Changing the Tax Code

Since we are in the midst of an election year, numerous proposals for changing the tax code are circulating. These proposals include items like a) president Obama's so-called Buffett Rule to raise taxes on the super rich to a minimum of 30%, b)reducing taxes on manufacturing to zero (Santorum's plan), or c)cutting all taxes across the board by 20% (Romney) with many others as well. Often lost in these discussions, however, are the goals that need to be achieved in any modification of the tax code. Before we can decide on what changes need to be made, we ought first decide what it is we are trying to accomplish. Here are some of the goals that should be included:

1) Let's make it harder for people to evade paying their taxes. The underground economy in America last year is estimated to have been well in excess of a trillion dollars. Some of this income is the result of illegal activities like selling drugs. Far more of it comes from people who work "off the books" or using phony social security numbers and the like. Many illegal immigrants have to work this way since they do not have legal status. Many other people simply decide not to declare all of their income. If the system is to function fairly, the people who have this hidden income need to be subject to taxation just the same way that everyone else is.

2) Let's have a tax code that makes America more competitive in world markets rather than less. High tax rates on products made in America mean higher costs for those products. In the global economy, American taxes must be structured so that we do not hinder sale of our own products with the result that we lose jobs overseas.

3) Let's have a tax code that is simple. Note that I did not say a code that is simpler than now. Right now, hundreds of billions of dollars are spent each year by companies and individuals just trying to comply with the rules and requirements set by the government. Imagine how much of an economic boost would be given to the economy if those funds were released to be used for productive purposes rather than tax code compliance. It would not be good news for H&R Block or tax accountants, and many attorneys would see their business fall, but for the country as a whole, it would be quite a boon.

4) Let's try to treat everyone the same. We have a code now that has all sorts of special goodies in it for the favored few. There are rules that apply only to companies incorporated on a particular day in a particular year; in other words, there are special provisions in the code that only apply to a particular company which had a great lobbyist. Every company should be treated like every other company. Every individual should be treated like every other individual. Having connections should not mean paying lower taxes.

5) Let's try to avoid using the tax code to try to modify behavior. Should folks who rehabilitate historic buildings get special tax breaks? Should folks who build housing for the elderly get special tax breaks? Should people who buy electric cars get special tax breaks? The answer to all these questions should be NO! If congress wants to help sales of electric cars, it can do so without using the tax code. All of these special tax expenditures make the code more and more complicated with the result that more and more is wasted in trying to comply with the provisions of the code. This issue, however, does not just deal with special provisions. For example, the deduction for charitable contributions is designed to increase such contributions. Let's do away with it. Folks who want to give to charity should do so without considering taxation. Indeed, many folks who set up charitable foundations do so to get the tax benefits while keeping control of the funds. There is also no reason why state taxes should be deductible. Those who live in high tax states should not be subsidized by those in low tax states.

6) Let's make the tax code pro-growth. This may seem to contradict some of the previous goals; is it using the code to modify behavior? The simple answer is no; there are many places where setting up new rules could have a pro-growth bias without complicating the code or using it to make tax expenditures. For example, there will always be a question how to handle capital investments by businesses; are these to be expensed or depreciated over time. Investments with a short life span (like seven years or less) could be expensed while those with a longer life could be depreciated. This would promote investment and economic growth.

7) Let's expand the base of the tax code. It is not good for folks to pay no taxes at all. Everyone needs to care about the level of taxation and whether or not that level is sustainable. I am not calling for the very poor to pay taxes; it would serve no point. The folks who are in the middle, however, should all pay something, even if it is a small amount.

8) Let's keep the tax rates progressive. Even if the base gets expanded with more of the middle income folks paying taxes, the wealthy should still pay substantially more than others. It is only fair that those who can afford the taxes actually pay them. Indeed, if all of the taxpayers are treated the same, many of the wealthy will actually be able to pay less while those who have avoided all taxes previously will make up the difference.

9) Let's keep the estate tax but only to prevent great concentrations of wealth. The estate tax has never raised much in the way of revenue; for decades it has operated more as a social policy than a tax measure. Because the tax was not kept current with economic conditions, however, it became too intrusive and a move arose to do away with the "death tax". The reality is that for most folks, there is not need to tax inheritances. Someone with a family farm or small business should not have to sell that farm or business in order to pay the inheritance taxes. On the other hand, those with great fortunes should not be able to pass the entire amount on to their heirs. That practice would only promote the creation of great hereditary fortunes that could dominate our country. Bill Gates may have made $50 billion dollars, but do we want his heirs for the next two centuries to have all the wealth and the power that comes with it? I think not. Anyone who has an extate of more than ten million dollars should have to pay tax on the excess.

There are other goals that apply as well, but these are the most important ones in my opinion. If we could first agree on these goals, it would be much easier to come to agreement on how to change the code.