056 Simplifying the Tax System Will Help Our Economy

Everyone agrees that our tax system is broken. It is too
complex. It interferes with the free market too much, and, worst
of all, it doesn’t equitably raise the revenue we need to fund
programs enacted by Congress. Most of the proposed tax system
fixes are the equivalent of putting a Band-Aid on a spurting
artery. It is time to stop the auction system of tax legislation and
go back to basics: raising the revenue we need with as few special
interest subsidies as possible. Now is the time to do it, because
this is one of the few times that the public’s attention is focused
on the issue, which will make it much harder to hide special
interest deals behind a cloud of complexity.

Corporate tax laws are so complex that even with the best
intentions, it is almost impossible to comply with them. And the
temptations to cheat are overwhelming, particularly for the
multinational corporations that can use transfer pricing and tax
havens to avoid taxation. Every IRS commissioner who has
testified on transfer pricing has admitted that the Service cannot
police it. This gives those multinational corporations a real
competitive advantage over domestic corporations paying much
higher taxes.

Abolishing corporate income taxes would make sense if it
were possible to impute the income to shareholders and collect
taxes from them. But far too many shareholders are tax exempt or
foreign, so that’s not possible.

Abolishing corporate tax provisions and imposing a tax on the
income corporations declare under oath to shareholders and the
SEC should be considered. That way, corporations would avoid
tax accounting costs and corporate tax rates could be substantially
lowered, thereby minimizing the economic distortions caused
by tax planning while raising the same amount of
revenue. Such an arrangement would also take some of the
pressure off the demand for special subsidies in the tax code by
sophisticated corporations. Actually, that could be this proposal’s
fatal flaw, because it could impair congressional fundraising.

This rationale, however, does not apply to taxes intended to
discourage harmful behavior, such as smoking or polluting.
There is another problem on the horizon. If we give in to the
multinationals’ push to adopt international financial reporting
standards rather than U.S. generally accepted accounting principles,
there will be far too much temptation to use the much
looser IFRS to manipulate income and avoid taxes. Finally, in
light of increasing worldwide trade, we should work with other
countries — particularly those in the OECD — on an international
mechanism to ensure that profits don’t get ‘‘lost’’ in tax
havens.

Individual taxes are too complicated and shift too much of the
burden from upper-income to middle-income taxpayers. Even
though the IRS is a terrible social welfare agency, Congress
continues to impose new welfare programs for upper- and
lower-income individuals on it. We need to eliminate all those
special welfare provisions and make tax rates truly progressive
once again. If a welfare program is worth funding, it is worth
reviewing each year in the appropriations process to determine
whether it is worth continuing, and if so, at what level. For far
too long Congress has financed social programs through the tax
system and continued them whether they work or not. At the
very least, we need to sunset every tax subsidy at least once
every five years.

In short, we shouldn’t be satisfied with simply tweaking the
system. We need to go back to basics and use the tax system to
raise money, not subsidize every special interest that is sophisticated
enough or deserving enough of government help. By
simplifying and lowering our business and personal taxes, we
will make them more equitable and allow our economy to
function more efficiently.

via http://www.taxanalysts.com/www/freefiles.nsf/Files/LOBEL-19.pdf/$file/LOBEL-19.pdf

 

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