While it’s clear that out of control spending is the primary reason for the country’s fiscal problems, our inefficient, outdated tax system also contributes significantly to the challenges we face. The US Tax Code is too complex, unfair and burdensome and is in need of immediate reform.
Even tax experts have admitted they have difficulty complying with the code’s twisted vine of rules and regulations. At a hearing of the Senate Joint Economic Committee, Kevin Hassett, an economist at the American Enterprise Institute said “The tax system is so complex—I have a Ph.D. in Tax economics. That’s what I’ve been working on my whole life. I’ve got many papers in tax journals. I will not do my own taxes. I will not do it.” Complying with the tax code is an enormous drain on important resources. The IRS’s Tax Advocate reports that tax compliance costs the nation $163 billion a year and takes more than 6 billion hours to complete.
In addition to the complexity, there is also an inherent unfairness in the tax code. The deductions and exemptions in the code treat similarly situated taxpayers differently, unfairly picking winners and losers. These loopholes allow certain businesses and industries to reap lopsided benefits, creating perverse incentives within the economy.
There will never be a better time to reap the benefits of fundamental tax reform: Lower rates encourage economic activity; A flatter tax code stabilizes revenue; Efficiency in the tax code increases compliance. Simplifying our tax code would lead to greater revenue, real deficit reduction, control over our debt, and a means to deal with the fiscal avalanche that looms over us.
The simplest and most profitable plan for tax reform is the flat tax. The basic structure of the flat tax is a single low rate on taxing income coupled with a limited number of deductions or credits. The Saving the American Dream Flat Tax I have proposed is as easy as “1-2-3.” It calls for one rate, two credits, and three deductions. The single, unified tax rate would tax only what was spent in the economy. Taxpayers would receive tax credits for purchasing heath care and low-income Americans would still receive the earned income tax credit. The three deductions would be for mortgage interest, higher education spending, and charitable giving.
While maintaining our focus on the need to reduce spending, reforming the tax code would allow us to promote economic growth in a way that will make our recovery robust and sustainable. The flat tax by definition achieves “fairness” and provides greater revenue than any rate increase, passing the test of balance for both parties.