We Need Tax Reform, Not Tax Extenders
With the deadline for filing taxes upon us, the only talk of taxes in Washington is approving a bundle of "tax extenders." These extenders represent an $85 billion package of special "temporary" tax provisions that sunset every few years and require a new vote to re-instate them. While there are a few provisions that benefit individuals, by and large, these extenders represent the work of corporate lobbyists who have carved out benefits in the arcane U.S. tax code. Rather than simply renewing these particular provisions, Congress should turn its attention toward revamping the entire code, which has become an unwieldy burden for American taxpayers-individuals and businesses alike.
Taxes are a fundamental fact of life, and policymakers must address both the magnitude and process of tax collection. Taxes are collected to fund the basic operations of government, and persistent shortfalls suggest a structural problem that feeds into the challenges of deficit spending. At the same time, the structure of taxation can have adverse effects on the economy; in the United States the tax code has become a political tool rather than a means of finance. Instead of simply collecting revenues, the tax code is used to reward or punish certain behaviors. The extenders for example, provide benefits for actions as varied as an "Enhanced charitable deduction for contributions of food inventory" to "Special expensing rules for certain film, television, and theatrical productions."
In fact, the entire debate over tax extenders is a perfect example of how political self-interests can generate poor policy outcomes. If the tax extenders are, indeed, good policy (a point that is certainly debatable), why not adopt them permanently and avoid the dance that occurs every few years? Because the dance is how Washington operates. Tax lawyers and corporate lobbyists earn a healthy living on the dance, and few politicians would complain about its benefits on political fundraising.
Unfortunately, complexity comes at a price. First it creates a "fiscal illusion," which makes it difficult for taxpayers to actually understand the tax burden or make reasonable decisions about the size of government. As noted by Professor Roger Congleton of George Mason University, the higher the costs of becoming informed about the tax code and fiscal policy, the more people will choose to remain ignorant about the actual outcomes of fiscal policy. Fundamentally, this means that as the tax code becomes more complex, the potential for political manipulation increases.
While the current tax code imposes a significant burden on taxpayers-over 7 billion hours in compliance costs-its complexity imposes far more damage on the economy. In particular, the armies of accountants, lobbyists and politicians who live off the tax code represent resources that could be allocated toward more productive uses under a simpler tax code.
Clearly, any sense of rationality in the U.S. tax code has fallen by the wayside. Nobody understands the tax code in its entirety. Fundamental reform is urgently needed. For years, Congress has fiddled while the code burns. Each Congress leaves behind a layer of new complications in the tax code that frustrate taxpayers and raise the cost of doing business in America. In fact, corporations have reached the point where reorganizing overseas is viewed as a serious option.
Adam Smith identified the basics of any tax code more than 200 years ago in the Wealth of Nations: "Every tax ought to be so contrived as both to take out and keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury." The U.S. tax code has become embroiled in special interest politics and social policy. At this point, it would be better to start from scratch, designing a tax code to ease the collection burden while forcing the lobbyists and interest groups to pursue their interests elsewhere.
The time has come to abandon the almost 74,000 pages that make up the current tax code and adopt a simpler, flatter and fairer tax. The flat tax would eliminate favoritism and the unnecessary political jockeying that dominates the current tax code. Compliance costs would drop dramatically, and by taxing income once and only once at a simple flat rate, resources and investments would become more productive. Rather than a debate about tax extenders, Congress should be debating fundamental tax reform.