Hostile Takeover: Resisting Centralized Government's Stranglehold on America (23 page)

Unfortunately, the end of World War II did not usher in a return to earlier levels of government spending and lower revenues. In fact, even before the war in the Pacific ended, domestic spending was rising. Congress had become addicted to spending, and taxes were needed to keep the pork-barrel machine running. Indeed, as Congress tweaked the tax code in search of more and more revenues, marginal rates rose, with the top rate reaching its wartime high of 94 percent in 1944 and remaining at 91 percent for the next two decades. Both President Dwight D. Eisenhower and President John F. Kennedy pushed some tax reductions through, but the call for more revenue kept rates relatively high for most of the 1960s and 1970s. The top rate stood at 70 percent from 1965 through 1981.

Unbridled spending in Congress also fueled inflation, as spending outpaced revenues, and monetary policy was used to monetize the federal debt. Spending problems came to a head in the 1970s, as the nation experienced an era of stagflation, characterized by both high unemployment and high inflation.

The Reagan Revolution reduced income tax rates to their lowest levels since the 1920s. The top rate fell from 70 percent to 50 percent in 1982, and by 1988 it was just 28 percent.
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Based on the results of previous rate cuts under President Calvin Coolidge in the 1920s and President Kennedy in the ’60s, the results of the Reagan tax reforms should be unsurprising—federal income tax revenue increased by 25 percent from 1980 to 1990, and real economic growth increased from 1.6 percent in 1983 to 3.5 percent in 1990.
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Tax rates went down, growth and revenues went up.

Unfortunately, despite all the evidence that the lower tax rates of the Reagan era had worked, a sharp but brief recession in 1990–91 prompted President George H. W. Bush to raise top income tax rates in 1991 (the infamous “read my lips” tax hike), followed by an even larger tax hike by President Bill Clinton in 1993. Clinton’s abrupt increase in the top marginal rate, from 31 percent to 39.6, slowed economic growth coming out of the recession, and even as growth continued, real wages fell. Notably, after relatively small tax cuts resulting from a 1997 compromise between Clinton and the Republican-controlled Congress, GDP and real wages both began to grow at a significantly higher rate.
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Clinton’s successor, George W. Bush, delivered on his campaign promise to lower taxes, passing major tax cuts in 2001 and 2003, which reduced the top tax rate to 35 percent. Unfortunately, though the Bush tax cuts did give tax relief to a large percentage of Americans, they were also made temporary, creating economic uncertainty because the rates would automatically increase again in 10 years without congressional action. In addition, the Bush tax cuts shrunk the tax base considerably and greatly increased progressivity. By 2003, the Joint Economic Committee reported that not only did the top 50 percent of earners pay 96.5 percent of all income taxes, but 11 million of the lowest income earners actually paid a “negative income tax”; that is, they received more in refunds from the IRS than they paid in taxes.
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Looking back at the last quarter-century of bipartisan tax rate fiddling, we find ourselves stuck with a progressive tax system that destroys wealth and prevents job creation and economic growth. This is true not only for the personal income tax but also for the corporate income tax, which drives businesses away from our shores.

Though the United States once may have been the premier location for doing business worldwide, that image has been tarnished, in large part, due to a tax code that puts American businesses at a competitive disadvantage. Rates that were low relative to other nations are no longer a draw to businesses. As of April 1, 2012, when Japanese tax cuts took effect, the United States will have the highest corporate tax rates in the developed world.
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,
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Since 1960, the number of the world’s twenty largest companies headquartered in the United States has been in steep decline, from eighteen in 1960, to just eight in 1996, and only six in 2010.
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The result of decades of meddling is a system so complex that only the most resourceful can navigate it. According to the U.S. Government Accountability Office, the lawyers have a field day with the tax code: “Tax avoidance has become such a concern that some tax experts say corporate tax departments have become ‘profit centers’ as corporations seek to take advantage of the tax laws in order to maximize shareholder value.”
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Indeed, General Electric, with its team of well-heeled lobbyists drawn from the ranks of the IRS and the congressional tax-writing committees, filed a 57,000-page tax return.
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The massive tax return is a symptom of a broken tax code that has long been a tool of political influence, with Congress setting policies based not on efficiency or fairness but “by graft and by pull.”

The picture is no better for individual tax filers. The tax code itself has more than 693 sections applicable to individuals, and 1,501 sections applicable to businesses. The IRS has issued more than 20,000 pages of regulations, according to Congress’s Joint Committee on Taxation.
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And even the IRS may not be able to help you understand it. Numerous studies have found that, when called for advice, the IRS has provided the wrong answer up to 35 percent of the time. Filling out IRS Form 1040 takes taxpayers an estimated 2.4 billion hours.
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Complexity does more than just increase compliance costs. It also increases the deadweight costs in the economy, when resources are diverted from productive to less-valued uses. This includes resources paid to accountants and lawyers to decipher the tax code as well as the more significant costs of lobbying and campaign spending as various interests pursue favorable changes to the tax code. Quite simply, the tax code has become an awkward, inefficient political tool for redistributing income to favored political interests. Tax credits, tax breaks, earned income credits, and deductions are used to reward or promote everything from renewable energy to child-rearing. Far from simply raising revenue, the tax code has become a favored target of lobbyists and others seeking special benefits or social goals.

SIMPLE, LOW, FAIR, HONEST

A
T THE MOST BASIC LEVEL, A TAX CODE SHOULD BE DESIGNED TO COLLECT
revenues fairly, efficiently, and in a way that does not promote corruption, encourage tax avoidance, or hamper economic growth. In short, if we are going to have an income tax, it should be a flat tax, period.

