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Posts Tagged ‘Flat Tax’

When I compared the tax reform proposals of various 2016 presidential candidates last month, Ben Carson got the best grade by a slight margin.

But I’ve now decided to boost his overall grade from a B+ to A-, or perhaps even A, because he’s finally released details and that means his grade for “specificity” jumps from a C to A-.

Here’s some of what’s been reported in the Wall Street Journal.

Republican presidential candidate Ben Carson on Monday called for imposing a 14.9% flat tax rate on income, ending taxes on capital gains and dividends and abolishing the charitable deduction and all tax credits.

By the way, the reporter goofed. Carson is proposing to end double taxation of dividends and capital gains, but all income would be taxed. What the reporter should have explained is that capital and business income would be taxed only one time.

But I’m digressing. Let’s review some additional details.

Mr. Carson’s flat tax would apply only to income above 150% of the poverty level… In some respects, Mr. Carson’s plan is similar to those of the other candidates, all of whom want to lower tax rates… But he goes farther, particularly with his willingness to rip up parts of the tax system that have been in place for a century. …In addition to eliminating the charitable deduction and investment taxation, Mr. Carson would also repeal the estate tax, the mortgage-interest deduction, the state and local tax deduction,  depreciation rules and the alternative minimum tax.

Wow, no distorting preferences for charity or housing. And no double taxation of any form, along with expensing instead of depreciation. Very impressive.

Carson has basically put forth a pure version of the plan first proposed by economists at Stanford University’s Hoover Institution.

Perhaps most important of all, Carson’s plan is a flat tax and just a flat tax. He doesn’t create any new taxes that could backfire in the future.

Here’s what the Carson campaign wrote about his flat tax compared to the plans put forth by Rand Paul and Ted Cruz.

Unlike proposals advanced by other candidates, my tax plan does not compromise with special interests on deductions or waffle on tax shelters and loopholes. Nor does it falsely claim to be a flat tax while still deriving the bulk of its revenues through higher business flat taxes that amount to a European-style value-added tax (VAT). Adding a VAT on top of the income tax would not only impose an immense tax increase on the American people, but also become a burdensome drag on the U.S. economy.

I would have used different language, warning about the danger of a much-higher future fiscal burden because Washington would have both an income tax and a VAT, but the bottom line is that I like Carson’s plan because the worst outcome is that future politicians might eventually recreate the current income tax.

What I don’t like about the Paul and Cruz plans, by contrast, is that future politicians could much more easily turn America into France or Greece.

Here’s my video that explains why the flat tax is the best system (at least until we shrink the federal government to such a degree that we no longer need any form of broad-based taxation).

P.S. If you want to get hyper-technical, Carson’s plan may not be a pure flat tax because he would require a very small payment from everybody (akin to what Governor Bobby Jindal proposed). Though if the “de minimis” payment is a fixed amount (say $50 per adult) rather than a second rate (say 1% on the poor), then I certainly would argue it qualifies as being pure.

P.P.S. Carson still has a chance to move his overall grade to A or A+ if he makes the plan viable by proposing an equally detailed plan (presumably consisting of genuine entitlement reform and meaningful spending caps) to deal with the problem of excessive government spending.

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With all of the GOP presidential candidates proposing varying plans to reduce the tax burden and reform the tax system, I’m constantly asked which one is best.

But that’s hard to answer because all of the proposals have features I like…as well as some features that leave me underwhelmed, or perhaps even worried.

My fantasy proposal is to have no income tax, or any broad-based tax, because we shrink the federal government to less than 5 percent of economic output (which is what existed for much of our nation’s history).

But since most of my fantasies won’t happen (at least in the near future), my intermediate goal is to junk the current tax system and replace it with a simple and fair flat tax, which would mean a low tax rate, no double taxation, and no corrupt and distorting tax preferences.

The bad news is that there hasn’t been a stampede by candidates to embrace this type of fundamental tax reform. But the good news is that they all want to move in that direction.

