Achieving true tax reform


Achieving true tax reform

Apr 15, 2015 2 min read
Edwin J. Feulner, PhD

Founder and Former President

Heritage Trustee since 1973 | Heritage President from 1977 to 2013

Getting Americans to agree on anything isn’t easy. So let’s hand it to our tax code.

When asked in a recent survey to rate it, only 5 percent of the public said it’s “working just fine.” When 95 out of every 100 Americans say you’ve got a problem, well — you’ve got a problem.

Even Congress averaged a 15 percent job approval rating last year, according to Gallup. It takes a special talent to chart lower than our lawmakers in Washington.

You might think that’s where the consensus ends, but no. More than two-thirds agree not only on the need for “major” reform, but also that “taxes should be kept as low as possible to stimulate investment and growth.”

The question, of course, is how best to go about that. There are several alternatives, including a flat tax, a business transfer tax, and a national sales tax.

But first things first. It would be a mistake to decide, for example, what mode of transportation to take before you decide where you want to go.

We need to start by asking what we want tax reform to achieve. Here are five basic objectives, courtesy of tax experts Curtis Dubay and David R. Burton:

First, lower tax rates on individuals and businesses. It never hurts to state the obvious, especially when dealing with such a fundamental step, but yes, the first major component of true tax reform starts with lowering rates. In particular, the top marginal rates are too high, discouraging work, saving and investment.

Second, establish the right tax base. You can lower rates all you want, but if you’re taxing the wrong thing, it won’t do much good. We can encourage economic growth by moving toward a consumption tax — one that taxes income that is spent, not income that is saved or invested. Our current system is tilted far too heavily toward the latter, and we all end up paying the price — literally — with a more sluggish economy.

Third, eliminate the bias against saving and investment. Yes, the right tax base helps in this regard. Gone, for example, would be the double taxation of capital gains and dividends under a consumption tax. But we also need to lower our corporate tax rate, which at 39.1 percent is the highest in the developed world.

It’s worth noting that, under our current system, the tax rate on small businesses is even higher than it is for large ones. Thanks in part to the 2013 tax increases and to Obamacare, the top federal rate on small business income is 43.4 percent, versus 35 percent for large corporations. This needs to change.

Fourth, get rid of tax preferences. Simply put, our tax system should be neutral. It shouldn’t pick winners and losers. A key part of any serious reform will be eliminating the current polyglot system of deductions, credits and exemptions.

Fifth, simplify the system. One of the main reasons so few Americans think our tax system is working well is the fact that it’s so ludicrously complicated. But we need simplicity not only to reduce aggravation and errors — we need it because reducing the size and scope of government without transparency is practically impossible.

“Because of income and payroll tax withholdings, and the hidden costs of corporate, employer payroll, and excise taxes, most Americans have little idea how much they are paying to fund the federal government or how proposed policy changes will affect them,” Messrs. Dubay and Burton write. “The sheer complexity of the system makes it difficult to understand the true impact of the tax system. Tax reform should strive to make that cost explicit to taxpayers.”

There are a lot of important issues on the table as we approach the next presidential election, but it’s obvious that true tax reform should be one of them. Let’s not just complain at tax time. Let’s turn that animus into positive, concrete change — for all Americans.

 - Ed Feulner is founder of the Heritage Foundation.

Originally appeared in The Washington Times