Tax Simplification Is Key To Growth, Fairness

Our tax system does not work well. Some say it is broken. Many Americans pay no income taxes. Others pay far more than they think reasonable.

Ordinary Americans are angry, particularly when tax administration and enforcement varies by taxpayer. What can be done to get out of this mess?

Our tax system has three fundamental weaknesses: (1) marginal tax rates are too high; (2) the structure of both personal and corporate taxes is much too complicated; and (3) the incentives for political mischief at the IRS are high while the likelihood of detection is low.

It turns out that all three of these weaknesses are related, and they have one simple solution: tax simplification. To see the need for tax simplification, consider the unfolding events of past weeks.

Conservative groups are rightly angry because their anticipated tax break, namely tax-exempt status, was delayed or disallowed.

Some lawmakers, such as Sens. Carl Levin, D-Mich., and John McCain, R-Ariz., are angry because Apple took advantage of legal tax breaks. "So the moral of the story of this is that at least in my view, Apple has violated the spirit of the law, if nor the letter of the law," McCain said.

But there’s nothing wrong with legally avoiding taxes.

A simpler tax system would solve many problems. It would likely reduce the benefits of tax-exempt status for all groups, including those targeted by the IRS.

A simpler tax would also reduce incentives of companies such as Apple to avoid the American tax jurisdiction. But most importantly, tax simplification would stimulate economic growth.

If you want to find complicated taxes, don’t look to China. The economy grows at nearly double-digit rates, individuals save nearly half of their income, according Chinese University of Hong Kong professor Lawrence J. Lau, and taxes are less complicated than in America. A complex tax code is not a prerequisite to economic growth.

America’s tax system has become so complex that a 2012 Taxpayer Advocate Service Report found that 6.1 billion hours per year are spent by individuals and business preparing taxes, not including time spent on audits or responding to IRS notices.

House Budget Committee Chairman Paul Ryan once suggested a two-step flat tax, with rates of 10 percent and 25 percent. Everyone would receive a $12,500 deduction -- but almost all other deductions would be eliminated. Those who didn’t like the new simple system could keep the current IRS code.

President Obama, Senate Democrats and House Republicans have all proposed lowering corporate tax rates. Reducing and simplifying corporate taxes would bring in more investment from abroad -- together with additional revenue.

America’s corporate rate, 35 percent, is now the highest in the industrialized world, far above the average of 24 percent in the Organization for Economic Cooperation and Development, our major competitors. Plus, America taxes income on a worldwide rather than territorial basis.

Two examples -- Canada and Germany -- have 15 percent corporate tax rates.

Both tax corporate income generated only within their borders, rather than corporations’ worldwide income, as does America.

Some have suggested replacing both corporate and individual income tax codes with a value-added tax or a national sales tax.

Both Congress and the American public know that our tax system is not working well. High rates, complexity and the appearance of political mischief discourage even the most earnest taxpayers.

The solution is to simplify the tax code. Congress can and should do it, unless it wants to see its future filled with hearings about dwindling tax revenues, corporations that pay no taxes, IRS political shenanigans and taxpayers who have lost trust in government.

This piece originally appeared in Washington Examiner

This piece originally appeared in Washington Examiner