March Madness, baseball and flowers. Spring in America would be so
grand without income taxes and the headaches of filing on April 15.
Just about everyone agrees our complex personal and corporate income
tax laws are too painful and expensive — tax filing, record keeping
and the like cost at least $170 billion a year.
They are unfair — billionaire Warren Buffett laments his tax bracket
is lower than his secretary's is.
And the system kills jobs — although some businesses use political
influence to pay a fraction of their fair share, most pay much
higher taxes than do foreign competitors lest they move factories
and other activities abroad.
Proposals abound to reform the system by limiting deductions and
exemptions to lower rates overall, but despite noble intentions, the
morass would remain. For example, last year then-House Ways and
Means Committee Chairman David Camp, R-Mich., proposed such a
scheme, but the executive summary of the bill was 194 pages and only
a tax lawyer could reasonably comprehend it.
In that rat's nest, opportunities would abound for lobbyists to game
the legislative process and sustain most of the faults of the
present system.
Other industrialized countries limit these problems by relying more
on consumption taxes than income taxes, and support is growing among
Democrats and Republicans to shift the U.S. system in that
direction.
The most efficient solution would junk income taxes altogether in
favor of a simple national sales tax — a valued-added tax (VAT)
similar to one used in much of Europe.
In 2014, the Treasury collected $1.7 trillion from corporate and
personal income taxes. This could be replaced by a 12 percent sales
tax on all private purchases and other payments — be they computer
equipment, college tuition or lunch at the corner takeout.
Businesses and institutions would then pay to the Treasury the taxes
they collected less sales taxes paid on purchases of materials and
equipment, rent and the like. This subtraction would avoid the
double taxation of materials and equipment businesses purchase and
create a VAT often proposed by advocates of reform.
It would end forever all the headaches associated with valuing
inventories, calculating depreciation on capital equipment and other
work that cost billions in accounting and legal fees.
A VAT would favor no activity over another, and by taxing goods and
services at the point of sale, it would end the problem of U.S.
firms parking profits abroad to avoid taxes.
Businesses and institutions would file a three-line return — how
much tax they collected, how much they paid and the difference.
Individuals would file no tax return at all!
Temptations would abound to exclude or exempt all kinds of
activities, but that is the kind of thinking that gave us the
current mess — and inequities, slow growth and exceeding complex tax
returns.
Two problems remain. A VAT is not progressive — it taxes rich and
poor consumers at the same rate. The elderly, who more or less live
on savings, have already paid income taxes on those savings and
would be taxed again.
A simple solution would be to raise the rate to 15 percent, and
award each parent $3,500 for each child and pay similar amounts to
each American 65 or older.
If Congress wants to spend more, it could raise the rate further.
That would make transparent to all the cost of spending more on
government activities. If conservatives on Capitol Hill want to cut
programs, they could explain to voters how much those savings would
lower the rate.
Elegant, egalitarian and efficient, such a VAT without exemptions
would give Americans the tax reforms they want but privileged rich
folks and big businesses spend a fortune avoiding.
The economy would grow faster, create more jobs and Americans would
live better and in less fear of the Internal Revenue Service.
With the money saved, April 15 could be declared a national holiday
— Tax Freedom Day.