It is time to scrap the code and replace it with a simple, fair, flat tax, which would greatly ease the burden of compliance and, with it, the need for an intrusive IRS. A flat tax would make the process of paying tax far less painful, while at the same time stimulating the economy. The average American would benefit; all individuals would be treated exactly the same as everybody else, and the average taxpayer would no longer be at the mercy of special-interest lobbyists who constantly seek to shift the tax burden to others.

How would it work?

Step one. Scrap the existing code.

Step two. Establish a single, flat rate on personal and business income.

These steps would massively shrink the current tax code, replacing hundreds of pages of tax forms with one postcard-size return. Taxpayers would calculate their income (salary and wages plus pension and retirement benefits), subtract their personal allowances based on marital status and number of dependents, and pay a flat rate on the rest. In one popular flat tax proposal, a family of four would have the first $40,000 of its income tax free, $10,000 per person; any amount above this would be taxed at 17 percent.

Step three. Do the same thing with corporate taxes.

These would also be simplified tremendously, reducing compliance costs and allowing businesses to invest in job growth while also lowering costs to consumers. Like the individual flat tax, with the business flat tax income would be taxed once and only once. Businesses would calculate total revenue, subtract total expenses, and pay a flat tax on that amount. Expenses would include purchases of goods and services, wages, salaries, and pensions, as well as capital expenditures such as land and buildings. The people or businesses that profited from those expenses would pay those taxes. Businesses making a profit, therefore, would pay a flat rate on those profits, while businesses with no profits or losses would pay nothing.

Step four. File your taxes on a postcard.

Step five. Use all the time and money you’ve saved in the full pursuit of life, liberty, and happiness.

Under real tax reform, everyone will understand the tax code, and clever lawyers or lobbyists will have no influence over how America pays its taxes. All taxpayers would be treated equally—imagine that—and the tax code would no longer discriminate against individuals based on how they spend their income. At the same time, generous personal allowances would assist those families struggling to make ends meet, by reducing their tax burden.

In addition, American taxpayers can reclaim the billions of hours they spend trying to comply with the current code. By eliminating the confusing and confounding layers of credits, deductions, and penalties that have been carved out by special interests over the years, taxpayers will reclaim the high ground, paying taxes simply and efficiently, without the painful, contorted maneuvers foisted on them by special interests.

While this is great news for the taxpayer, it is bad news for the lobbyists who curry favor in Washington. The tax code is arguably responsible for the majority of lobbying activity in Washington. One measure of this activity is that members of the congressional tax-writing committees are the most heavily lobbied. According to data from the Federal Election Commission (FEC) compiled by the Center for Responsive Politics, during the 2009–2010 congressional cycle, the thirty-nine members of the House Ways and Means Committee received a total of $31,473,562 in contributions from various political action committees (PACs). During this same period, the twenty members of the Senate Finance Committee received a total of $59,285,173 in PAC contributions.
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Under a flat tax, this growth industry and its backroom deals would evaporate.

A simple flat tax thus offers a number of advantages over the existing tax code. The fixed rate exercises a real restraint on government growth. Politicians who try to raise it would likely face universal opposition. And the flat tax is much more transparent than the current code, allowing taxpayers to keep a much closer watch over the spending proclivities of Congress.

Under existing tax law, interest, dividend income, and capital gains are taxed at both the corporate and the individual level, meaning investors are double-taxed. With the flat tax, however, this income would no longer be taxable, ending the excessive double taxation of investment income.

Additionally, rescinding the capital gains tax removes negative incentives for investment, since returns would be greater with lower taxes. Improved gains from investments would encourage more savings, through stocks, bonds, and bank accounts. Savings plans like IRAs would have no caps and all returns would be tax free. By encouraging savings, the flat tax would fuel economic growth, as savings prompts capital formation, which increases productivity, lowers costs, and increases wages.

Adopting a flat tax will also boost economic growth by increasing take-home wages, which will increase incentives to work and expand economic output.
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Additionally, removing punitive taxes on capital gains and interest would promote greater investment in the economy. In other words, hard work and success would be rewarded. Economist Lawrence Kotlikoff found that within ten years, the capital stock would increase an estimated 17 percent, which would help to fuel an initial increase in the national output of 4 percent.
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If GDP does grow immediately by 4 percent, and over the next ten years the capital base increases by 17 percent, this would greatly promote long-term fiscal health, as wages, profits, dividends, and consequently, incomes would increase rapidly.

This all sounds great, you might say, but the federal government still needs to function. Won’t lowering tax rates prevent the government from providing essential services? In fact, historical data shows that lowering tax rates can
increase
government revenue by growing the economy. According to economist Veronique de Rugy, when President Coolidge slashed tax rates for the highest bracket of taxpayers (from 60 to 25 percent), their share of the overall tax burden actually doubled.
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Tax rate cuts by President Kennedy (one of the original supply-siders?) similarly saw revenues from the wealthy climb by 57 percent, while the Reagan tax rate cuts saw the revenues from the top 1 percent increase from 17.6 percent of the totals to 27.5 percent, according to Cato economist Dan Mitchell.
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Why did this happen? Because freedom works. When individuals and entrepreneurs pay less in taxes, they can spend more on developing their businesses, investing in expansion, and hiring new workers. Lower rates unlock wealth and capital that otherwise sits idle and protected in tax shelters and havens. More wealth creation means more income being taxed and more government revenue. So we can have both economic growth and sufficient revenue to fund the constitutionally appropriate functions of government.

Such a healthy, growing economy is obviously not only good in the abstract; it has real-world impact. It means more jobs, more wealth creation, and more opportunities for Americans of all backgrounds to assert their economic liberty and pursue their happiness. Indeed, economic growth is important to all Americans and provides the engine for families to live the American dream. To shackle growth with a tax code that is inefficient, complex, and unfair makes no sense.