Please Simplify the Tax Code

by Mario Loyola

Harvey Golub, who serves on the executive committee of the American Enterprise Institute, has a great piece on tax reform in today’s Wall Street Journal. Mr. Golub takes aim at the inherent unfairness of a tax code “replete with preferences, penalties and subsidies of all kinds.”  

Senator Barry Goldwater liked to say that progressive taxation is theft; and there is an obvious danger in using the federal taxing power (which is supposed to be used “for the general Welfare”) as a tool of wealth redistribution. Regardless, whether out of charity or gratitude or a sense of civic duty, most wealthy people accept a higher tax burden, even though today half of all Americans don’t pay any income tax at all.

Still, if progressive taxation is theft, the tax code’s endless “preferences, penalties and subsidies” are grand larceny. There is at least a colorable argument that the redistribution of wealth from the upper class to the lower class serves “the general Welfare.” Not so the myriad of tax benefits enjoyed by particular interest groups at the expense of everyone else. 

#more#Mr. Golub makes a compelling case for simplification as the guiding principle of tax reform:

What should be done to improve our arcane, complicated and unfair tax system? First, eliminate all preferences in the tax code and, if we still want to subsidize certain behaviors, pay for them through a legislative appropriations process, making them transparent to the public.

In other words, everyone earning the same amount of money should pay the same in federal taxes, regardless of how they earned their money and regardless of how they choose to spend it. What would be fair is all Americans paying federal taxes on all their income, whether it is earned in the form of cash or benefits, and paying taxes on earnings only once.

Such a tax code would be very simple—count all income whether in cash or kind, whether in dividends or interest, whether in capital gains or salary. From that total income, subtract any amount saved for retirement or invested. Borrowing and withdrawals from retirement savings would be taxed as income in the year withdrawn. Taxes owed would then be computed on a flat rate for everyone, which I prefer, or a graduated rate to maintain a level of progressivity.

Congressman Paul Ryan of Wisconsin has put out the smartest reform proposal in this general direction. The Ryan plan is revenue-neutral and sets up an alternative simplified tax code that Americans can opt into at tax time. Under the Ryan plan, Americans would abandon the existing tax code in droves, leaving special interests to fend for themselves. 

The tax code’s complexity also entails an unbelievable waste of money: As Arthur Laffer wrote in the WSJ last year, fully 30 percent of every dollar of tax burden goes to simply complying with that complexity. That means that America spends more of its GDP sustaining the unsustainable complexity of the tax code than it spends on national defense. And worst of all, as we learn from Mr. Golub, the only real purpose served by that complexity is to benefit politically connected interest groups at the expense of the general Welfare.

Simplifying the tax code is necessary and it is achievable. It should be the highest priority of the next Congress. 

— Mario Loyola is director of the Center for Tenth Amendment Studies at the Texas Public Policy Foundation.

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