How Can We Simplify the Tax System?

It’s getting near the middle of May, and in an election year, that means the already heated election cycle is only going to get hotter. You can see it already, as the Obama campaign takes firmer aim at Mitt Romney, and Romney’s supporters in turn attack Barack Obama all the more fiercely. This is not going to be a discussion of politicians, as I’m not very good in that arena, and would prefer a less argumentative way to get people to leave comments. (If you want some of the best advice I’ve seen on most politic coverage in a long time, try this article from Cracked (yes, the comedy site) telling you how to determine if a political story is B.S.) I’m just going to ask, wouldn’t you like to see something that both the Left and the Right in this country can agree on?

Well, there is at least one thing: both sides acknowledge that the tax code has gotten too complex. Both the left-leaning Brookings Institute and the right-oriented Heritage Foundation make that point pretty clearly, illustrating how complex our system has currently gotten. Admittedly, they quickly disagree on how to handle the issue (Brookings recommends a progressive tax system, Heritage supports a flat tax), but still, it’s nice to see some agreement amongst those encouraging political action from different sides.

How Complex Is It

Before we can look at possible ways to simplify the tax code, we need to understand just how complex it currently is. It’s a bit tough to say for certain, as almost nobody has actually read the entire thing. The tax code currently stands at over 3.8 million words, over three million more than the King James Bible (not known for being an quick evening read). So, very long, check.

Unlike the Bible, you can’t even count on it being it the same over time. You could get a King James Bible made for King James himself, and not notice much difference from what is being currently published under the King James name. The US tax code, on the other hand, enjoyed over 4400 changes over the last decade, not exactly the sort of thing the average person (or even the avid tax code fan, if such a person exists) could keep track of without an extreme amount of time devoted to the task. Constantly changing, that’s another big check in the too complex column.

Ideally, you should be able to calculate your taxes using this calculator

As if that wasn’t enough, there’s also the lack of common English in the tax code that would definitely imply more than a little complexity. When an entire industry has sprung up to help the typical citizen follow the tax code and submit the proper amount of tax money (and the IRS has become THE most threatening agency at the federal government), that’s definitely a bad sign. When the IRS commissioner needs help filing his taxes, you know things have gotten pretty complicated.

My Plans to Simplify the Tax System

At this point, you’re probably wondering what I would do with taxes if I were in charge. (Alright, that’s not quite true; you’re probably thinking of how you would change the tax system, and more than a few of you might be thinking that you’d just end taxes, and the federal government, and be done with it.) Well, I’ve shared some thoughts on how to change the tax system before, most of which I still stand by. (If you want the Cliff’s Notes version: gradually progressive, not much difference (if any) in how different types of income are taxed, and easy enough to understand that anyone would be able to tell if tax rates are being increased.)

Recently, though, Fareed Zakaria has come forward with a tax system (taking Herman Cain’s 9-9-9 plan as a starting point), where taxes would be taken as follows:

-9% on personal income up to $150,000
-18% on personal income between $150,000 and $500,000
-27% on personal income over $500,000
-18% on corporate income
-9% in a VAT (value-added tax)
-50% Inheritance Tax

While I haven’t run the numbers to see if this tax plan would provide us enough money to match our current tax intake, or better yet, close the deficit gap (and if Zakaria has run the numbers, he isn’t sharing), it does seem pretty solid to my mind. If I were proposing this plan, I’d just make a few modifications and clarifications before putting it forward, including:

-On the personal income: Just a clarification that this includes all (non-inherited) types of income, from earned income to investment income (excepting municipal bonds) to profits from real estate sales income, so we’re clear on how this works. Also, I’d add retirement account investments and a child income tax credit (for at least the first child or two) to the short list of deductions Zakaria laid out (state and local income and charitable donations at efile time).

-On corporate income: I’m torn on corporate income taxes; on one hand, it does make sense as a source of government income, as well as encouragement for corporations to spend their money in tax deductible ways rather than passing it all along to the owners and stockholders. (Not that the current tax deduction system is perfect, of course; the idea of CEOs getting houses, planes, and parties on the corporation dime is practically cliché.) On the other hand, the argument that the money is taxed twice (once when it is earned by the corporation, again when it is paid out to shareholders) does make sense as well. How about this: once we get rid of this whole idea that corporations are ‘people’, and return them to the place of legal constructs to limit the financial liability of investors to only the money they put into the company, we’ll get rid of the corporate income tax and only tax the income when it is paid out to investors. Speaking of double taxation:

-On the VAT: I’ve heard more than a few arguments that VAT systems or other spending taxes tend to be regressive, although there are also some that maintain that a tax on spending would help us as a country to trim our overspending. Make sure that most of the essentials of life (food, housing, medical care) aren’t included, and you’ll have more of my support, although I’m still a bit leery.

-On the inheritance tax: There are plenty of arguments out there against an inheritance tax (some mentioned in the comments on Zakaria’s piece), many focusing on issues like what happens when a small business is passed down or a family house is inherited and the inheritors have to sell it in order to pay the taxes on the inheritance. (As well as arguments that this is another form of double taxation, but I’ll be honest, I see it as, well, your children earning money from being born to a well-off family.) A few simple exemptions, like for privately owned businesses when you receive at least 30% of the business (to enable up to a three-way split in inherited control, more than enough for most situations) and a primary residence, as well as any inherited amount beneath a given limit ($100,000, perhaps) should work to keep this tax focused where it belongs.

-On the whole package: A limited number of years before the whole thing is scrapped and a new set of tax laws have to be put into place. Part of why we’re in this current tax mess is that it is easy to simply add more layers to the current tax system, allowing politicians in power to point out their additions to their contributors while maintaining that they aren’t responsible for the rest of the massive tax tangle. Instead, let’s make sure that anyone who votes for changes to the tax system has to vote for the WHOLE tax system, preferably during an election (preferably Presidential) year. (A four-year period would give us a chance to see what works and what doesn’t, so we can make educated changes to the system, while still providing more stability in the tax code than we currently seem to have.)

Whew, I got a bit wonky at the end there. Still, I think this could make a pretty solid system (and I’ll have to run the numbers myself at some point to make sure we won’t end up even deeper in debt). Plus, let’s be honest, almost by definition it would have to be simpler than our current system.

How would you change the tax system? Are there any types of taxes we should include (or avoid)? Do you think anyone has actually made it through all 3.8 million pages of the taxes code?

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