The best site for seeing what the various candidates are proposing is the Tax Foundation, and you can click here to learn everything that you need to know about their plans. There’s less detail, but the Committee for a Responsible Federal Budget also has a helpful summary that can be perused here.

Conservative Review put together some useful graphs to compare the major plans. Here’s the tax rate structure for households.

Though this is not very accurate since the value-added taxes in the plans put forth by Rand Paul and Ted Cruz mean the real tax rates on labor income would actually be 29 percent and 26 percent, respectively.

And here’s the degree of double taxation in the major plans.

What stands out in this chart is the fact all the candidates want to reduce double taxation, but Marco Rubio’s plan gets rid of that pernicious practice completely.

There are lots of additional metrics. Most of the candidates abolish the death tax, which is a very damaging form of double taxation.

They all lower or eliminate the corporate income tax.

Most of the candidates also replace depreciation with expensing, thus ensuring the proper treatment of business investment.

And the candidates generally scale back on favoritism in the tax code, particularly the deduction for state and local taxes.

To summarize, the plans have lots of good features, but none of them are perfect. Which is why they all get similar grades. Here’s my back-of-the-envelope assessment (with apologies to John Kasich, Rick Santorum, Mike Huckabee, Carly Fiorina, etc, since I imposed my own arbitrary cutoff on which candidates merited close consideration).

Ben Carson gets the best grade because he says he wants a pure flat tax. But he doesn’t get an A because there are no details. In theory, you don’t need a lot of details because the plan is so simple, but the fact that he hasn’t even pinned down the rate (it was 10 percent, but is now 15 percent) leaves me uncertain. Moreover, he hasn’t put forth many details on how to reduce the burden of government spending, which would be necessary to make a low-rate flat tax viable.

By the way, Carly Fiorina would probably get a grade similar to Carson since she’s talked generically about a pure flat tax, and Rick Santorum’s more detailed support for a not-quite-pure flat tax also merits applause.

Jeb Bush and Chris Christie are almost identical (and John Kasich probably would be in the same category) because they make good progress (but not great progress) in almost all areas of the tax code.

Rand Paul and Ted Cruz are more aggressive taking big steps in the right direction, but the value-added tax is a very worrisome feature of their plans.

Donald Trump has the biggest net tax cut, but seems to have no interest in controlling the burden of government spending. He also is the only candidate (to my knowledge) who doesn’t want to replace America’s anti-competitive worldwide tax system with a territorial tax regime.

And Marco Rubio is unique in that his plan is great on double taxation, but is a bit of a dud with regards to tax rates.

Last but not least, Mike Huckabee’s support for replacing the income tax with a national sales tax is theoretically appealing, but it’s either impractical (because there aren’t enough votes to repeal the 16th Amendment) or too risky (because the crowd in Washington would adopt a sales tax without completely repealing the income tax).

P.S. For those who really care about these issues, there’s a debate tomorrow morning (December 8th) between representatives of the Cruz, Paul, Bush, Rubio, and Kasich campaigns.

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Why does the tax code require more than 10,000,000 words and more than 75,000 pages?

There are several reasons and none of them are good. But if you had to pick one cause for all the mess, it would be the fact that politicians have worked with interest groups and lobbyists to create myriad deductions, credits, exclusions, preferences, exemptions, and other loopholes.

This is a great deal for the lobbyists, who get big fees. It’s a great scam for politicians, who get lots of contributions. And it’s a great outcome for interest groups, who benefit from back-door industrial policy that distorts the economy.

But it’s not great for the American people or the American economy.

Writing for Reason, Veronique de Rugy of the Mercatus Center explains that the net result is a Byzantine tax code that imposes very harsh compliance costs on the productive sector.

According to a 2012 study from the Internal Revenue Service (IRS) and the Treasury Department, …corporations alone spent $104 billion complying with the tax code in 2012. …The cost to individuals may be even higher. According to a 2013 study by Jason Fichtner and Jacob Feldman of the Mercatus Center, Americans face nearly $1 trillion annually in hidden tax-compliance costs. …Why does tax compliance cost so much? The answer is largely that the Internal Revenue Code…is riddled with exclusions, exemptions, deductions, preferential rates, and credits.

