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The essays in this
collection were originally written as part of a series in
Investor's Business Daily about fixing the tax code. In the
beginning, the biweekly newspaper columns served as an open letter
to the President's Advisory Panel on Federal Tax Reform, which was
in the spring of 2005 soliciting public commentary on how to fix
the tax code. But as the columns developed from February through
June, each one building upon the other, they became a
plain-language "how-to" manual on tax reform -- how to go about it,
mistakes to be avoided, and suggestions about what the final
product might best look like. Hence, the decision to republish them
as a short electronic book. This introduction summarizes some of
the main points and expands upon others in ways that were not
possible within the space constraints imposed on a newspaper
One recurring theme is that tax reformers should concentrate on
commonsense solutions that work. That is, reformers should not
indulge their egos and curiosity with experimental ideas that may
sound good in an academic treatise but in real life are almost
certain to have unknown and unwanted side effects. Another is that
tax reform should concentrate first on removing saving and
investment from the large amount of existing double taxation that
needlessly constrains economic growth, costs jobs, and impairs
living standards. By doing so, tax reform will allow all Americans
a fair opportunity to become capitalists and thereby to enjoy that
special kind of freedom that comes with being an owner.
Tax reform is central to the ongoing struggle between free markets
The current tax code does exactly the opposite of what common sense
says is in the best interests of the American people. It favors
high rates of tax over high rates of GDP growth; consumption over
saving; imports over exports; foreign investment over domestic; and
mindless paperwork over genuine productivity.
The bad influences exerted by the tax code have powerful
consequences that do great harm. Because we Americans save and
invest too little, we produce too little and consume too much; and
because our consumption is too high relative to our production, our
imports are too high and our exports too low; and because we import
more than we export, we must borrow from foreigners; and if we
borrow from foreigners and also continue to consume too much, we
must repay them with part of our savings; and when we deplete our
savings, it is harder to invest and produce.
With all its mind-numbing complexity and wrong-headed rules, the
tax code is emblematic of the entire body of federal laws and
regulations on every subject imaginable. Thus, the stakes riding on
successful tax reform are enormous. Because if the Congress and the
President cannot (or will not) reform something so fundamental or
readily fixable as the tax code, what hope is there for ever doing
anything about the rest of the federal edifice, where the faults
are much grander and reform is far more difficult to achieve?
Tax reform is not the complex, Herculean task that many have
thought. The half dozen aberrations in the tax code that are most
damaging to economic growth are also sources of much tax
complexity. Remove the most egregious impediments to economic
growth and get major simplification as a free byproduct.
Nearly all tax reform options eliminate the double taxation of
saving, investment, and international trade, and, in the process,
cut out big chunks of complexity as well.
If the dozen different IRA and 401(k) variations in the current
code are replaced with a better alternative that really does
eliminate the double tax on saving -- as tax reform promises to do
-- the tax code and regulations will shrink by more than 1,100
extraordinarily complex pages.
Replacing the current code's half dozen different depreciation
systems with simple and effective first-year expensing for
machinery and equipment will cut out another 400 pages of code and
regulations that put a double whammy on the economy: Not only do
the existing depreciation rules impede investment and constrain
productivity, they increase compliance costs enormously.
A straightforward exclusion of export income will moot another 100
to 200 pages occupied by several overlapping, partially irrelevant
and generally failed "Rube Goldberg" schemes that have cluttered up
the tax code for decades.
In addition to fixing the export situation (where U.S. businesses
produce here and sell abroad), some tax reform options also do away
with the tax code's archaic two-tax regime for income that is
earned when a U.S. business both produces abroad and sells abroad
in a foreign market. There are currently about 950 pages of rules
about such "foreign source" income. Most hamper the ability of U.S.
companies to compete in global markets. Few appear to raise any tax
revenue. Critics say they cost tax revenue.
Experiments in the 1990s indicate that eliminating double taxation,
in combination with other simplifications and a plain-English
rewrite of the tax law, will reduce the size of the Internal
Revenue Code by half.
Concentrating tax reform on eliminating double taxation also
provides the most bang -for -the buck in terms of economic growth.
For example, for each $1 of static revenue cost, switching from
depreciation to first-year expensing will produce roughly $9 more
GDP, and switching from double to single taxation of personal
saving will produce $4 to $7 more GDP.
Successful tax reform has the capacity to help chart a new course
for the 21st century -- one in which the economy is larger and
living standards are higher as ever more people reap the rewards of
market capitalism. And as fewer Americans depend on government
paternalism, freedom will flourish.
But before tax reform can succeed, the Congress must undergo a
considerable attitude adjustment. The Congress is aware of the
damage the tax code is doing to America. And the Congress knows how
to fix the problem. But the Congress has thus far refused to do
The American people should demand that the Congress get on with the
job before more trillions of dollars of GDP are lost, before more
jobs are lost and, in the case of some industries, before it is too
late. And if the members of Congress do not act, the voters should
hold them all to account in the next election.
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Ernest S. Christian is a former Treasury tax official and is
now Director of the Center For Strategic Tax Reform in Washington,