overall revenues should go up or down. Republicans continue to favor lower revenues (or maybe flat revenues, if you’re a moderate), despite wanting to balance the budget (nominally, at least). Democrats aren’t going to agree to open up the tax code and lower revenues when mathematically that means domestic spending programs have to be reduced dramatically (since defense spending also seems to be off the table).

  • http://bookwi.se Adam Shields

    No one likes the current tax code. But without complete overhaul (to a complete flat tax or a complete VAT) we will never get real reform. We will get tweaking. Tweaking tends to add exceptions or credits for those that have the ability to lobby for them and add overall complexity to the system.

    I know several people that oppose the loss of home owners exception (which I think would have to go under any real reform) and deductions for charitable gifts, even when the actual amount of the tax would not change (or it would be reduced).

    People like what they know, they are afraid of what they don’t know. And with the current climate that sees religious discrimination under every rock, my guess is that many would consider the loss of a charitable deduction as religious discrimination.

  • Robert

    The big problem with VAT is that it takes the poor, who have to spend all they earn, at a higher rate than the rich. Direct taxation is progressive, but it has to be done properly!

  • T

    KyleJ,

    You’re right that multiple tax rates are only a small part of simplification. (And I agree with many others that we should always look at the net effects of any changes on all people, especially the poorest among us.) That said, the reason that the ultra rich pay at lower rates (such as Warren Buffet paying a lower rate of tax than his secretary) is due to the multiple rate system currently in place, and the way FICA/FUTA is applied to incomes of various kinds and amounts.

    I think the solid majority of Americans understand and agree that revenues must go up, especially given the decreased revenues from the Bush tax cuts and the large current deficits, Republican propaganda notwithstanding.

    But as AHH noted, the devil will be in the details. It won’t be impossible, though, to keep the average total taxes for most folks relatively stable if we phase in a major reform.

  • Jerry

    My mother, who is 86, says the happiest year in recent memory was when she had enough income to pay fed tax. Flat tax is absolutely the way to go with income below a certain level to be exempted. Even then I think something should be paid so everyone is invested in the system. Flat tax with NO deductions not even for charity. I doubt we’ll get there soon. The atmosphere in Washington is poisoned.

  • Joe Canner

    “The U.S. is the only rich country in the world without a national sales tax. Germany has one at 19%, Britain at 20%, Korea at 10%.”

    This is probably somewhat misleading, as most people in the US pay sales tax and income tax to one or more local jurisdictions. I doubt that this is the case in other countries. (Please correct me if I am wrong.)

    Re tax deductions: I agree that the tax code has too many loopholes and should be simplified. However, we need to remember that the tax code is not just for raising money. Tax deductions and credits are very effective means of influencing behavior (giving to charity, buying a home, having children, saving energy, etc.). Getting rid of deductions and credits might have some rather unpleasant and unforeseen side effects. That’s not to say it shouldn’t be done, just that we need to be careful.

  • RobS

    A few politicans (of both sides) could get together, identify 10-20 loopholes or ridiculous tax situations that exist today and create legislation to get rid of them. The bi-partisan support could easily be 70%+ on some of these, I’m sure. This doesn’t seem hard. But it doesn’t happen…

    And because it doesn’t happen, I guess that most politicans do not really support tax reform. If they did, there were would change and talk. If I’m really mad about something and I wish to change it, then I change it. No action = no heart on this one.

    As long as trillions of dollars are buying votes, we continue along. Term limits could come at the same time and I’d be Ok with it.

  • Barb

    I heard someone say that unless there is a tax deduction for charity people will not give. Boy are we messed up. I’m a well-off retiree and I think that I should pay MORE taxes.–of course, I have to may through the nose for all medical expenses so I guess it’s a toss up at this time. I do believe that a totally flat tax is regressive and that most all sales taxes are also regressive.

