For the Sake of Our Economy, We Need Tax Reform
Matthew Vitale, Fiscal Policy Contributor
Opinion - The first job I had was canvassing for my State Assemblyman’s campaign during the 2016 election cycle. I was excited to get the job, partly for the boost to my resumé, and partly for the pay -- $12 per hour. It might not seem like much, but two dollars above minimum wage for one’s first job is certainly not bad. I was later hired by the consulting firm that took over the campaign closer to the election, at a monthly salary of $2000. I was even more excited, until I realized how much I had to pay in taxes. My position was classified as an “independent contractor,” meaning I received form 1099 instead of a W-2. Thus, I not only had to pay state and federal taxes but another 15.3 percent in“self-employment tax.” This was my first job. I assumed that my employer took care of taxes, until I realized the meaning of my status as “self-employed.” I did not save much for taxes, but my family is lucky enough to have an excellent accountant, so I ended up receiving a refund of twelve dollars. Sadly, a good friend of mine who also worked for the consulting firm was not so fortunate, and currently owes close to $1000 to the IRS.
A major plank of President Trump’s campaign for office was tax reform, aimed at unleashing the economy from burdensome taxes and allowing individuals to keep more of their hard-earned money. His planoutlines several sweeping changes to the tax code, including a much-needed simplification. The income tax would be abolished for single people earning less than $25,000 or married joint filers earning less than $50,000; the seven income tax brackets would collapse to four; the marriage penalty and Alternative Minimum Tax would be abolished; the estate tax, colloquially known as the death tax, would be abolished; and the corporate tax rate would be lowered to a maximum 15 percent.
When speaking on tax reform, Ted Cruz alleged “there are more words in the IRS code than there are in the Bible… and not a one of them is as good.” That claim, sadly, is true. The only people who truly understand the full ten-million-plus-word tax code are the accountants and attorneys whose job it is to deal with tax preparation and litigation. The tax preparation industry commands $10 billion in revenue, and is the most profitable industry in the United States. The industry is so large precisely because of the tax code’s immense complexity. There is nothing inappropriate about an industry becoming large and successful -- tax preparation is a great need, and industries that meet needs are usually poised for success. However, the creation of an industry to meet a need does not necessarily legitimize that need. The tax code’s complexity necessitates simplification, not the creation of an entire industry for the express purpose of interpreting its details. Tax preparation costs the economy $202.1 billion in lost productivity, thanks to the 6.1 billion hours Americans spend each year preparing their taxes.
The exorbitant costs and complexities of preparing and paying taxes each year could perhaps be forgiven if they went to an agency that spent the money effectively and functioned well, but that is not the case. The Internal Revenue Service is perceived by Americans to have the worst customer service of the nine major government agencies, and its unfavorability ratings have more than doubled since 2009. Part of that unfavorability rating may be explained by the revelation that the IRS was acting in an almost Orwellian fashion when the IRS Acting Director of Exempt Organizations, Lois Lerner, admitted in 2013 that organizations were targeted for increased scrutiny “simply because the applications had [Tea Party or Patriots] in the title.” The IRS is broken, and so are its rules and regulations. They need to be fixed.
Many have tried to paint the President’s plan for tax reform as a tax break for the rich at the expense of the poor, but that is an entirely flawed allegation. This incredible simplification of the tax code provides the most help to middle-class and lower-middle-class Americans who struggle to understand the tax code themselves and cannot necessarily afford to pay an accountant to ensure they receive the maximum refund. The rich routinely employ high-powered attorneys and tax accountants to ensure they claim the maximum tax refund, or in some cases, pay no taxes at all.
The Alternative Minimum Tax (AMT) was originally conceived in 1969 to avert cases like these, where the rich are able to avoid taxes through claiming deductions not available to most Americans. It disallows deductions on more complex tax structures like stock options, drilling costs, and the accelerated depreciation of leased property. However, most of the common deductions people employ to lower their taxes, like the deduction of state and local taxes or property taxes are also disallowed under the AMT. It originally targeted 155 people who earned over $200,000 per year in 1969 dollars, which after adjustment for inflation is the equivalent of roughly $1.3 million in 2017 dollars. The AMT, however, was not inflation-adjusted until 2013, and as a result, the tax extended farther toward the low end of “high-earning” for decades. Many people who were not intended to be taxed according to the AMT brackets (which are separate and higher than normal tax brackets) were nonetheless charged the higher tax, and prevented from claiming any deductions to help defray the cost. The President’s tax reform plan does well to abolish the AMT. Under his plan, many tax deductions can be done away with (and are indeed abolished) while still ensuring taxes are not burdensome and allowing more people to afford their taxes without deductions because of a lower rate.
The next major change to the tax code is the reduction of the corporate rate to 15 percent. When the United States is compared to rest of the Organization for Economic Cooperation and Development, the only nations that have higher corporate tax rates are the United Arab Emirates and Chad. It is therefore no wonder that businesses leave our shores, as large corporations have no incentive to keep their dollars within our borders. A high corporate tax rate does nothing but discourage investment and promote practices like corporate inversions, where a corporation moves its on-paper address to a tax-haven country while continuing to do business in the other country and avoiding the higher taxes of its country of residence. President Trump ran as “the greatest jobs president God ever created,” and slashing the corporate tax rate to fifteen percent will encourage growth and investment within our borders. The key to the success of this policy is the application of the tax to small businesses as well as large corporations, as small businesses are currently taxed at the top marginal income tax bracket of 39 percent. Small business is the backbone of the economy, but it is a fragile construct. The growth of small business depends solely on personal incentive, which is stifled when tax rates are so high. An essential component of job creation and investment growth is a lower tax rate, and the president’s tax plan accomplishes that.
If the U.S. expects to lead the world in private-sector innovation as it once did, tax reform is essential. Those who point to the ballooning deficit as a reason for our suffocatingly high taxes fail to understand that the government can shrink. The government was not always as big as it is today. It will be extremely difficult, as governments do not easily forfeit power once it is given. When a responsible individual is unable to afford something, that individual does not purchase it. It is not too much to ask for the government to behave the same way, and tax reform is one excellent method to force the government onto a diet.
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