And she also points to a solution.

Genuine reform would cut out loopholes that tilt the playing field in favor of those with political connections. It would also aim to provide lower tax rates, fewer tax brackets, and less double taxation of income that is saved and invested. Such measures would be good for growth, but they would also mean taking on the interest groups that benefit from swapping tax preferences for campaign cash.

Since I want to rip up the tax code and replace it with a simple and fair flat tax, this is music to my ears.

Of course, achieving genuine tax reform won’t be easy.

There’s the obvious political obstacle since all the groups that benefit from the current system (politicians, lobbyists, bureaucrats, cronyists, interest groups, and other insiders) will fiercely resist reform.

There’s also a policy obstacle because many people oppose loopholes in theory but they haven’t paid sufficient attention to the nuts-and-bolts details.

With that in mind, let’s set out a set of guiding principles for the elimination of tax loopholes and the creation of a neutral tax system.

1. A loophole exists when income isn’t taxed – In libertarian Nirvana, the central government is so small that there’s no need for an income tax. Until we get to that point, though, we’re stuck with the internal revenue code and the goal should be to collect revenue (hopefully a modest amount) in a way that minimizes the economic damage per dollar collected. And that means a tax code that doesn’t have loopholes, which are best defined as provisions that enable people to avoid any tax based on how they earn income or how they spend income. In a neutral system, all income is taxed one time.

2. The economy performs better without a loophole-riddled tax code – Most people understand that high tax rates are bad for growth because they penalize people for earning income. They also generally understand that double taxation of saving and investment is bad for growth because it creates a bias against capital formation. But there’s not nearly enough appreciation of the fact that loopholes in the code are bad for growth since they are a back-door form of industrial policy that exist for the purpose of incentivizing people to make decisions on the basis of tax rather than on the basis of what makes economic sense. A neutral tax system means less economic damage.

3. It’s not a loophole to protect income from double taxation or to require income to be measured correctly – The bad news is that the current system forces taxpayers to overstate their income and it also imposes multiple layers of tax on income that is saved and invested. The good news is that there are provisions in the tax code – such as IRAs, 401(k)s, deferral, bonus depreciation – that seek to mitigate these biases. These parts of the system oftentimes are needlessly complex and they frequently will alleviate penalties in a discriminatory manner, but they are not loopholes. In a neutral system, all income is taxed only one time.

4. Loopholes should be eliminated as part of a plan to lower tax rates, not in order to give politicians more money – If loopholes are a corrupt and distorting dark cloud, the silver lining to that cloud is that all the special favors in the tax code deprive the government of tax revenue. Even the most egregious of loopholes, such as ethanol, have this redeeming feature. This is why loopholes should only be eliminated as part of an overall tax reform plan that also lowers tax rates and reduces double taxation. A neutral tax system shouldn’t enable bigger government.

There are some important implications that follow from these four guiding principles.

As a practical matter, we can now identify provisions in the tax code that are clearly loopholes, such as the healthcare exclusion, the municipal bond exemption, and the state and local tax deduction (the mortgage interest deduction is misguided, but isn’t technically a loophole since one of the goals of tax reform is to give business investment the same tax-income-only-one-time treatment now reserved for residential real estate).

We also know that the capital gains tax rate isn’t a “preferential” loophole, but instead is the mitigation of a penalty that shouldn’t exist. Similarly, it’s not a loophole when companies deduct expenses when calculating income. And you’re not getting some sort of handout simply because Uncle Sam isn’t imposing double taxation on your retirement account. At the risk of repeating myself, all income should be taxed in a neutral system, but only one time.

Let’s close by looking at a few secondary – but still important – implications of a neutral tax code.

First, getting rid of loopholes won’t put a burden on poor and middle-income taxpayers for the simple reason that an overwhelming share of the benefits of these provisions go to high-income taxpayers.

I’ve already shown how the vast majority of charitable deductions are taken by those making more than $200,000 per year.

