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Peter Morici

A modest proposal for tax reform  

Published on: March 13, 2017 4:08 AM

 

Americans desperately need simpler, fairer personal and corporate taxes. The current system imposes terribly high rates and a myriad of special-interest credits and deductions. It requires expensive record keeping that drives taxpayers mad and complex auditing functions at the Internal Revenue Service that have proven susceptible to political abuse – conservative organizations and contributors were targeted during the 2012 campaign. The system favors large businesses, which can afford expensive K Street lobbyists, over small enterprises and individuals, and industries whose activities are concentrated in states with senators and representatives influential on tax-writing committees. Individuals in quite comparable situations can pay radically different amounts of tax – consider the difference between a renter and the owner of a condominium, who benefits from the mortgage interest deduction. Foreign governments rely more on value-added taxes (VAT), which approximates a national sales tax. Those are rebatable on exports and applied to imports under World Trade Organization rules, whereas income taxes are not. This places U.S.-based businesses at a competitive disadvantage. Businesses are making decisions for reasons of tax avoidance, not sound economics. Some move headquarters offshore to avoid U.S. taxes, robbing Americans of much-needed jobs. The most effective reform would be to simply junk the personal and corporate income taxes in favor of a VAT. The Treasury annually collects about $2 trillion through personal and corporate taxes. This could be replaced by an 11 percent national sales tax on all private purchases and payments – be they computer equipment, college tuition or lunch at the corner deli. Businesses and institutions would then pay to the Treasury the taxes they collected, less sales taxes paid on purchases of materials and equipment, rent and the like. This subtraction would avoid the double taxation of materials and equipment businesses purchase and create a VAT often proposed by advocates of reform. It would end forever all the headaches associated with valuing inventories, calculating depreciation on buildings and machines and other work that cost billions in accounting and legal fees. A VAT would favor no activity over another, and by taxing goods and services at the point of sale, it would end the problem of U.S. firms parking profits abroad to avoid taxes. Businesses and institutions would file much simpler tax returns, and individuals would file no tax return at all. Several House Republicans, led by Ways and Means Chairman Kevin Brady, propose to do essentially this for the corporate but not the personal income tax. That plan would eliminate credits and deductions and lower the maximum corporate rate from 35 to 20 percent, which would be refunded on exports and applied to imports. The latter would raise retail prices of imported goods but not nearly by 20 percent, because the tax would be applied at the wholesale level. Still it would create many new jobs in export industries and by returning to America some production in activities like electronic components. This proposal has two important flaws. It would continue the myriad of filing headaches and inequities most ordinary Americans endure paying personal income taxes. Many businesses are limited liability corporations and pay through the personal income tax system. They would face even greater disadvantages by paying rates up to 39.6 percent and not enjoying rebates on exports. The answer is simple – generalize Mr. Brady’s reforms to include the personal income tax as well. Junk it and impose a VAT of 11 percent on all economic activities. Two problems would remain. A VAT would tax rich and poor consumers at the same rate. The elderly, who more or less live on savings, have already paid income taxes on those savings and would be taxed again. An effective response would be to raise the rate to 14 percent, and award each parent $4,000 for each child under 21 and to seniors 65 and older. Taking things a step further, Social Security and Medicare taxes could be eliminated by raising the rate to 20 percent. Temptations would abound to exclude or exempt all kinds of activities, but that would do more to appease big corporate contributors and the wealthy than to serve the public interest. That is the kind of thinking that gave us the current mess – and inequities, slow growth and mindless harassment from the IRS. Elegant, egalitarian and efficient, a value-added tax without exemptions would permit the economy to grow faster and create more jobs. April 15 could be declared a national holiday – Tax Freedom Day. 

Filed Under: Business

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