April 15, national lawbreaker day, is around the corner. Everyone could be a criminal on tax day because of the sheer size and complexity of the federal tax code. At more than 9 million words and growing, the tax code is a leviathan of potholes, pitfalls, and disasters waiting to happen. Special interests have long fed at the tax code trough, getting clever exclusions and deductions added to the code while you and I break pencils worrying about if those late-night copies constitute a business expense or whether mileage can be deducted from our taxes. Who knows? Unless you like pouring over indecipherable tax forms, instruction booklets, and the attendant guide books published by the tax consulting industry, you will probably never know for sure if you’ve paid the right amount this year. You might just be a felon.
Tax Day is once again time to call on our elected representatives to scrap the current system and replace it with something that works. Our current tax code is the product of millions of individual decisions, many of which were hidden from the public eye and the consequences of which were generally unforeseen. The result has been a proliferation of deductions, credits, and special preferences that require more than 60,000 pages to spell out. Complying with this Byzantine collection of regulations has become a daunting task. The Treasury Department now estimates the total cost of complying with the income tax at $125 billion – a year. Other estimates are even higher.
It’s not just taxpayers who are confused. Government investigators determined that IRS tax experts gave incorrect information to about half a million taxpayers during a six-month period in a study performed in 2002.
It is no wonder, then, that noncompliance is such a major problem. The government loses about $200 billion a year of tax revenue just due to noncompliance. The system’s absurd complexity provides ample opportunity for tax cheats to mask their true earnings while undermining the American people’s confidence in the fairness of tax code.
President Bush and the Republican-led Congress have done an excellent job delivering on one of their most important campaign promises. They pushed through a series of tax cuts that have stimulated the economy, encouraged investment and driven job creation. Federal tax receipts were way up in 2005 to a record $2.15 trillion, as robust economic growth generated a great deal of taxable activity.
However, while the president and Congress have made the tax system more efficient, they haven’t made it simpler or more transparent.
The U.S. tax code remains the principal source of political pollution inside Washington, D.C. Every day, an army of lobbyists goes to work pushing new tax breaks or subsidies on behalf of favored industries. And taxpayer-funded earmarks, which provide cash for member’s pet projects, have skyrocketed. There were more than 15,000 last year, up from about 1,200 a decade ago.
The result is growing citizen resentment towards our entire income tax system. In the last few years, FreedomWorks has helped voters defeat major statewide tax initiatives in three states, Alabama, Oregon, and Washington. In each case, citizens made it clear that they were tired of new tax schemes to pay for government waste and excessive spending.
It’s time for a change. Congress should replace the current income tax with a fair, simple flat tax system. The flat tax would have generous individual and dependent exemptions to help working Americans get ahead – a family of four would pay no tax on its first $40,000 in income. Eliminating all other deductions, exemptions, and special favors would eliminate the nagging suspicion that the wealthiest Americans are not paying their fair share.
Additionally, a comprehensive flat tax would have an often overlooked, but vital effect on our nation. One simple word: competition. By streamlining our tax system the United States would gain a tremendous competitive edge over nations whose tax systems simply do not stack up. Ironically, our current system takes away from our competitiveness. But comprehensive tax reform would help to spur foreign investment, draw companies, know-how and the brightest minds to our shores, and spur domestic innovation.
Eastern and Central Europe are already experiencing the benefits of simplifying the tax code. Nine nations in Central and East Europe adopted the flat tax since the fall of the Soviet Union and such forward thinking policy helped to draw massive foreign investment and jump start economies.
While the United States is a much different story, the underlying principle is the same: a competitive tax system will make our nation a more appealing site for global investment dollars and increase our overall competitive edge. And that will be good for all Americans.
Congressional Republicans have six months to demonstrate to America’s voters that there is a real difference between the two parties when it comes to spending and fiscal discipline. Fundamental tax reform is a good place to start.
Passage of a flat tax would send a strong message to voters that they have a choice beyond just Democrats or Democrats-lite.
Mr. Kibbe is president and CEO of Freedom-Works, a grassroots organization with 800,000 members fighting for lower taxes, less government, and more freedom (www.freedomworks.org/).