The same is true for the state and local tax deduction and the healthcare exclusion.

And the Washington Post just editorialized that the home mortgage interest deduction is a boon for rich taxpayers as well.

The mortgage interest deduction is also a significant cause of after-tax income inequality: The top 20 percent of earners get 75 percent of the benefits; the top 1 percent get 15 percent, according to the Congressional Budget Office. …Specifically, 10 metropolitan “hot spot” counties (among them Los Angeles in California and Fairfax in Virginia) with the greatest number of mortgages larger than $500,000 accounted for 45.1 percent of all such mortgages nationally. Just eight California urban and suburban counties accounted for 40 percent of the national total. Outside of such tony coastal precincts, the only big-mortgage hot spots were resort destinations such as Martha’s Vineyard, Mass., and Vail, Colo. — where many homes are vacation places, not primary residences.

To be sure, the Post is misguided in that it wants to restrict tax preferences in order to finance a larger burden of government spending.

So I’m not expecting the editors to join a coalition for pro-growth tax reform.

The second implication is that a neutral tax system means less corruption.

To cite one example, consider the oleaginous way that politicians deal with so-called tax extenders. Marc Short and Andy Koenig explain in a column they wrote for the New York Times.

Congress will soon take up the so-called tax extenders package, which has more than 50 tax breaks affecting a variety of industries and issues. …this bill mostly helps the wealthy and the well connected.

The fact that rich insiders benefit is no surprise, but what makes “tax extenders” so odious is that what began in 1988 as a supposedly one-time fix now has become a regular part of the process, a scam that gives lobbyists and politicians a way of generating fees and contributions.

The first tax-extender package…opened a door that lobbyists and lawmakers were all too willing to run through. …A 2014 analysis by Americans for Tax Fairness found that more than one out of every 10 lobbyists in Washington focused specifically on the extenders package. Given that this bill comes up about every year or two, special interests constantly have the opportunity to demand new handouts.

By the way, some of the extenders actually are good policy. They’re in the mitigation-of-penalties category I discussed above.

But those good provisions should be made permanent and the bad provisions should be jettisoned.

Unfortunately, that’s not in the interests of the politicians and lobbyists who benefit from an annual extender package, so the problem doubtlessly will fester.

Last but not least, let’s consider the moral component.

For those of us who believe in justice, it is ethically offensive that some rich and powerful taxpayer get better treatment simply because they know how to manipulate the political process.

This violates the important principle that the law should treat everyone alike. Yet another reason to have a simple and fair flat tax.

P.S. At the risk of being a nit-picker about my own writing, I should confess that a flat tax is not a purely neutral tax system. There will still be a penalty on earning income. But the penalty presumably will be modest if there is a low rate and that penalty won’t be exacerbated by penalties and loopholes that distort how people earn income and spend income.

P.P.S. Here, in one image, is all you really need to know about the economics of taxation.

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Last year, I wrote a column for the Wall Street Journal making the case that families would benefit more from lower tax rates rather than targeted tax credits.

My argument was simple and straightforward.

Child-based tax cuts are an effective way of giving targeted relief to families with children… The more effective policy—at least in the long run—is to boost economic growth so that families have more income in the first place. Even very modest changes in annual growth, if sustained over time, can yield big increases in household income.

I then had a follow-up piece that expanded the discussion, responding to critics but also noting that advocates of lower rates and supporters of targeted credits at least agree on the importance of reducing double taxation and also want to address non-fiscal impediments to growth.

Now it’s time for a third installment in the series.

The Wall Street Journal opined today against tax credits, citing the challenges that have arisen on the other side of the ocean.

Parliament blocked David Cameron’s plan to reform family tax credits. There’s a warning here for conservatives…about the dangers of social engineering through taxation. At issue is a convoluted tax benefit developed by Tony Blair in 2003 that was supposed to reward low-income work and childbearing. …This policy hasn’t worked.

The editorial points out that welfare reforms deserve credit for a somewhat improved job market.

Moreover, there’s scant evidence of desirable effects on birthrates (an important issue because of the collapsing welfare state, as discussed yesterday).

