Will Washington ever simplify our confusing federal tax code?
After all, its pages of rules number in the tens of thousands! The Cato Institute has estimated that the total cost of just complying with the code is a shocking $265 billion per year! That is more than a quarter of a trillion dollars that could be flowing into much more productive uses in our economy.
If any part of government ever needed simplification, our tax code surely does.
Unfortunately, the Obama administration does not seem particularly interested in making federal taxation easier to understand.
The president asked his Economic Recovery Advisory Board to consider “pros and cons” of simplifying the tax code. But he has no interest in any proposal that would protect families earning more than $250,000 or individuals earning more than $200,000 from tax increases. That is in accordance with his promise to raise taxes on “the rich.”
But it is hard to see how dividing tax relief from tax hikes based on that artificial boundary would simplify – rather than further complicate – the tax code. And from an economic standpoint, many in that higher income category are small-business owners who create lots of jobs, and who already pay much higher taxes than people at other economic levels.
The truth is, it is no accident that the tax code is maddeningly complex: That helps hide from the American people just how much of their income is going to the wasteful federal government. If workers simply had to pay their full federal income tax bill in a lump sum at the end of each year, there would be such outrage that it would virtually force immediate tax reform. Instead, by using a maze of deductions and credits – and by having taxes withheld in relatively small paycheck-by-paycheck increments – the government makes it harder to get a handle on just how big one’s tax bill is. Many people even “celebrate” getting back an annual tax refund, and think Washington is doing them a “favor” by returning overpayments to them.
It would be wonderful for the American people – though not for high-taxing politicians – if we had a truly simple, flat tax. That might involve exempting a certain amount of each household’s income and then charging a flat rate of, say, 17 percent of what remains. Such a system would require a form no larger than a postcard and would radically reduce the hundreds of billions of dollars wasted on tax compliance each year.
Tax simplification and relief are especially needed in a time of economic crisis, when businesses need stable, predictable economic policy and low taxes to be free to invest in job creation. Getting to a better tax code will not be easy, but sticking with the broken one we have now is a poor alternative.