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The fix
is in. Last week the US Congress passed a $168-billion
fiscal-stimulus bill, including tax rebates for
households and tax breaks for business. President George
W. Bush plans to sign it today. The Internal Revenue
Service should start issuing tax rebates to 130 million
Americans in May, according to the Treasury.
Members
of both parties seemed pleased with themselves and their
bipartisan effort. That, in itself, should tell you the
package is pretty benign: It won’t help, or hurt, very
much. If nothing else, the initiative is certain to help
the incumbent reelection effort.
This got
me thinking about the misuse, and often abuse, of tax
policy. There is no agreement on what tax cuts should do
(Provide relief to cash-strapped consumers? Stimulate
business investment and job creation?), not to mention
the effectiveness of temporary cuts.
The late
economist Milton Friedman won a Nobel Prize for his
theory that consumers make decisions about their
spending patterns based on long-term income
expectations, not current income. More recently,
research by Nicholas Epley, a professor of behavioral
science at the University of Chicago Graduate School of
Business, found the designation of money given to
consumers—a “rebate” versus a “bonus”—determines whether
they save or spend it, respectively.
Even
decades after the fact, with data in hand, economists
can’t agree on the effect of a particular tax cut. (It’s
virtually impossible in a diverse, $14-trillion economy
to conduct a control experiment, holding everything else
constant except tax rates.)
First
principles
It makes
you wonder why the nation’s tax policy is always up for
grabs. Tax policy is too important to be left to the
politicians, who use it for their own purposes,
shamelessly defying the principles on which they ran for
office.
Isn’t it
about time we stopped tweaking tax rates to get a little
more spending here, a bit more investing there and a lot
of votes on Election Day? Here’s my motto for the tax
system: flatten it, fix it (set it in stone) and forget
it.
Income-tax rates should be designed to meet the needs of
the government (the Founders clearly had a different
vision of the legitimate role of the federal government
than today’s leaders) and nothing else. They should
promote economic growth, not punish success. They should
be low enough to act as a disincentive for noneconomic
activity, such as shifting or sheltering income,
avoiding or alleviating tax liability.
Simple,
stable
The tax
code should be simple enough to put tax-preparation
firms out of business. (Most of us would be happy to
subsidize the education and retraining of accountants in
exchange for a postcard-sized return.) Tax
simplification requires elimination of deductions and
loopholes.
Tax
rates should be constant, not subject to ever-changing
political cycles. That goes for individuals as well as
corporations, whose actual tax rate is 35 percent but
effectively is about 22 percent—and less than that for
bigger companies with better tax lawyers.
“At some
point, the entire corporate-tax structure should be
thrown out, along with all the murky K-Street
tax-earmark loopholes that litter the IRS code,” writes
Larry Kudlow, host of CNBC’s Kudlow & Co. in a column on
Realclearmarkets.com.
One
option, which I advocated in a column two years ago, is
getting the politicians out of politics—returning to a
citizen legislature—since efforts to get the money and
influence-buying out of politics have come to naught.
Our elected representatives go to
Washington ostensibly to do the people’s business, but end up
feathering their own nests instead.
Life
without 1040
That
isn’t going to happen. There’s a better chance, albeit
somewhere between slim and negligible, of getting a
similar result by fixing the tax code. (Yes, lobbyists
would still line up at the spending trough, but you have
to start somewhere.)
By fix,
I mean toss it out and start from scratch. Trust me: no
one will miss it. Instructions for filing Form 1040, the
federal-tax form, number 143 pages, according to the
National Taxpayer’s
Union, a nonpartisan group advocating lower taxes. That’s three
times the number in 1985, the year before taxes were
“simplified.”
If the
basic form isn’t adequate, the IRS has 195 different tax
forms with more than 1,000 pages of related publications
and instructions.
No
wonder Americans are expected to shell out $325 billion
this year in federal tax-compliance costs, according to
the Tax Foundation, a nonpartisan tax research group in
Washington.
The IRS
estimates that households and businesses spent a
combined 6.6 billion hours last year filling out tax
forms.
Wouldn’t
life be better without the rigmarole surrounding April
15? Mine would. For that reason, I pledge that if real
tax reform ever comes to pass in my lifetime, I will
“donate” my tax-preparation fee (pay Uncle Sam more than
I owe) to the Treasury for the purpose of deficit
reduction. |
