Tax code heavy on courts

by Brody Burns

In 1976, former President Jimmy Carter referred to the federal income tax system as “a disgrace to the human race.” His Republican predecessor, former President Ronald Reagan, shared similar sentiments, and in 1983 described the tax system as being, “utterly impossible, utterly unjust and completely counterproductive … (it) reeks with injustice and is fundamentally un-American.”

The Post-Reagan tax code has only grown more complex and significantly longer throughout the years. The 2005 version of the Internal Revenue Code and Federal Tax Regulations had more than 60,000 pages and nearly 9 million words. To put this in perspective, the King James version of the Bible has slightly less than 800,000 words, making the tax code nearly 12 times the length of that Bible.

According to the Internal Revenue Services, American taxpayers spend an astonishing 6.6 billion hours per year complying with tax-filing requirements, which includes preparation, planning and paperwork. This averages out to an astounding 21 hours of tax preparation for every American. Furthermore the cost of this compliance, including the cost of an accountant or software and all other economic costs, will surpass the $400 billion mark next year.

With this serving as a backdrop, Republican presidential candidate Rick Perry recently unveiled his flat tax plan. Under Perry’s “Cut, Balance and Grow” plan, Americans will be given the choice to either pay a 20 percent flat tax rate or pay their current rate based on predetermined income tax brackets. His plan also aims to abolish the death tax, lower the corporate tax rate to 20 percent, balance the budget by 2020 and place a cap on federal spending at 18 percent of GDP. Perry views the flat tax as a key to stimulating growth; his support for the plan: “The way to stimulate the economy is not through temporary tax relief or government spending. It’s to stimulate private spending. The flat tax will unleash growth.”

The first major problem with his plan, which guarantees failure, is the optional nature. If the loopholes of the old system are more advantageous, then why would anyone leave that system? In 2009, the average tax rate for all taxpayers was 11.06 percent. In fact, only one economic bracket, those in the top 5 percent, averaged paying income taxes of more than 20 percent, with an average paying rate of 20.46 percent. Perry’s plan almost guarantees none of the top earners will switch.

From an economic standpoint, the adoption of a flat rate would require a greater income tax payment, which would seem financially unappealing to the gross majority of Americans who actually pay income tax. In contrast, there is a significant percentage of Americans who pay no income tax. For instance, in 2009, 51 percent of American household paid no income tax because of tax credits or deductions. These Americans would certainly not sacrifice paying nothing in income tax in order to paying something. So where does the growth happen? Americans who actually pay income tax .

Other aspects of his plan are equally unbelievable. Reducing federal spending to 18 percent of GDP is appealing but impractical, as it would require nearly an additional $1 trillion in spending cuts. Our congress has lost traction, making a mere $100 billion in cuts; $1 trillion is entirely unbelievable. Finally, corporations are unlikely to flock back to America and bring their money with them, because a 20 percent rate is still significantly higher than what many corporations are paying abroad.

In the end a flat income tax would almost certainly place a more significant financial burden on the poor. This is because numerous regressive taxes already exist, such as sales, sin (alcohol, tobacco, etc.) and payroll taxes. A regressive tax effectively takes a larger portion from a low-income person, than someone with a high income. Adding in a flat tax to these regressive burdens would have a greater financial impact on the poor.

While Perry’s plan may not be viable his intent is noble, as drastic overhaul is needed. Last year, the IRS employed more than 94,000 people, and had an operating budget in excess of $12 billion. Simplifying this system would be a landmark achievement and in theory, a flat tax would have several advantages. First, a flat tax has been known to foster economic growth, and is currently employed by numerous countries around the world. For instance, Estonia first enacted a flat tax rate in 1994 and witnessed double digit economic growth by 1997, with a steady 6 percent annual GDP growth thereafter. The U.S. economic growth rate never surpassed 4.9 percent during the same time period. Russia, which began employing a flat tax rate in 2001, witnessed a 26 percent growth in the amount of income tax revenue the year after institution of the flat rate.

A second major advantage is the direct simplification of the entire system. According to The Economist, “In a typical year, the IRS estimates that for every dollar it collects, another 19 or 20 cents is owed, but not paid.” This can lead to shortfalls in the hundreds of billions of dollars. Simplicity of the system creates a standard rate and directly combats the blatant avoidance of tax responsibilities.

A final advantage of a flat tax would be the reduction of loopholes, which would directly correlate to a reduction in the number of lobbyists. Last year, there were 12,951 registered lobbyists and a shocking total of $3.51 billion was spent on lobbying. These lobbyists and the tax loopholes in our current systems are perpetually linked. Loopholes are exchanged for campaign contributions and electoral successes. Fareed Zakaria, contributing editor-at-large at Time magazine, sums this exchange, “In other countries, this sort of bribery takes place underneath bridges and with cash in brown envelopes. In America, it is institutionalized and legal …”

In the end, as the percentage of federal revenues coming from individual and corporate income taxes decreases, and the amount of federal spending increases, an overhaul of the system is desperately needed.