Tax code: Simplify, simplify, simplify
Published 11:00 pm Wednesday, June 6, 2012
Henry David Thoreau, one of the great American authors, had a profound influence on me when I was younger. He was famous for having said things like, “Be not simply good, be good for something” and “Simplify, simplify, simplify.”
Thoreau’s call for simplification comes to mind for me whenever I think about our federal tax system. Our tax code today is approximately 72,000 pages long; it was just 400 total pages around 1912. Many of the rules in the code are contradictory, and most of us would probably be in big trouble if a careful audit – one that focused on making sure we complied with every detail in the code – were ever performed.
The complexity and growth in America’s tax code have caused many economists and people of all political persuasions to call for tax simplification. Some of my economist friends think the US could benefit from a flatter income tax. Many of the people I talk to in public forums – people who have read Neal Boortz and John Linder’s best-seller, The Fair Tax Book – think a tax on consumption would be better than our current tax system. I think they’re right.
In 2010, Americans spent more than 6 billion hours complying with the tax code and paid $300 per person to CPAs for tax preparation. The time and money spent on taxes could have been spent on more productive uses, and a simpler tax on income or consumption would reduce compliance costs by billions of hours per year.
People also like a flat income tax or national sales appeal because it treats everyone equally under the law. Rather than have a code with endless deductions and loopholes for people who fall into certain categories—farmers, mortgage holders, people with children, veterans—a simple tax policy seems fairer to many.
While a flatter, simpler tax system might reduce waste, encourage economic growth, and feel fairer, we should remember one thing: Tax reforms in the real world can never be isolated from spending. When a government is spending 50 cents on every dollar a person makes, they will need to recover 50 cents from you (or your grandchildren) to maintain their balance sheet in the long-run. The simplest tax in the world won’t help us avoid this hard accounting reality.
Many of my fair tax friends are confused and promise “free lunches” — lunches economists say don’t exist — when it comes to tax reform. They want us to believe that tax reform alone will increase federal revenues and solve most of America’s fiscal problems. They are correct in thinking more revenues could be collected with simpler taxes, but they are doing us all a disservice when they ignore the mess our politicians have made on the spending side. Collecting more of our money just for the sake of having more of our money should never be the goal of tax policy. That a particular tax can generate more revenue should never be treated as a desirable aspect of a tax, but it is often treated as a benefit by folks wanting flatter, fairer taxes.
Listen closely when Barack Obama and Mitt Romney about their tax plans: Are they treating government revenue as something to be desired when they talk? I bet they are. Both will talk about more government revenue—trillions of dollars of more taxes collected—as a desirable aspect of their tax plans. And, both will shy away from talking about spending cuts. Both are making the mistake of treating revenue as a desirable end of tax policy, but more revenue for the government just means more money for them to spend and less for you to control.
True simplification is different. It involves changes in taxes and spending. Simplification is easier, for example, when the federal government doesn’t have to find $4 trillion of revenue each year. Simplification involves us figuring out ways to do more with less. It requires us to remember another famous Thoreau quote: “That government is best which governs not at all.”
Scott Beaulier is Executive Director of the Manuel H. Johnson Center for Political Economy at Troy University.