Even with new approval of a GOP health care bill from the Freedom Caucus that could provide the votes to repeal and replace Obamacare, another major focus for the GOP and many Americans is tax reform. Tax policy is something often misunderstood and misconstrued, breaking down into partisan bickering over higher or lower rates and who doesn’t pay enough: presumably the wealthy and corporations or for some, the documented 47% of Americans who pay nothing.
Needless to say, the Trump administration is taking a different approach than we would have seen from Bernie Sanders, who advocated a personal rate of up to 54.2% and as high as 39.2% on all income for even married couples earning as little as $250K/annually and almost ⅓ of ordinary income for individuals earning as little as $37k/year. Republicans and Trump have expressed an interest in prioritizing simplification and closing loopholes, along with lowering corporate taxes in particular. The US continues to have one of the highest corporate tax rates in the world and the belief is strong that lowering it will improve the competitiveness of American businesses in a number of ways.
But even with talk of simplification, rarely is it a serious critique of how absurdly complex the tax code is. The actual code along with statutes, regulations and case law amount to an estimated 70,000 pages and growing. There is no such thing as a perfect tax system but it’s hard to defend a monstrosity that perpetuates accommodations for virtually every special interest under the sun along with enabling a massive public bureaucracy to keep it functioning and necessitating specialized professionals to help the consumer navigate it.
Progressives often view the tax system not just as a means of funding the basic needs of government but for increasing social programs and redistribution of wealth as part of desired social engineering. Those professing to be fiscal conservatives seem to understand that over taxation can be harmful but have their own sacred cows and in regard to simplifying the tax code, the actions haven’t matched the rhetoric nor addressed the kind of overhaul we need.
Discussions about reform that don’t address these issues are too often derailed with sidebars entrenched in ideological narratives, often among people who have little understanding of how taxation works. Even general knowledge on a macroeconomic level doesn’t address the tens of thousands of rabbit trails that too often require CPAs and tax attorneys to sort out. Worse, the tax code is a red carpet for special interests to lobby Congress for favorable treatment.
A simple and easily decipherable tax code would also allow us to easily analyze tax policy and perhaps lead to greater scrutiny of the complicated process of passing spending bills. It seems counterintuitive to start somewhere other than insulating the system as much as possible from being bought. This begins with a simplified tax system that assigns a very low burden across a broad spectrum and eliminates special accommodations.
Understandably, there is resistance to change. For Congress, it seems largely about control but there are also employees in a large IRS bureaucracy and a large cottage industry that includes certified public accountants, tax attorneys and related professionals. If the tax code were simplified, it’s true that jobs in these areas might be lost and in this instance that's acceptable: we won't lament the demise of oncology when cancer is cured. Just as there are other diseases to treat, so too can accounting and legal skills be put to good use elsewhere.
The Fair Tax website points out, “almost 40 percent of the public, according to the IRS, is out of compliance with the present tax system, mostly unintentionally due to the enormous complexity of the present system.” While much may not be deliberate and we hear a lot about the rich and corporations not paying “their fair share,” why isn’t it a bigger priority to find a way to tax those who don’t report income at all? Some may be otherwise benign, ranging from nannies to construction workers paid under the table. Others are street thugs and drug dealers all the way up to cartels and organized crime. These tax evaders get little scrutiny from most of the people who ostracize businesses and the wealthy earning legally, yet the the Washington Post reported in 2013 that it’s estimated “as much as 18-19 percent of total reportable income is not properly reported to the IRS. That's as much as $2 trillion in underground economic activity, with about $500 billion in taxes that aren't being paid to the government.”
Further, the Federal Reserve’s rather generous use of quantitative easing has resulted in a soaring money supply, from $803 billion in 2007 to $1.18 trillion in March of 2013. Much of that could reflect growth of, or even be an enabler of unreported economic activity from people getting paid in cash. This isn’t what is being addressed in the media or on either side of the aisle. Surely we can all agree that those not reporting their earnings, particularly from nefarious activities, are the most egregious tax evaders.