To the degree there are more births, it is because of the U.K.’s large immigrant population. Tax policy has no significant impact.

A 2013 Office for National Statistics study noted that the combination of economic climate and tax policy “does not have a clear impact in a particular direction.”

But there definitely is a measurable impact in other ways. People now expect to get checks from the government based on the size of their families.

…the tax credits have become a new entitlement for the child-rearing middle class. …eliminating the credits has proved to be politically difficult. The tax-credit system is so entrenched that it’s as hard to reform as any other entitlement… That’s a lesson for Americans as a debate about tax reform gathers momentum.

And the WSJ expands the lesson.

…the most pro-family tax policies are those that do the most to boost broad-based growth and raise incomes, which means a flatter tax code with lower rates and fewer distorting credits and exemptions. As Britain shows, the danger of using the tax code for pro-natalist social planning is that you end up with an expensive new entitlement that is merely another mechanism for income redistribution and can’t be reformed.

And if you want evidence, just look at how the so-called earned income tax credit has become the federal government’s fastest-growing entitlement program.

So why expand the problems of the EITC by creating new and bigger credits?

Especially since the tax code already is a convoluted and corrupt mess.

Writing for Investor’s Business Daily, Amity Shlaes and Gregory Thornbury make the case for a low-rate flat tax instead of expanded credits.

The fixation on family tax benefits abides, even though the tax code already features dozens of credits and deductions installed in the name of children. …The assumption that such credits are the best gift for the religious family dates back 100 child credits ago… But that doesn’t mean that the policy truly benefits families.

They explain that growth is more important.

And you’re more likely to get a better-performing economy when marginal tax rates are reasonable.

…a better policy for families, then and today, is a tax code that does more to realize their aspirations than any political lobby. Such a plan has no child credits but would be simpler and flatter, with a top rate of, say, 20%, 18%, 15% or even, as Carson would have it, 10%. The reasons why this is so have to do with standard tax parameters such as marginal rates and standard tax concepts such as the incentive.

Keep in mind, by the way, that there are tradeoffs. If politicians want big credits, they will want to make up for the foregone revenue by raising tax burdens elsewhere.

Costly tax breaks like the child credit are one reason why top rates are so high in the first place. To compensate for the revenue that such a break forgoes, lawmakers raise rates at the top of the tax schedule or lower the point at which the top rate kicks in.

Last but not least, there’s a moral component to this debate.

There are taxes in the Bible. But nowhere does the Bible say that a great share of the rich man’s money has to go to a secular government. And it never crosses the minds of today’s politicians that they encourage their constituents to violate the 10th Commandment when they stoke resentment and envy. …Our code does feel like a maze because progressivity represents behavioral engineering par excellence. It treats humans like rats who struggle through, avoiding trap doors and hunting for chunks of cheddar cheese without ever gaining much idea of where they are. It’s time for a tax code that treats humans with dignity.

And that tax code, needless to say, is a simple and fair flat tax.

Which, for what it’s worth, includes a generous exemption based on family size. So the goal is to provide some tax relief to families, but to keep it reasonable so that other objectives (such as growth) can be realized.

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The tax-reform landscape is getting crowded.

Adding to the proposals put forth by other candidates (I’ve previously reviewed the plans offered by Rand Paul, Marco Rubio, Jeb Bush, Bobby Jindal, and Donald Trump), we now have a reform blueprint from Ted Cruz.

Writing for the Wall Street Journal, the Texas Senator unveiled his rewrite of the tax code.

…tax reform is a powerful lever for spurring economic expansion. Along with reducing red tape on business and restoring sound money, it can make the U.S. economy boom again. That’s why I’m proposing the Simple Flat Tax as the cornerstone of my economic agenda.

Here are the core features of his proposal.

…my Simple Flat Tax plan features the following: • For a family of four, no taxes whatsoever (income or payroll) on the first $36,000 of income. • Above that level, a 10% flat tax on all individual income from wages and investment. • No death tax, alternative minimum tax or ObamaCare taxes. • Elimination of the payroll tax and the corporate income tax… • A Universal Savings Account, which would allow every American to save up to $25,000 annually on a tax-deferred basis for any purpose.

