The NFIB’s recent survey of small business owners found that 85% of them were in favor of tax reform. If I were able to unilaterally craft tax reform, here are five changes I’d make.
1. Simplify, simplify
We get it; the Tax Code is complicated. There are an estimated four million words in it, and even tax experts (myself included) often disagree on what some of them mean. Let’s go back to square one when taxes were meant solely to raise revenue and were not designed to encourage or discourage certain activities (e.g., encouraging “green” activities with special tax credits).
a) It would surely help to bring down the tax rates overall and eliminate the impact of lobbyists on tax law.
b) It likely would reduce tax evasion; a low rate makes it less beneficial to engage in fraudulent activities that, if detected, could result in civil or even criminal penalties.
c) It would give small business owners and other taxpayers more time to devote to their businesses and other activities rather than having to be concerned with the tax implications that their decisions may have.
d) It would save taxpayers money on recordkeeping (e.g., there would be no need to track mileage for car use if no deduction for it were allowed) and tax preparation.
Simplification could be done with a flat tax, which has one or two low tax rates and only a limited number of permissible write-offs.
2. A single tax
Right now, there are income taxes, employment taxes, and excise taxes. All of these taxes are funneled into the federal coffers to pay the government’s expenses (which include such things as promised Social Security benefits).
Why have separate taxes? Adopt a single type of tax and levy it. This would make it clearer to taxpayers exactly what they pay. Take the example of a self-employed person who is single and whose business nets $275,000. In 2013, he’s paying income tax (perhaps at the 28% rate if deductions bring taxable income below $225,050), self-employment tax of 12.4% on $113,700 and 2.9% on $275,000, and an additional Medicare surtax of 0.9% on $75,000 (earnings over $200,000). You tell me what his effective tax rate is!
3. Eliminate different tax treatment based on marital status
The tax law treats single individuals differently from married couples. Some singles (e.g., heads of households and surviving spouses) have special tax breaks that most singles do not. When two spouses with substantial earnings file jointly, they pay a marriage penalty (they pay more than they would if they had been single).
On the other hand, when two spouses, one with high earnings and the other with little or no earnings, file jointly, they have a marriage bonus (they pay less than they would if they were single). And why should spouses in community property states have community property rules apply for most federal tax purposes (they are disregarded when it comes to “earnings” for IRA contributions, self-employment tax, and some other purposes). Why should disparate treatment remain?
4. Make everybody pay something
At last count, 46% of Americans pay no income tax. This means they have no interest in whether taxes are high or low, fair or unfair; they have no skin in the game. Yet, many of these people vote for representatives who make tax law and impact the other 54%.
I’d make everyone, regardless of income (or even receipt of tax refunds) file an income tax return and pay at least a nominal amount (say $25). Non-profits could help low-income individuals with this perfunctory filing and payment.
5. Collect from tax deadbeats
It was reported that federal workers owe $3.5 billion in back taxes for 2011. Federal workers aren’t the only taxpayers who are delinquent. The IRS offers various options for paying back taxes, including installment agreements and, when paying is a hardship, offers in compromise. And, let’s not forget that garnishment is a tool the IRS is allowed to use to collect unpaid liabilities and it could easily be applied for delinquent federal workers and other taxpayers.
I believe that tax reform can be accomplished. What needs to be done upfront is reaching an agreement on the goals for tax reform. Sweeping overhaul is needed for any meaningful changes from the status quo.