Tax Impacts

Fiscal Follies: Is it Time to Raise Taxes, Simplify Them, or Both?

Posted on Monday, April 4, 2011

Americans face two very annoying prospects in the next few weeks. One is that the government may shut down because elected officials can't agree on a federal budget that begins trimming the country's routine deficits and spiraling federal debt. The threat of a gridlock-induced shutdown just makes the second annoyance all the more annoying: a lot of us will begin the headache-inducing process of filling out our income tax forms. Even if you pay someone or buy software to help you, there's still the aggravating exercise of hunting down the paperwork, rummaging through bank statements, and scanning or photocopying all those little perforated W-this and W-that forms just in case something gets lost. It's a pain.
No one likes paying taxes, which helps make one vocal segment of the body politic more influential, namely the group that is ready to rise up against any politician who dares state the obvious: The country will almost certainly have to raise taxes in some form to make any serious dent in our long-term fiscal problems.
All the major commissions and independent studies say this. When our organization, Public Agenda, surveyed Beltway insiders last November, three-quarters agreed that both spending cuts and tax increases would be needed to solve the problem . Most crucial perhaps, nearly two-thirds of the public (64 percent) sees a combination of cutting spending and raising taxes as "the best way" to reduce the deficit. Just 31 percent prefer only cutting spending; an infinitesimal 3 percent prefer just raising taxes. Well, what do you expect? As we said, no one actually likes paying taxes.
But even with such broad agreement that higher taxes are probably a given, there's even more agreement that the current U.S. tax system is a mess. Surveys routinely show that 8 in 10 Americans consider the tax code too complex. Since it runs to about 67,000 pages (making War and Peace look like a pamphlet in comparison), you can't really fault the public's judgment on this. A study by the Tax Foundation showed that businesses, nonprofit organizations, and individuals put in a total of 6 billion hours calculating their taxes at an estimated cost of more than $265 billion. Not surprisingly, most people support a major revamp.
Corporate taxes are a prime example. The official corporate tax rate is 35 percent, pretty high by international standards. But there are so many special provisions that some of our major corporate citizens pay just a sliver of that. According to an analysis by The New York Times, 115 of Fortune 500 companies pay less than 20 percent in federal and other corporate taxes, and some very successful enterprises pay much less. The study calculated Boeing's tax rate at 4.5 percent. Southwest Airlines paid 6.3 percent; Yahoo, 7 percent, General Electric, 14.3 percent. As the Times' David Leonhardt said: "Arguably, the United States now has a corporate tax code that's the worst of all worlds. The official rate is higher than in almost any other country, which forces companies to devote enormous time and effort to finding loopholes. Yet the government raises less money in corporate taxes than it once did, because of all the loopholes that have been added in recent decades."
At least taking advantage of loopholes is legal. The IRS estimates that we lose at least $250 billion a year to outright cheating . Given the recent brawl in the U.S. Congress over attempts to cut $60 billion from the budget, an extra $250 billion a year would be really, really welcome in these tough times. But to get even half of that, the IRS would need more agents, more audits and possibly even more paperwork. Instead, House Republicans have proposed significant cuts to the IRS budget, which may actually drive collections down.
So, since we almost certainly have to raise taxes in some manner at some point to get the budget under control, is it actually fair to the American people to do it without reforming our chaotic maze of a tax system? How are we going to persuade people to pay more to a system that has so many holes?
Maybe it's time to trot out that old political motto -- never let a crisis go to waste. The Simpson-Bowles budget proposals marry tax simplification to the urgent need to do something about the budget. They recommended a menu of changes that reduce tax rates for both individuals and corporations, but eliminate many of the tax credits and deductions that make the tax code so impenetrable (Yes, they do recommend eliminating the home mortgage deduction, but only for second homes and mortgages over $500,000 ).
There's another sign of d├ętente in the works. The conservative Heritage Foundation has had kind words for Democratic Senator Ron Wyden's corporate tax reform proposal. And President Obama says that he wants "something smarter, something simpler, and something fairer" for corporate taxes too.

The trouble is that the idea of simplifying taxes often draws broad support. It's when the debate gets down to specifics that things fall apart. Everybody wants taxes to be simpler -- until they find the loophole that's just right for them. That's when the lobbyists and the lawyers come out of the woodwork battling for the provisions their clients wants. Special interests seem to trump the general interest over and over again when it comes to tax reform.
Will the prospect of higher taxes finally spur us to streamline the tax code? We'll be watching, but in the meantime, we'll be riffling through our desks looking for a couple of lost 1099 forms.
THE HUFFINGTON POST Scott Bittle and Jean Johnson, Executive vice presidents of PublicAgenda.org


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