Greg Ip

Articles by The Economist’s U.S. Economics Editor

Tax reform in America: Simpler, fairer, possible

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An imperfect proposal could still improve America’s awful tax code: back it, Mr President

NO ONE denies that America’s tax code is a mess. It is unintelligible, which is why 90% of taxpayers use an accountant or commercial software to file their returns. It is a labyrinth of loopholes, which is lovely for tax lawyers but bad for America. Public outrage tends to focus on specific abuses. How is it, people ask, that multinationals such as Apple can legally avoid billions of dollars of tax? Why is it, conservatives fume, that the Internal Revenue Service just so happened to select anti-tax groups for intrusive scrutiny? But the real problem is much broader. A tangled code is unfair and inefficient. Loopholes for some mean higher tax rates for everyone else. The 6.1 billion hours Americans waste each year complying with tax rules could have been spent inventing new products. Exemptions promote unproductive activities, such as buying big houses, while high rates penalise work and drive companies abroad.

Ideally, no tax break should be spared, even the popular ones for charity, housing, health insurance and research and development. (All these things are desirable, but their privileged treatment imposes a cost, in the form of higher taxes, on other desirable things.) The political reality is that some of these tax breaks will survive, just as there is no hope for a carbon tax, one of the more sensible ways to raise money. Yet Mr Camp and Mr Baucus have found enough common ground to build a more efficient tax system. Where they differ is on the crucial question of whether tax reform should raise more revenue. Mr Camp, being a Republican, says no. Mr Baucus, like the rest of his party, including Barack Obama, says yes. On this, the Democrats should concede, for two reasons.

First, tax reform is so important that lawmakers should not let the perfect be the enemy of the good. A revenue-neutral tax simplification would raise the same sums to pay for Leviathan, while imposing a lighter burden on taxpayers. A simpler code would create fewer distortions and spur faster growth. Getting rid of all loopholes would allow individual income-tax rates to fall a whopping 44% and still raise the same revenues.

One thing at a time

Second, although the Democrats are right that higher taxes will eventually be needed to stabilise America’s debts, this is a separate issue. By using tax reform as a bargaining chip for higher revenues, Democrats probably doom it to fail.

Better to pass it into law quickly. That would still allow Mr Obama to pursue a separate grand bargain, with the Republicans tolerating higher taxes in return for the president accepting curbs on the growth of entitlement programmes such as Social Security and Medicare (pensions and health care for the elderly), as suggested in his own budget. For the moment, the chances of the Republicans swallowing that are slim. That is a shame for a party that used to believe in balancing the books. But it is not a reason to let the Baucus-Camp reform die. A simpler tax system with lower rates and fewer loopholes is good for America. Push it, Mr Obama.

The original article is linked here.


Written by gregip

July 11, 2013 at 9:24 pm

Posted in Uncategorized

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