Small Problems with the Tax Code Beg for a Large Solution
A recent OECD (Organization for Economic Cooperation and Development) study finds that, by taking advantage of countries’ differing treatments of financial instruments, transactions, and business entities, multinational businesses have saved themselves as much as $3.5 billion over the past twenty years. The study concludes that member countries — including the U.S. — should consider modifying their laws to make these “hybrid mismatch arrangements” impossible.
Such a reflexive reaction — fix it! — is the sort of response that, through the decades, has created the ad-hoc and growth-reducing tax laws currently in place. U.S. Tax Code is completely broken. Lawmakers should redouble their efforts to pull up the current tax code by its roots and begin anew, and resist the temptation to clip a few dandelions.
Our tax code is complicated for a whole host of legitimate reasons. At the top on the list for multinational businesses is the their exceedingly complex nature: defining a multinational’s taxable “profits” for a particular time and place is anything but simple.
But the primary reason for the tax code’s complexity is lawmakers’ desire to use it to address every problem under the sun. Under the guise of encouraging or discouraging activities they consider economically or socially productive or harmful, lawmakers have added hundreds of incentives and disincentives into the tax code. Even though many are of little or no economic value, they stay on the books because lawmakers find it easier to leave even questionable tax provisions alone than to risk the wrath of voters and contributors who benefit from them. Besides, as President Reagan wisely observed, the thing coming closest to having eternal life on earth is a government program.
A small-bore “fix” of a tax code flaw often begets a whole range of unintended consequences with far-reaching effects. For instance, when 155 Americans completely avoided taxes in the 1960s by combining various tax incentives, rather than reduce or eliminate the incentives, Congress enacted the Alternative Minimum Tax (AMT). It was a 10 percent tax on alternative minimum taxable income over $30,000. That is $180,000 in today’s dollars. Over the next 40 years, that once-obscure provision has come to affect millions of taxpayers. Instead of a 10% tax on AMT income of more than $180,000, it is now a 26% on incomes of more than about $50,000 (single) and $75,000 (married), and 28% on AMT incomes of more than $175,000. Every year, Congress passes a temporary “patch” to keep the AMT from reaching even more people.
A list of the unintended consequences of well-meaning tax provisions could fill a book. For just one recent example, look at the addition of an “alternative energy credit” to the tax code. Shortly after the credit’s enactment, the IRS determined that the paper industry’s use of “black liquor” — a paper-processing byproduct the industry had already used for decades to generate power — qualified for it. Lawmakers neither intended nor foresaw this application of the credit, and enacted a provision to close this loophole, but not before the industry claimed a few billion dollars in the credits. Rather than merely clarifying the law, however, lawmakers deemed the “fix” a loophole-closer that would “raise” $23 billion in new revenue, thus permitting them to use it to “pay” for $23 billion in new spending.
The amount of tax revenue the U.S. Treasury loses by “hybrid mismatch arrangements” is small in the scheme of things — roughly $175 million per year. Rather than spend a moment of effort to address OECD’s proposal, lawmakers need to resist the temptation to solve every perceived problem of social and economic behavior with a tax incentive or disincentive, and find the fortitude to create a tax code that looks, in the words of a former Treasury secretary, like it was designed on purpose.
Sir William Bragg (1890-1971), physicist and Nobel-prize winner, appreciated the need of communicating easily and clearly when speaking to his students. This is surely a lesson that lawmakers need to learn when writing laws. Language is a wonderful gift. I find it obscene when educated people have to use such convoluted and confusing language when they have at their disposal the richness of language that allows them to say things simply and clearly. Could it be that they do this deliberately for some or other reason? I can not imagine that it is because of intellectual laziness. I do think that nothing can serve justice better than for laws and especially tax laws to be clear enough for the ordinary man in the street.
Great line from the movie “Gettysburg”:
“…thats fine way to trivialize the momentous, and complicating the obvious…you should consider a career in Politics”
Just another reason to vote in a flat tax. You would proabably end up paying less taxes but have almost no deductions (if any). The Simpson/Bowles commission was a step in the right direction, even though Obama totally blew them off and did nothing with their recommendations. You see, to socialists like Obama, it’s the “evil rich” that have to pay everything, even though you could take literally all of the money the rich have away from them and never have enough to pay all of our bills. A flat tax would make sure everybody has some skin in the game, from the poor to the very rich. But to Obama and socialists like him, only certain people should pay taxes while everybody else gets a free ride. Even today, almost 50% of Americans pay NO Federal income tax. If we keep spending the way we’re spending, we will not be able to sustain this for much longer. A flat tax (which is supported by economists like Arthur Laffer) could actually save us from ourselves, assuming we want to take the chance.
Actually, no matter the method, there is no way to tax people correctly. I personally believe that we should all have to pay based on our load on society. Our load has almost nothing to do with how much money we make, it has to do with our consumption of resources.
The government should not have the power to tax directly any individual. The government should derive its revenue from import, export and excise taxes. This would place the government on a playing field of the Natioinal Production and would make the IRS an insignificant group from the view of the Citizen.
Maybe it is time for us to have a Constitutional Convention so we can clean up this over the top Social Experiment.
