News Home

First step: burn the current tax code

Congresswoman Virginia Foxx

About half of American workers didn’t pay any federal income taxes last year. 

Huge agribusinesses got billions in tax subsidies to turn food into fuel—pushing up the price of food for American families.  In fact, last year’s tax subsidies for turning corn into ethanol reached $6 billion.  The Congressional Budget Office even estimates that government subsidies for ethanol amount to about $1.78 per gallon. 

What do these two rather divergent facts have to do with each other?  Answer: they each point to the need for fundamental federal tax reform. 

Let’s face it.  Our tax system is a complete disaster.  It is so byzantine that only the sharpest tax lawyer or Washington lobbyist can tell you what lies beneath the surface. 

In true Washington fashion, it gets more complex, more unfair and more indecipherable with each passing year.  Congress can’t resist tinkering at the margins, throwing in new provisions or special carve outs and generally adding to the economic dead weight that is our tax code. 

The year-end debate over tax rates just serves to illustrate the point.  There are currently six separate tax brackets that will all increase in 2011 if Congress doesn’t do something to stop it.  Some people want to increase taxes on some brackets, others would like to increase taxes on all brackets and still others would like to increase taxes on no brackets.  (You can put me in the not increasing taxes on anyone column.)

This tax debate is rowdy and the disagreements are sharp.  Left unsaid is the fact that no matter what Congress does about these upcoming tax increases, we’ll still have an opaque system that is constantly gamed by special interests. 

You may wonder what special interests have a stake in the current tax code.  The honest answer is almost all of them.  This is why real tax reform is such a herculean task.  Thanks to hundreds of exemptions, deductions and carve outs inserted into the tax code over the past several decades, almost every interest group with a mailing address in Washington, DC will be crowing for another carve out if Congress sets about retooling taxes. 

The tax code is so bad that Americans waste at least 6.6 billion hours each year working to comply with the IRS requirements.  Add to that the more than $200 billion spent to stay in compliance and keep the auditors at bay and you have a massive drag on the economy and economic growth.

So Congress must be bold.  Tax reform can’t be a piecemeal sort of operation.  Step one must be burning the current tax code.  Step two must involve creating a tax system that is fair and efficient and that doesn’t pick favorites.  There are plenty of tax reform options out there—many of them far, far better than what we have now.      

The core problem is that our tax system is stuffed with needlessly complex provisions.  These carve outs mean tax rates are artificially high.  The carve outs also end up arbitrarily punishing some taxpayers and rewarding others.  As a matter of fairness, any tax reform proposal should strip away the layers of tax carve outs and lower the tax rates everyone pays.  After all, if you get rid of the special deductions, you could lower rates without seeing tax collections fall

This kind of reform could look like a Fair Tax or a flat tax or some sort of hybrid proposal.  Ultimately the exact type of tax reform should be up for negotiation.  The most important thing is to kill off the current tax code and replace it with something straightforward and fair for everyone. 

The result of fundamental tax reform would be immediate and dramatic.  America would experience a profound—and real—economic stimulus.  The uncertainty and ambiguity currently plaguing hundreds of thousands of businesses would virtually evaporate.  The wasted time and money of tax compliance would be slashed to a pittance.  Most importantly, tax rates would fall—empowering entrepreneurs to focus on big ideas rather than long tax forms and families to focus on their budgets and not their tax returns. 

If we get tax reform right we will spur investment in the people and businesses of tomorrow on a level not possible under the current tax system.   In today’s tough economic times, we can’t afford NOT to scrap our tax code and start over.