During his short-lived campaign, former presidential nominee and Texas governor Rick Perry espoused a controversial proposal. He postulated, in his signature southern drawl, that the United States ought to adopt a flat income tax. Unfortunately, the merits of his proposal were drowned out by his perpetual speaking gaffes and poor podium presence. But for once, Rick Perry wasn’t making a mistake.
The current tax code is a convoluted mess that, in the words of Stanford’s Hoover Institution, can’t find 10 serious economists to defend it. It incentives evasion, penalizes growth and constitutes a massive sunk cost. Clearly the 72,000-page atrocity is in desperate need of comprehensive reform.
Cost efficiency and tax equity would be better served by a simple, transparent flat tax.
Calculating taxable income and navigating the maze of deductions and credits are both recipes for a migraine, but complexity also has severe monetary costs. According to the findings of the Cato Institute, Americans spend $431 billion dollars and 6.1 billion hours annually complying with the tax code.
To put this in perspective, this cost amounts to a markup of 30 cents on every dollar paid in taxes.
The cost of compliance is a burdensome weight that rests squarely on the shoulders of hard-working taxpayers. And the fact that the same dollar of income is taxed not once but multiple times merely exacerbates the problem.
You see, when you earn income in the form of a wage you pay taxes on that wage. When you invest your after-tax income you are taxed again on the profit you make on your investment. And paying taxes on both capital gain and wage income further complicates the filing process.
The tax code’s complexity, coupled with high marginal rates, provides a compelling incentive for evasion. Wealthy investors tend to hold their spoils in Swiss bank accounts or offshore bonds in order to evade the menacing hand of excessive taxation and cost. Even Republican presidential nominee and former Massachusetts Governor Mitt Romney is guilty of this crime of profitability. He has millions of dollars stashed in private accounts in lucrative tax havens like the Cayman Islands.
Many voters are appalled that Romney would hold his wealth in foreign accounts, but this campaign crisis is merely a symptom of the disease. If Governor Romney were not forced to pay interest and investment taxes and if his marginal rate was much lower than 35 percent, he wouldn’t have to seek shelter overseas.
A single rate tax would eliminate the tax code’s prejudice against capital formation by taxing income only once at a judiciously low rate.
Wealthy investors, bankers and so-called ‘Wall Street fat cats’ are constantly criticized for moving their capital to other nations with lower tax rates. This practice is seen as unpatriotic and anti-American. But the livid Occupy protestors and political pundits who voice this criticism fail to realize one thing: high taxes incentivize sheltering. Therefore, a lower marginal rate would make America a more competitive force in the global market.
Capital flows to the highest return on investment; if the cost exceeds the profit, capital flows will be diverted The Business Insider recently concluded that the U.S has the highest statutory income tax rate in the world. We could minimize evasion and maximize investment if we removed the incentive for evasion and the impediment to investment.
In the words of the immortal Daniel Webster, “the power to tax involves, necessarily the power to destroy.” Taxation is a necessary evil but unfortunately our tax code tends to exert far more evil than is necessary. High marginal rates, convolution and excessive compliance costs have characterized federal tax laws for years.
It’s high time that Washington cleaned house, cleared away the cobwebs and radically simplified the tax code.
Amos won second place at Four Star Leadership’s commentary writing competition. The first place piece, which disputes the flat tax, will be published tomorrow.
Amos is entering his senior year of high school as a home schooled student in Dallas. He participates in parliamentary debate, team policy debate, extemporaneous speaking and Moot Court competitions and is a Cadet First Class in his Air Land Emergency Response Team Unit. He plans to attend law school and enter the political arena.
Four Star Leadership is a program jointly hosted by General Tommy Franks, the National Center for Policy Analysis and Oklahoma Christian University and strives to teach students from all over the United States and abroad leadership in conjunction with effective communication.