I agree. A flat tax starting at dollar one. I would have have only two deductions: for spouse and children, and for mortgage interest. And no estate tax. One page to file would do it.
Of course, what would happen to all the IRS agents (including the 16,000 newly hired ones) and all the tax accountants and lawyers that are dependent on the current system?
I remember talking to an H&R Block employee about the flat tax. She was utterly opposed to the idea. Mainly I think because she’d be out of a job. This is something we should consider here when talking about a flat tax. Or a VAT to replace the income tax which might also work. That there are a lot of people who earn their livings dealing with the income tax and taxes in general.
“Or a VAT to replace the income tax ”
Be careful what you wish for….no new tax will ever “replace” an existing one.
They will need an entire New Agency, a Cabinet Level Agency, staffed with Public Employee Union Loyalists, receiving unobtainium benefits packages for their make-work jobs, buy offices, furniture, cars, etc, etc, all while we’re still paying the “old tax”. That will cost A LOT of money. Think higher taxes and/or more debt to China to fund these new “appropriations”.
Then, because you cant just flip a switch and change revenue sources, we will have to “transition-in” the new Value Added Tax WHILE WE’RE STILL PAYING INCOME TAX. (don’t worry Mr. & Mrs. J.Q. Public, it only on Big Evil Businesses!) and all products will rise in cost.
Then, suddenly (how could it be?) some unexpected, never foreseen set of unique circumstances forces them, FORCES them oh-so-painfully and against their will, to “temporarily” extend the Income Tax Collections until the New Agency is up and running at full speed, producing all that revenue that will save us forever. Just think how the “tobacco settlement” was supposed to “solve” the “healthcare crisis”. Remember how all that free money that went to all of us, at no cost any of us, and how rich we all became?
Funny, me neither.
And so, we will be as they planned all along, saddled with a permanent NEW tax, on top of every EXISTING tax we ALREADY have…
Gee, just like those $5.00 a pack taxes on smokes, AND Obamacare costs…
Whoda thunk-it ?!
Get it straight: Any “new” tax scheme they propose (with the laughable idea it could “save” you anything?) is an intentional, criminal fraud to impose an ADDITIONAL tax on you. Everyone who suggests a “replacement” tax of any kind, at any level of government (like, new State Sales Tax to “replace” that unfair and onerous, ever increasing Property Tax?) is a dangerously unknowing fool, or a committed thief.
Our Children will be ash in the crematories of their Death Camps, before they ever stop demanding more money from us.
It can be done, just don’t tolerate any transition period. We go cold-turkey overnight. Do it January 1, and allow no overlap.
Tax accountants and lawyers? Whatever happened to blacksmiths, tailors, and wheelwrights? The accountants and lawyers would have to learn a new trade (or specialty).
If we repeal the 16th Amendment, so much less money will flow through Washington, stopping its ability to spend our money in such stupid ways.
Hmm, write the laws in language simple enough that the common man can understand them? Didn’t our Founding Fathers try that one? If all the laws were easy to understand we wouldn’t need lawyers. Anyone ever try to figure out all the gun laws that are on the books now? I don’t see how anyone could legally own a firearm. Yet they still want to pass more.
Whatever happened to making sure whatever it is you are trying to pass isn’t already covered by an existing law? What would happen if someone picked a subject, found all the laws pertaining to that subject and just eliminated those that were duplicates or contradictions? Tax laws? It would take a lifetime to try to go through all of them. Maybe we could form one large, central law review board, assign all the lawyers to it and let them spend the rest of their lives just doing that. While we are waiting for them to complete the task, maybe we could pick something simple say like, oh, I don’t know, maybe the constitution, and use that to govern us while we wait. Silly idea I know but it might work.
The only approach I know of that seems to
be gaining traction is the truly flat tax.
It has both a flat tax base (money received)
and a flat tax rate (less than 1%) which equals
tax certainty and replaces present income tax revenue.
There is no filing, no reporting, and no paperwork.
It’s collected in real time as money transfers
through the banking system with full accounting
to both taxpayer and government.
According to A.Laffer and S.Moore this approach
which abolishes the income tax code will reduce
the cost of living and doing business in the U.S.
by over $500 billion per year. This is the financial
equal of a $10 Trillion sovereign fund asset @ a 5%ROI.
However unless Republicans, Democrats, and Independents
jointly agree to use the power of their vote to
strictly and absolutely limit the tax rate to a maximun
of 1% then the country is better off with the pathetic
system now in place. But why get loss in the discussion
of trade offs until taxpayers in general are aware of
what the FreedomIncomeTax is, and how it can be demonstrated
prior to any formal debate on the merits.
Google pulls up the 303 word FreedomIncomeTax presentation
as a .com website. Check it out in 10 minutes.
June 29, 2010 by Sector Senate
The current tax code is an obscene perversion. It will indeed take bold and vigorous action to fix it in a meaningful way. IMHO the only way to fix it is to start from scratch, and replace the whole boondoggle with a no-nonsense, zero loophole, and zero deduction flat tax. Anything less will be subject to political tinkering and soon devolve back to what we have now, a mess.
No doubt they should tear it up and start all over. As convoluted and overgrown as the code is, it’s gotten very hard to hand out goodies to special interests. A blank sheet is exactly what is needed.
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