  • BradK

    A national sales tax would require a constitutional amendment. If that is a possibility why not consider replacing income tax with a tax on wealth, like a property tax? That would eliminate any burden on the poor as they wouldn’t own (much of) anything. And the largest share of the tax burden would be born by those who have the most. It could possibly be argued that such a tax would spur investment and innovation as well in that if one does not use their wealth to generate more income and more wealth, it would be slowly chewed away by taxes.

    Just musing out loud…

  • JohnM

    I’m not a retiree like Barb (#21), but I too think I should pay more taxes – and so should all of you, I don’t care what your income level is. Sales tax, or flat tax elimination of deductions – without exemption for income levels but possibly with exemptions for actual necessities – might well be the way spread the cost of all we need (or want) government to do. In absolute terms the largest share of the tax burden would be born by those who have the most, but we’re all beneficiaries one way or another.

  • http://natomaschurch.wordpress.com Mike

    I am a church leader and I think it would be an incredible boost to God’s Kingdom to eliminate the charitable giving deduction. It would purify our motives for giving, and force churches to consider their priorities as well.

    Currently, Christians give 2.5% of income to all charities.I think this number would change if charitable giving deductions were removed, but I think with the purification of motives, it is just as likely to increase.

    Also, so many people do not itemize, so their charitable giving cannot be deducted now. It would probably mean that those with lower incomes (who do not itemize their deductions) would have a larger impact with their giving when no one’s giving can be deducted.

  • http://LostCodex.com DRT

    Now that we are all comfortable being flat, I just have to say that I have not paid fed tax in about 4 years and not because I have not had an income (well, at least not for some of that time). I invested quite a bit of money in a small business and have pretty much lost it all due to the recession. I appreciate my deductions because I don’t have the money (the better part of a million) anymore…..

  • http://LostCodex.com DRT

    …and I need to go on a bit more. I am in favor of business paying taxes. But when a business genuinely loses the money invested, it should be deductible.

    But one of the political parties is seeking to go quite further than that. They seem to think that those who actually make money, that is they get all the money they invested back and then make more on top of that, they should not pay tax. I categorically disagree with that unless they are investing in expanding in some way. Just taking profits is not stimulating the economy.

  • http://www.dry-bones-valley.blogspot.com Rob Dunbar

    While a flat tax would be “regressive,” it could be more than offset through federal benefits. And–who knows?–there might actually be real money to pay those benefits. And VATs don’t seem to have harmed the social safety net in the countries that use them. As for equating VATs and state taxes, I don’t know of any state with a 19% sales tax.

    I absolutely agree that the tax system needs to be flattened. Taxes should be about raising revenue rather than encouraging or restricting certain behaviors or businesses.

    Robert Samuelson wrote an excellent column in November of last year: “Budget Fairy Tales, Left and Right.” http://www.realclearpolitics.com/articles/2011/11/07/budget_fairy_tales_left_and_right_111957.html Main points: The rich pay more than most people think they do, the biggest spending is in Social Security, Medicare and Medicaid, big government is here to stay, and if it’s too big it can crush a nation. The real problem is we want to have it both ways: Benefits of big government and costs of small government.

  • JohnM

    Rob Dunbar #27 – “Taxes should be about raising revenue rather than encouraging or restricting certain behaviors or businesses.” – Exactly! Using taxes as a “tool” to proscribe or prescribe behavior misses the point of taxes and adds to the confusion, all to the hurt of the very necessary task of raising revenue.

  • C

    @Rob Dunbar #28 @JohnM #28

    While I agree that “taxes should be about raising revenue rather than encouraging or restricting certain behaviors or businesses,” the fact is that taxes do have significant effects on the incentives in production and consumption, and we must wrestle with what those effects are.

  • Percival

    No one mentioned that a VAT encourages saving.

    By the way, none of this is going to happen. Congressmen don’t want their power diminished.

  • Diane

    I remember taxes being simplified in the Reagan years. My family lost our deduction on interest on our car loan. And now look where we all are as a country–everything is more complicated and corrupt than ever. Simply passing a flat tax rate is meaningless–it takes almost no time for it to be whittled away here, there and everywhere. Perhaps we need something like a Jubilee for taxes–every five years the tax rate goes flat again.


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