No one credible believes the wealthy shouldn’t shoulder a larger burden per capita than those of lesser means but there is disagreement and a fundamental lack of understanding about business taxes. Just as with any other expense, business tax liability is essentially passed on to the end user as a company must take into account all costs of doing business in determining pricing. Taxes are not taken from some mythological excess profit, especially in a small companies that comprise the vast majority of US businesses. Fair Tax points out “corporations pass on their tax burden in the form of higher prices to consumers, lower wages to workers, and/or lower returns to investors.”
Proponents of the Fair Tax advocate what amounts to a 30 percent sales tax on consumers (with a prebate for the poor) and zero tax for businesses, which would be a great engine for economic development but is also a likely enabler for rampant fraud, even with provisions in place to prevent it, due to the huge gap between consumer and business taxes. Still, it provides a good starting template and while some believe any consumption tax is regressive, with a prebate that isn’t the case: the lowest spenders will pay close to nothing and for others, the more they spend the closer they get to 30%, with the important add-on of the underground economy included.
But even without the complete elimination of all business taxes, simplifying and lowering business taxes has the same benefits as it would for personal taxes. Further, a very low, broad-based consumption tax on everyone and everything eliminates tax-exempt status for organizations that are actually hate groups or political organizations. It’s long past time we stopped enabling non-profits too often involved in activities that shouldn’t be subsidized.
Under a sort of national transaction tax, everything would be taxed at a low rate. To get some basic idea of the pool we could be collecting from, we could start with what’s known as gross economic output, which Mark Skousen, a presidential fellow at Chapman University described in the Wall Street Journal as “an attempt to measure what the BEA calls the ‘make’ economy—the total sales from the production of raw materials through intermediate producers to final wholesale and retail trade. Valued at more than $30 trillion at the end of 2013, it's almost twice the size of gross domestic product.”
We should also include investment transactions, which generally concern only the top half of earners, and would be another selling point for anyone concerned that a consumption tax would be regressive. With many brokerages charging just a few dollars per trade and even lower fees for large volume traders, a small transaction tax would not discourage trading.
Information on the volume of individual trades, as opposed to dollars or shares, is hard to come by in some markets but in 2014, the major stock exchanges recorded nearly 7.5 billion stock trades and that does not include other options such as mutual funds, bonds, and commodity futures. There were over 7 billion futures contracts in North America in 2012. While information on the volume of bond trades is more difficult to come by, SIMFA reports the average daily trading volume on the U.S. bond market is $822 billion.
Excluding what we don’t already know, let’s do a little math:
The federal budget in 2016 was about $3.54 trillion and GDP was about $18.56 trillion, up a little over $1.5 trillion from 2013. If we impose a modest 9 percent tax on every dollar spent in the United States, based on an anticipated increased gross economic output of about $33.75 trillion, we could generate over $3 trillion, or almost the entire federal budget. A $20 transaction tax on stock trades and futures contracts could generate nearly $300 billion.
Additional revenue could be garnered from similar fees on mutual funds, bond trading, and other investments. Collections in excess of the total budget could be used to reduce our federal debt and/or the consumer/business consumption tax and offer a prebate to reduce the tax burden on low earners. In addition, there could also be added sources such as luxury taxes on select items or usage fees for interstate highways, air travel, etc.
As an added bonus, 100 percent of actual taxes would be collected without preparing or reviewing arduous returns, a time and money saver for the taxpayer at both ends of the process. The money will be collected not long after people actually make purchases, rather than during a burdensome annual ordeal the following year.
The collection efforts and non-payers under the current structure would also be eliminated. Situations where people fall behind end up settling with the IRS for much less than their original liability or trying to work with tax relief companies that may be running scams would become a thing of the past.
These numbers are not meant to be a final draft but rather a general direction that focuses on simplicity and spending, as opposed to income which is too often not reported. These changes would include transactions relegated to high earners while still leaving room for specifics that easily fit into a short description rather than thousands of pages, while still leaving room for a few tweaks—preferably a lot fewer than in the past.