The tax code has become so convoluted and the ramifications of erring so onerous that tax preparers have become almost a priestly class of intercessors between the IRS and taxpayers. And yet, most of us are simply report numbers that the IRS already has. Filing our taxes is less about reporting our incomes than providing the IRS free secretarial support. This cesspool of confusion delivers a cornucopia of benefits to lawyers, tax accountants, favored industries, lobbyists and politicians.
In part, the tax code is a make-work program. Congress digs legal holes, and we pay lawyers and accountants to fill them in again. Favored industries and lobbyists benefit more subtly. The more intricate the tax code, the easier it is for politicians to hand out favors without attracting attention. Industries pay lobbyists to encourage politicians to create special tax favors, and politicians receive political and financial support from the industries. This symbiotic relationship thrives in an environment of complexity.
Complexity benefits the politicians both coming and going. Politicians decry the complexity and vow to close tax “loopholes” while counting on voters not to notice that those same politicians created the loopholes in the first place. Politicians pledge to tax corporations while counting on voters not to notice that every tax on a corporation gets passed on to voters in one form or another. Politicians vow to make the rich pay their fair share while counting on voters not to notice that the richest 10% of taxpayers already pay almost 75% of all federal income taxes.
History suggests simplifying what’s known informally as “Hauser’s Law.” For the last 70 years, it hasn’t mattered whether Congress taxed the rich or the poor, whether it taxed corporations or individuals, whether it taxed capital gains or wages, whether it taxed a lot or a little. The result has always been the same: the federal government has collected around 18% (plus or minus 2%) of the economy in tax revenue.
If 18% is the answer, regardless of the simplicity or complexity, let’s opt for simplicity and tax all income at 18% — no deductions, no exemptions, no credits, no caps, no different treatments for wages and capital gains. The problem is that taxpayers want simplification, except for their favorite carve-outs. Homeowners want to deduct mortgage interest. Retirees want capital gains taxed differently from wages. The chronically ill want medical deductions. The poor want to be taxed at lower rates than everyone else.
Replacing the federal income tax with a national sales tax would make the tax code simpler and more transparent. When we grow angry about “the rich,” we picture people living a high life off passive income. We don’t picture hard-working middle-class people who have amassed wealth through frugal living. An income tax hits the industrious. A consumption tax hits the spendthrifts. The major hurdle is that a national sales tax would require a constitutional amendment. And, if we didn’t simultaneously repeal the 16th Amendment, which established the income tax, we’d end up with both a national sales tax and an income tax.
A simplified tax system would save taxpayers time and money and would reduce opportunities for the powerful to co-opt the tax code to their benefit. Businesses would focus more on innovation instead of on co-opting the tax code. Entrepreneurs would focus more on attracting consumers than attracting politicians. Politicians would focus more on satisfying constituents than satisfying lobbyists. The many smart people who serve as tax lawyers and tax accountants would re-direct their efforts to creating value rather than counteracting problems Congress creates for the rest of us.
Antony Davies is an associate professor of economics at Duquesne University/InsideSources.com
