Now Is the Perfect Time to Think About Taxes - T.R. Reid on "A Fine Mess"

TaxesNow that our taxes are completed, it's actually a good time to think about taxes. Or at least the future of taxes. They could be a lot simpler and easier.

Author T.R. Reid writes books about important subjects that affect us all: healthcare, the international balance of power, microchips, and now, the American tax system. Reid describes the the current system as "incomprehensible," and there's no doubt that most of us agree with that conclusion. But history tells us we could have a "fairer and simpler" tax code very soon.

Read on to see how that could happen. And if you really want to arm yourself, read T.R. Reid's A Fine Mess, which covers the history of the U.S. tax system, how other countries have made paying taxes much easier, and how we could do the same in this country.

Having read the book myself, I came to two conclusions: we really could have a fairer, simpler tax system soon, and reading about taxes is far more interesting than doing them.

 

An Interview with T.R. Reid, author of A Fine Mess --

Chris Schluep: Almost every country in the world has cut tax exemptions and deductions and made their system easier. Why can’t the US do that?

T.R. Reid:  The U.S. could do that. In fact, we did it in 1986, the most admired tax reform in U.S. history. Congress and the president worked together then to eliminate scores of loopholes and exemptions and deductions; this made taxes much simpler, and allowed a major cut in tax rates.

Could we do it again? Almost all voters would benefit from a simpler system and lower tax rates. So the political winds would seem to be favorable for major change in the next two years.

Schluep: What’s the cost of us not making our tax system simpler?

Reid:  The U.S. has the most complicated and difficult tax system in the world; we’ve made it hard to file and pay taxes. Americans spend 6 billion hours per year gathering data and filling out returns; we spend some $12 billion on tax preparation help and tax software.  In other words,  just filing our income taxes has become one of America’s biggest industries.

And here’s the most maddening fact of all: It doesn’t have to be this way. In my book I show how other countries make it simple to file your tax return; it takes about 15 minutes, and costs nothing. We could make it that simple, too. In fact, the IRS could fill in almost every line of the forms for most American families.

Schluep: Can you talk about “BBLR” and why you support that idea?

Reid: Economists agree that the formula BBLR – that is, Broaden the Base to Lower the Rates – is the proven method for improving any tax code. It means you broaden the definition of “income” to include anything a person earns (including the health insurance premiums your employer pays for you), and then eliminate deductions, loopholes, credits, etc. That creates a Broad Base of income, which means the government can take in the same amount of tax revenue at much Lower Rates.  This makes the system simpler—plus,  lower rates increase voluntary compliance with the tax laws.

Schluep: You also support a VAT? Why?

Reid: The Value-Added Tax, a sales tax that applies at every level of business transactions, is an easy tax for governments to collect, and a hard tax to evade. So it makes the job of raising revenue easier. The revenues from the VAT can then be used to lower taxes on income and saving and investment. The Value-Added tax doesn’t penalize work or saving; it’s a tax on buying stuff.

This is such a good idea that 176 countries now have a VAT-like consumption tax; only a handful of poor countries and the United States have failed to implement this highly effective innovation. When it comes to taxation, Americans are still banging out letters on a typewriter and dropping them in the mail box while everybody else has moved on to texting and Instagram.

Schluep: Why are American corporate taxes so high?

Reid: Since the 1980s, most advanced democracies have been cutting the corporate income tax, as a way to encourage industry and job creation. The U.S. has not cut its rate for three decades; for most big firms, the tax is 35%.  That’s a serious competitive disadvantage for U.S. companies that have to go up against foreign firms in the same industry.

Congress has not cut the corporate rate for political reasons. There would be a public outcry if we cut the tax rate for corporations but not for individuals. Since Congress has not been able to agree on individual income tax cuts, it is stalemated on the corporate income tax as well.

Corporations have responded in a predictable way: As my book shows, they use all sorts of complex stratagems to move their profits overseas, and thus escape the U.S. income tax.

Schluep: Do you think Americans would be surprised to know they pay relatively low taxes?

Reid: Relative to the world’s other advance democracies, Americans get off easy on tax day. Of the 35 richest countries, the U.S. ranks 32nd in total tax burden.

One American who presumably would be surprised by this is Donald Trump. The President repeatedly says that “America is the highest-taxed country in the world.” This is an alternative fact.  We pay less in taxes, and our government spends less, as a share of our total wealth, than our counterparts in Western Europe and East Asia.  But Trump is right when it comes to corporate tax rates; the U.S. corporate income tax right is among the highest in the world.

Schluep: Why do we see a 32 year gap between each change in the tax code?

Reid: Congress wrote a comprehensive tax code in 1922. Three decades later, the code was such a complicated, contradictory mess that Congress threw it out and started over: The Internal Revenue Code of 1954. Once again, annual amendments made the code a confusing monster, so Congress started over again: The Internal Revenue Code of 1986.

There’s a pattern here: Every 32 years, we need to repeal the existing code and rewrite it from scratch.  That’s because the accumulation of new rules and provisions over the years finally reaches a point, every 32 years, where the thing is so complex it’s incomprehensible.

 It has been 31 years since the last revision, in 1986. So the time has come to start over. We need a brand new Internal Revenue Code of 2018.

Schluep: What are the odds of the U.S. having a simpler tax code in the near future?

Reid: It’s likely, because history repeats itself. Our tax code becomes so absurdly complex every 32 years that we have no choice but to scrap it and re-write. The 32-year period is up in 2018. So the time has come. History tells us that we’re going to produce a fairer, simpler tax code by 2018.  

 

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