From an economic perspective, there’s a lot to like. Thanks to the low tax rate, the government no longer would be imposing harsh penalties on productive behavior. Major forms of double taxation such as the death tax would be abolished, creating a much better environment for wage-boosting capital formation.

And I’m glad to see that the notion of a universal savings account, popularized by my colleague Chris Edwards, is catching on.

Moreover, the reforms Cruz is pushing would clean up some of the most complex and burdensome sections of the tax code.

But Cruz’s plan is not a pure flat tax. There would be a small amount of double taxation of income that is saved and invested, though the adverse economic impact would be trivial because of the low tax rate.

And the Senator would retain some preferences in the tax code, which is somewhat unfortunate, and expand the earned income credit, which is more unfortunate.

It maintains the current child tax credit and expands and modernizes the earned-income tax credit… The Simple Flat Tax also keeps the current deduction for all charitable giving, and includes a deduction for home-mortgage interest on the first $500,000 in principal.

But here’s the part of Cruz’s plan that raises a red flag. He says he wants a “business flat tax,” but what he’s really proposing is a value-added tax.

…a 16% Business Flat Tax. This would tax companies’ gross receipts from sales of goods and services, less purchases from other businesses, including capital investment. …My business tax is border-adjusted, so exports are free of tax and imports pay the same business-flat-tax rate as U.S.-produced goods.

His proposal is a VAT because wages are nondeductible. And that basically means a 16 percent withholding tax on the wages and salaries of all American workers (for tax geeks, this part of Cruz’s plan is technically a subtraction-method VAT).

Normally, I start foaming at the mouth when politicians talking about value-added taxes. But Senator Cruz obviously isn’t proposing a VAT for the purpose of financing a bigger welfare state.

Instead, he’s doing a swap, imposing a VAT while also getting rid of the corporate income tax and the payroll tax.

And that’s theoretically a good deal because the corporate income tax is so senselessly destructive (swapping the payroll tax for the VAT, as I explained a few days ago in another context, is basically a wash).

But it’s still a red flag because I worry about what might happen in the future. If the Cruz plan is adopted, we’ll still have the structure of an income tax (albeit a far-less-destructive income tax). And we’ll also have a VAT.

So what happens 10 years from now or 25 years from now if statists control both ends of Pennsylvania Avenue and they decide to reinstate the bad features of the income tax while retaining the VAT? They now have a relatively simple way of getting more revenue to finance European-style big government.

And also don’t forget that it would be relatively simple to reinstate the bad features of the corporate income tax by tweaking Cruz’s business flat tax/VAT.

By the way, I have the same specific concern about Senator Rand Paul’s tax reform plan.

My advice to both of them is to ditch the VAT and keep the payroll tax. Not only would that address my concern about enabling the spending proclivities of statists in the future, but I also think Social Security reform is more feasible when the system is financed by the payroll tax.

Notwithstanding my concern about the VAT, Senator Cruz has put forth a plan that would be enormously beneficial to the American economy.

Instead of being a vehicle for punitive class warfare and corrupt cronyism, the tax code would simply be the method by which revenue was collected to fund government.

Which gives me an opportunity to raise an issue that applies to every candidate. Simply stated, no good tax reform plan will be feasible unless it’s accompanied by a serious plan to restrain government spending.

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I’m happy that many of the presidential candidates are proposing big tax cuts.

Bobby Jindal and Donald Trump have large tax cuts, and Jeb Bush, Rand Paul, and Marco Rubio are proposing smaller – but still significant – reductions in the federal tax burden.

All of these plans, to be credible, should be accompanied by proposals for a sustained reduction in the burden of government spending (with real enforcement mechanisms).

But there’s something else that needs to be part of the discussion. Yes, we need tax cuts and smaller government, but we also need radical tax simplification.

Consider this depressing chart showing the number of pages in the instruction manual for the IRS’s 1040 tax form.

