Real Tax Reform

This column is about tax reform. But first a didactic press moment.

The Phoenix newspaper (Arizona Republic) carried a series of stories last week designed to rev up interest in the upcoming Super Bowl XLIX to be held in Phoenix in February. Among the stories was a squib about interesting facts for Super Bowl XLIX including the following:

“We’re less than a month out now and Super Bowl tickets start at $2,347.74 for upper end zone seats [the worst seats in the house] on StubHorn.com. If that’s mere chump change to you, maybe you’d like to go high end with club lofts sideline seating, which will set you back $469,620.82. The big question: What’s the 82 cents for?” [Bracketed words supplied]

Outrageous you say? You’re right. The point to be made is that none of these seats would be sold for anywhere near those prices unless the payments were tax deductible for business purposes. But that is only a portion of the problem. Along with the ticket prices, the costs of transportation, housing, meals, drinks and other entertainment that accompany the Super Bowl (as well as many other sports events) are likewise tax deductible.

Look, I’m a sports fan and particularly a football fan but I don’t think that it is a business that ought to be subsidized by taxpayers – directly or indirectly. If you believe in the free market, these businesses – any business – ought to be able to survive without the intervention of the state or federal governments.

But even at that, these “entertainment subsidies” are only a small slice of the pie that requires nearly 74,000 pages of Internal Revenue Service rules and regulations, nearly 100,000 IRS employees to enforce them and approximately 1.2 million tax professionals to assist taxpayers in filing returns. What a waste.

For those who wish to seriously tackle the problem of tax reform, they should start by eliminating the term “tax policy” from their vocabulary. Tax policy assumes that you use taxation as a means to implement, alter or enforce social policy. And that is precisely why we have 74,000 pages of IRS rules and regulations. Virtually the entirety of the IRS code deals with exemptions, special treatment, incentives and exceptions – each designed to favor or burden otherwise lawful activities by taxpayers. Among those exemptions are special treatment for the petroleum industry, special treatment for the solar energy industry, special treatments for the wind energy industry and so on and so on. Each special treatment is designed to bolster the economic advantage of the recipients and while there are many such special treatments they are not equal amongst competitors and all of them distort the market.

So real tax reform should begin with the following premises:

1. Taxes should be levied solely for purposes of funding the legitimate activities of government. The idea of using taxes to accelerate, suppress or otherwise alter competition should be rejected.

• That would include direct tax subsidies to businesses in the form of unique tax deductions, tax deferrals, and tax forgiveness
• That would also include indirect tax subsidies to businesses in the form of tax deductions, credits, deferrals, government mandated rebates, and government granted or backed low cost loans to consumers of such businesses products.

1. Representative democracy requires that everybody accept responsibility for the consequences of their actions. Alex de Tocqueville once opined that a democracy will last only until such time as the majority realizes that they can vote themselves a benefit at the sole expense of the minority. (Think about the last income tax increase in Oregon.) That means everybody should pay taxes and any tax increases or decreases should reflect an equal percentage of increase or decrease. People would be more discerning about increasing taxes if they had to pay a portion of the increase.
2. Tax filing should be sufficiently simple that the average person can prepare and pay taxes without the necessity of tax professionals. One clever cartoonist years ago produced a tax form that was basically two lines: “How much did you make. Send it in.” While that is absurd, there is a “teachable moment” in that humor:

• Eliminate all deductions –  every one with the exception of taxes and fees imposed by the government, which should be treated as tax credits.
• For purposes of determining business income, deductions should be limited to the cost of goods sold (including advertising) and depreciation of capital investment.

• Depreciation of capital investment should be limited to a straight line methodology and the depreciation life of such capital investments should be placed in one of three categories:

• Improvements to real estate
• Heavy and manufacturing equipment
• Technology (and all other items)
• A depletion allowance for the extraction of oil, gas, and other minerals based on the estimated period of time for removal and limited to the cost of acquiring the rights and returning the property to its approximate original condition.

• All income, including interest income and capital gains are subject to taxation – no exceptions, not even interest paid on federal, state or municipal bonds. Dividends are paid from earnings after taxes and therefore taxes have already been paid on them.
• Since inheritances are not income (and, in fact, the income tax has already been paid on them) all estate and inheritance taxes would be eliminated.

There should be no more than four categories for tax rates:

• A flat fee for those earning less than minimum wage
• A low percentage for those earning up to double the minimum wage
• A high percentage for those earning more than double the minimum wage but less than members of Congress
• The highest percentage for those earning in excess of members of Congress.

(I reference the minimum wage and the salaries of members of Congress so that the people’s representative – Congress – will be cognizant that changes in the minimum wage and their own salaries will have adverse impacts on tax revenues.)

That’s it. The entirety of the income tax code could be written in less than a hundred pages. The regulations would require less than two hundred pages. Everyone could read and understand them without the assistance of a tax professional. And the savings would be enormous.

In a 2013 study by the Cato Institute, noted that the cost of federal workers was:

“When benefits such as health care and pensions are included, the federal compensation advantage over private workers is even larger, according to the BEA data. In 2013, federal worker compensation averaged $115,524, or 74 percent more than the private-sector average of $66,357.”A simplified federal income tax could result in the elimination of two-thirds of those federal employees, or 66,000 positions. At $115,500 each, the resulting savings to taxpayers would be $7.59 Billion dollars. And the savings to individual and business would be at least double that by eliminating the need for two-thirds of the tax professionals. (And a side benefit might be the elimination of a host of lobbyists, each seeking a competitive advantage for their principal through favorable tax treatment.)

The marginal tax rate would be reduced significantly assuming that the new tax rates without the myriad of deductions, exceptions, incentives and special treatments produced the same level of income as the current tax code.