As another Tax Day has come and gone, we reflect upon what’s wrong with our tax system and what can be done to fix it. The President’s idea is to use the tax system as a way of dividing classes by income as he did with the Buffett Rule proposal. He knew it was a gimmick, yet he spent days of taxpayer dollars trying to ram through his proposal. Luckily, it was defeated in the Senate earlier this week.
The problem is that an individual tax code with 3.8 million words is too complicated for the average American to understand. We have a corporate tax code – at almost 40 percent when you add federal and state taxes together – that makes America hopelessly uncompetitive. And our tax code contains loopholes that are exploited by companies large enough to hire an army of lawyers.
As Investor’s Business Daily wrote, in 1981 the entire developed world had high corporate tax rates, averaging 47 percent. Then capital became mobile and rates plummeted to 25 percent and haven’t stopped falling. The United States remains stuck since 1986 in an out-of-date, high corporate tax rate, which sent companies fleeing America for a more competitive tax climate. Just ask any number of companies why they left America and they’ll tell you that between the high tax and unreasonable regulatory burden in America, other nations are now a more profitable place to do business. And this problem will only get worse at the end of this year when the current tax cuts may expire at the will of President Obama. Billions more in investment will flee our shores for other countries.
We need a tax system that forces large, well-connected corporations to play by the same rules as small businesses and individual Americans and that protects and provides fair competition in free markets.
In the 1980’s Ronald Reagan enacted tax reform that created a period of unparalleled prosperity. We should follow his blueprint for tax reform that had as its core principle to stop taxing investment and productivity.
First, it is only fair that everyone should contribute something to the core government services like national defense, our courts, our roads and necessary infrastructure--our public goods. Everyone benefits and everyone needs to pay something.
Let’s face it: freedom is not free and all of us benefit from it. Today we live in a world where only 53 percent of Americans pay federal income tax. That means 47 percent pay nothing. People who pay nothing can easily forget the idea that there is no such thing as a free lunch.
Second, even though everyone should pay something, those who can afford to pay more should pay more. This is true not just in absolute terms. Someone at a higher income level should pay at least the same percentage of income as someone at a lower income level. In other words, a flat tax should at least be flat, and not tilted against lower and middle income families.
Third, fairness also demands that government limit its claim on the hard work and talents of the people it taxes. The income people earn is not the government’s income; it belongs to the people who earned it. When people in Washington say things like “we can’t afford a tax cut,” they need to think about whom the “we” is. It is the people’s money, not the politicians’ money.
When you say that government has first claim on the income earned through people’s work and creativity like President Obama has, you are not far from saying that the people themselves belong to the government.
The fundamental principle of a flatter tax system should be to level the playing field for all people and all businesses. We need a national discussion on tax reform rather than gimmicks. Only then can we make our system fair for all Americans.