Our tax code is broken. It’s a simple fact, yet year after year our government leaders fail to address it. Meanwhile, the consequences of the overly complex and poorly designed system are felt by middle-class families and entrepreneurs alike. They benefit little from the existing array of incentives and loopholes, which are mainly targeted to special interests and the wealthy.
This week, House Ways and Means Chairman Dave Camp, R-Mich., and Senate Finance Committee Chairman Max Baucus, D-Mont., are visiting San Francisco and Santa Clara to hear directly from the California high-tech community about the inefficiencies of the system, and the potential effects of several of the proposed reforms.
One thing everyone agrees with is the need for simplification, especially simplifying everyday provisions that would make tax reform real for most taxpayers. Not only would a simpler code reduce red tape, it would also create a better economic environment for businesses of all sizes, raise revenues for deficit reduction and incentivize urgent investments in our nation’s future.
Simplification, however, should never abandon the principle of progressive taxation. One example of a misguided reform is what’s called the “flat tax.” It sounds simple, but in order to keep tax revenue stable the rate would be considerably higher than the 15 percent rate most taxpayers pay today. That means the majority of Americans would pay higher taxes in the name of simplification.
Also in the mix are political gimmicks such as “return-free filing,” in which the IRS would calculate your taxes for you. Such a system would only hide the inefficiencies and dysfunction of the system from many Americans, reducing support for desperately needed reform. In addition, there is an inherent conflict of interest in having the tax man do your taxes: If there’s any question about how to apply the tax code, the IRS is likely to choose the interpretation that brings in more taxes.
If Congress and the Obama administration are serious about simplifying the tax code, any plan must:
Promote economic efficiency and growth to help speed economic recovery, bring down unemployment and shrink the national debt.
Reduce the number of tax incentives to rebuild the nation’s revenue base. Each tax loophole is fiercely guarded by the special interests whom it benefits. Closing tax breaks en masse will not be easy, but it is essential both to lower tax rates for middle-class families today and to whittle down public debts that impose harmful tax burdens on our children tomorrow.
Maintain progressivity. Most tax incentives today make it less progressive, not more. Eliminating many tax incentives and using the savings for lower rates can, in conjunction with maintaining (and maybe even expanding) the Earned Income Tax Credit, maintain or improve progressivity in the tax code.
Reduce errors and avoidance. Tax law complexity often leads to perverse results. There are 14 different incentives for college, 11 types of IRAS, and three major incentives to help defray the cost of raising children. Common-sense simplification would make tax reform meaningful for average working American families.
Better align federal and state tax rules. Simplification will never be maximized unless federal and state governments can work together to reduce paperwork, streamline the filing process and create less opportunity for gaming the tax system.
There is a moment of opportunity in this Congress and this administration to do great good in making our tax system more rational, understandable and effective. We need to seize it.
Find the article at San Francisco Chronicle.