By Kurt Johnson
Tax simplification is a complex and politically difficult issue.
I would love to see tax simplification. I am a C.P.A. and have difficulty preparing my own return using a computer program! Real income tax simplification means moving to either a low flat tax rate or to significantly lower progressive tax rates with very few, if any, exemptions and deductions. Income from all sources would be taxed under the same rate structure. It we did that, there would need to be thousands of pages of transition rules.
For example, would existing Roth IRAs continue to grow tax free and would future withdrawals be tax free? If I invested in real estate and was promised future tax credits or deductions will those credits and deductions be honored in the future? There are hundreds of questions like these. It would be really hard to wipe the slate clean in one fell swoop. Politically, I think it’s probably impossible. It would really require a revolution.
Practically, I think that the best route is to repeal or let sunset the hundreds of special interest deductions and credits and to reduce tax rates as much as possible to lower the overall tax burden. For example, if we did away with the mortgage interest deduction or if we taxed employer provided health insurance benefits, we would need to lower tax rates significantly. Otherwise, total taxes collected would go up dramatically.
Regarding a national sales tax or “fair tax”, most conservatives who support this want it to replace the income tax. This would discourage spending and encourage savings, which I think would be a good thing. Politicians today are almost begging us to spend more and are keeping interest rates low so that we can borrow more. But the idea of not taxing income is a non-starter. Most liberals want a national sales tax or value added tax to be in addition to the income tax. I am very fearful that if a national sales tax were to replace the income tax that an income tax would be re-instituted later.
As a libertarian, philosophically, I believe that income taxes should be truly voluntary. This is also not politically possible. It would require that most everything be paid for by users. In many cases that would mean there would be free riders. But having free riders is better than using force to make people do what they don’t want to do. What is immoral for an individual to do does not somehow become moral just because it is done by a majority through government.
Finally, at the State level, I would love for the federal government to use its powers under the Interstate Commerce Clause to prohibit the States from offering special credits and deductions and exemptions to try to lure businesses to locate in their State. That would actually be a proper action under the Constitution – “To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes;” States would have to attract businesses in other ways – like lowering overall taxes and regulations, improving schools, improving roads, etc.
[Thanks to guest contributor, Kurt Johnson, for sharing his views on the challenge of tax simplification.]