Or the number of sections in the tax law, which has skyrocketed in the past four decades.

I think it’s fair to say that complexity is a proxy for corruption (and even the World Bank agrees with me). Our tax code is a Byzantine mess because interest groups and lobbyists conspire with politicians to swap loopholes for campaign cash.

Some say that this problem could be solved by restricting the First Amendment and limiting people’s ability to participate in the political process. But that’s naive. So long as we have a convoluted tax code, insiders will figure out how to curry favor with the political elite and manipulate the system to their advantage.

Rather than trashing the Constitution, we should be trashing the internal revenue code.

I have lots of economic arguments for fundamental tax reform and I can wax poetic about the harm of high tax rates and double taxation of saving and investment.

But this new chart from the Tax Foundation, showing the ever-growing number of words in the tax code, is probably the single most compelling argument for a simple and fair flat tax.

Wow. It doesn’t seem to matter which party is in power. It doesn’t seem to matter who controls the White House or who controls Congress. Just as the number of pages in the tax code keeps expanding, so does the number of words.

And I think all of us know that this relentless growth in complexity is not good for ordinary taxpayers.

The only winners are the cronyists, politicians, and other insiders who get rich by using the coercive power of government.

And don’t forget that a complicated tax code means a very powerful IRS, and we’ve seen how that leads to venal corruption.

Now let’s circle back to where we started. I mentioned that many presidential candidates have proposed big tax plans that reduce the amount of money flowing to Washington. Many of those plans also include partial reforms of the tax code.

All of these components are desirable in that they both reduce the tax burden and simplify the tax system. And I could list other attractive partial reforms that are in the various tax plans.

But I can’t help but wonder why no candidate has explicitly embraced the gold standard of tax reform.

By the way, I’m ecumenical on a replacement system. There are other plans that satisfy the goals of real reform.

My only caveat, for those who advocate a national sales tax or value-added tax, is that we first need to repeal the 16th Amendment and replace it with something so ironclad that politicians could never do a bait and switch and saddle the American people with both an income tax and a consumption tax.

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I’m delighted that so many presidential candidates are talking about partial tax reform and I’ve specifically analyzed the plans put forth by Marco Rubio, Rand Paul, Jeb Bush, and Donald Trump.

These proposals all make the tax code less punitive, and that would be good news for job creation, growth, and American competitiveness.

But that doesn’t mean any of them are perfect. They all fall short of the pure flat tax, which is the gold standard for full tax reform. Another problem is that these proposals won’t be plausible or sustainable unless unaccompanied by some prudent plans to restrain the growth of federal spending.

Today, though, I want to focus on another shortcoming. The various plans need to be augmented by long-overdue restrictions on the IRS, which has become and abusive and rogue bureaucracy.

Consider a few examples.

These horror stories provide plenty of evidence that the internal revenue service should have its wings clipped.

But let’s add another straw to the camel’s back. The tax collection agency in the midst of an audit fight with Microsoft and the IRS is making a mockery of its own rules and flagrantly abusing the company’s legal rights.

This is bad news for one of America’s most successful firms, but it also is creating a very dangerous precedent that could victimize many other companies – large and small – in the future.

Writing for The Hill, Andy Quinlan of the Center for Freedom and Prosperity highlights some of the IRS’s most offensive actions.

First, the IRS is flouting its own rules as part of its persecution of Microsoft.

Government officials, counter to federal law, are trying to bully the company into extending an audit process that should have ended over 6 years ago. …Federal law provides a three-year time period for the completion of an audit, yet IRS officials have been digging through the company’s files for over nine years.

Second, the IRS won’t even tell the company how much money it wants!

Seattle-based Microsoft had to force a hearing on this matter because the IRS refused to submit a final tax bill to Microsoft for a dispute over taxes owed from 2004 to 2006. The IRS has been dragging out this audit process for close to a decade, and continues to pressure the company to sign waivers extending the audit infinitum.

Third, the IRS has been whining about supposedly inadequate budgets, but the bureaucrats are paying a private law firm millions of dollars to participate in this never-ending audit.

