(This post was authored by NTUF Associate Policy Analyst Spencer Woody.)
Taxpayers all over the country and many in Washington understand the need for tax reform. The current U.S. tax code is over 73,000 pages long, which, as Senator Rob Portman points out, is “ten times the length of the Bible, with none of the good stories.” To make matters worse, it is nearly incomprehensible even by those appointed to manage and implement it.
While many agree tax reform is essential, questions arise as to what constitutes a positive replacement to the current tax system and what principles are required for a good tax policy. This past week, National Taxpayers Union Foundation staff attended a discussion entitled "Updating the Tax Code: What Everyone Needs to Know about Tax Reform" hosted by The Heritage Foundation. At the event, experts discussed why tax reform is needed and how it could be done.
The experts agreed on four basic principles that tax reform must address in order to effectively encourage economic growth and protect taxpayers:
- Simplicity: The current tax code is extremely long and exceedingly complicated, which places a tremendous economic burden on individuals and businesses, especially small business that cannot absorb compliance costs as easily as large corporations. Tax code compliance takes an estimated 6.1 billion hours of labor and costs the economy nearly $233 billion per year. Moreover, individuals and businesses struggle to determine what tax credits, breaks, and exemptions they're eligible for due to the tax code's complexity. Any reform must address this burden.
- Transparency and Predictability: The current tax code leaves businesses and individuals in suspense with little degree of certainty concerning how the tax code might change in the future. Businesses are less likely to expand or invest in new ventures if they do not know what taxes are in store for them tomorrow. Due to the large number of temporary tax provisions in the current tax code, Dr. Jason Fitcher, a Senior Research Fellow at the Mercatus Center, has described our current tax code as "a permanent state of temporary tax policy." Being able to plan with some form of certainty for the future allows businesses and individuals to properly choose whether to spend, invest, or save without fear of hidden burdens in the future.
- Responsiveness: Between the lack of assistance the Internal Revenue Service (IRS) effectively provides to taxpayers and the increasing prevalence of identify theft and fraud, the IRS fails to properly administer the colossal tax code. As cited in a recent NTUF study, two out of every people who call the IRS are not assisted before being disconnected, or they give up due to the 20 minute average wait time. The tax code's current complexity prevents taxpayers from receiving help from the IRS in understanding the code and addressing concerns related to identity theft.
- Consistency and Efficiency: The current tax code discourages long-term investments and savings, which are universally considered beneficial to economic growth. Income consumed immediately is only taxed once through the initial income tax, but income that is invested or saved is taxed once initially and again through multiple smaller taxes, such as the estate tax and capital gains tax. In this way, the current system incentivizes immediate spending rather than saving or investing. This could result in slower growth across the entire economy. Moreover, lack of investment disproportionately harms those who are just starting their climb up the "economic ladder" by making the bottom rungs harder to reach.
There are a number of different tax reform blueprints that have been proposed in Congress recently, such as Senator Marco Rubio's (R-FL) and Senator Mike Lee’s (R-UT) Plan, Senator Rand Paul's (R-KY) Flat Tax Plan, and the FairTax. Regardless of which specific tax reform policy is considered, though, the focus must be on creating a tax code that is simple, predictable, responsive, and efficient. Washington must take these tax reform proposals seriously in order to realize a prosperous economy while at the same time alleviating taxpayers from an overly burdensome tax code.