In 2014, the government in an unprecedented move hired Quinn Emanuel, a L.A.-based litigation firm to help audit the company. The IRS has billions in budget, teams of lawyers and accountants, yet they decided spend $2.2 million dollars outsourcing their legal team to lawyers that charge in excess of $1000 an hour.  It should come as no shock to anyone following the IRS scandal that Quinn Emanuel is chock full of lawyers who are also large contributors to the party in power.

Fourth, the IRS’s rogue behavior may become standard practice if the bureaucrats don’t face any repercussions for stepping over the line.

This fight actually has little to do with Microsoft. It has everything to do with the prospect of the IRS abusing power, wasting taxpayer money and setting dangerous precedents for enforcement against small businesses. …The actions of the IRS that put this matter into court threatens to set a dangerous precedent on the power of the federal government with regard to tax issues. Congress needs to protect citizens against IRS overreach, and now a potential new procedure that will allow private tax information to be shared with outside law firms.

Wow, what a damning indictment against a vindictive bureaucracy.

And while Microsoft is a big company with plenty of money to defend itself, this is still outrageous. Particularly since the IRS will employ these thuggish tactics against less powerful taxpayers if it isn’t slapped down for by either Congress or the courts.

By the way, I should say something about the underlying dispute. The IRS is not happy about the prices that Microsoft charged when doing intra-firm sales between the parent company and foreign subsidiaries.

Yet if the bureaucrats really think Microsoft abused the “transfer pricing” rules, then the IRS should come up with its own estimate and – if necessary – they can go to court to see who’s right.

For what it’s worth, I suspect the IRS isn’t presenting Microsoft with a bill precisely because the bureaucrats ultimately wouldn’t prevail in a legal fight. The agency probably hopes a never-ending audit eventually will force the company to voluntarily over-pay just to end the torture.

Since I’m a policy wonk, I can’t resist noting that the only reason this kind of dispute even exists is because the United States has the highest corporate tax rate in the entire world. So companies naturally seek to maximize the income they earn in other nations (sort of like entrepreneurs and investors decide it’s better to do business in low-tax states such as Texas rather than fiscal hellholes such as Illinois).

And there’s nothing wrong – legally or ethically – with taxpayers choosing not to overpay the federal government.

The IRS can, of course, ask politicians to change the law if their goal is to grab more money. But as explained by Brian McNicoll in a column for the Washington Times, it shouldn’t try to confiscate more loot with endless harassment and dubious tactics.

If Microsoft’s business strategies are a problem for the IRS, it is up to Congress to change the tax law. But as long as those strategies are legal, no one should question Microsoft for doing what it can to limit its tax obligation. …there is reason Congress gives the IRS three years — not eight and certainly not carte blanche to go on indefinitely. …If the IRS has something on Microsoft, by all means bring it forward. But if it doesn’t, it needs to close the books on this near-decade of harassment and send Microsoft a bill for its taxes.

Returning to our main point, this is why tax reform should be accompanied by reforms to rein in the IRS’s improper behavior.

P.S. They haven’t put forth many details, but some candidates have indicated support for the kind of radical tax reform that would de-fang the IRS. Rick Santorum, Ben Carson, and John Kasich have all stated that they like the flat tax. And Mike Huckabee embraces a national sales tax to replace the current tax code.

And if there’s wholesale replacement of the internal revenue code, then a lot of the problems with the IRS automatically disappear.

P.P.S. Since we’re criticizing the IRS, I can’t resist sharing some oldies but goodies.

P.P.P.S. And since I’m digging through my archives, here’s my collection of IRS humor, including a new Obama 1040 form, a death tax cartoon, a list of tax day tips from David Letterman, a cartoon of how GPS would work if operated by the IRS, an IRS-designed pencil sharpener, two Obamacare/IRS cartoons (here and here), a sale on 1040-form toilet paper (a real product), a song about the tax agency, the IRS’s version of the quadratic formula, and (my favorite) a joke about a Rabbi and an IRS agent.

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