Why the tax code needs an overhaul

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Alvin Bessent is a member of the Newsday editorial board.

 

If you want to know what's wrong with the federal tax code, think breast pumps.


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The IRS decided recently to allow an income tax deduction for the cost of breast pumps and the accessories nursing mothers use to store their milk. And women who have flexible savings accounts will now be able to buy those things with pre-tax dollars.

Who doesn't want to encourage mothers to nurse their babies? Breastfeeding has been associated with lower rates of infant illness and sudden death syndrome. All good stuff.

But what's the IRS got to do with breastfeeding? The answer should be nothing.

When the federal income tax was first enacted in 1862, the goal was simple - to raise money to run the government.

The tax became a fixture in 1913, and since then it has morphed from simple revenue raiser to a powerful tool the government uses to get us to do what it wants. Deductions and penalties are wielded as rewards and punishments.

So the tax code has come to include deductions for such things as producing a television show, financing a home, having a child or a home office. And now for breastfeeding.

Somebody can make a reasonable case for each and every deduction, credit and loophole. But not for the result: a tax code so complex that it encourages cheating, causes accidental overpayments, rewards gaming the system for special breaks, is difficult to administer and a pain to comply with.

It's also made corporate executives, industries and interest groups vulnerable to endless pitches for campaign contributions. They write checks to ensure open doors and sympathetic ears among the tax writers in Washington.

They also deploy an army of lobbyists - 12,965 last year according to the Center for Responsive Politics - who roam Capitol Hill pushing legislation and lucrative tax breaks for their clients. A stunning $3.47 billion was spent lobbying Congress last year for one simple reason: It works.

But one devilish consequence is that we're all saddled with a federal tax code that runs 3.8 million words, changes at the rate of once a day, and makes compliance so difficult that taxpayers devote about 6 billion hours and $163 billion a year just to file. It's a mess.

Doesn't everybody want a simpler tax code? My fantasy is scrapping the whole thing and replacing it with a consumption tax - a national sales tax, maybe, or a value added tax. Getting from here to there would be daunting, and you'd have to make it fair for low-income workers. But imagine a world with no taxes withheld from your paycheck, no tax forms to file and no IRS.

My dream aside, officials generally agree what should be done: Lower the tax rates and eliminate most of the current code's $1.1 trillion a year in deductions, credits and loopholes. And do it in a revenue neutral way - Washingtonese for reform that raises no more and no less revenue than the current system.

That should mean about the same tax bill for most individuals, but it would mean giving up cherished breaks. And while we all like to rail against loopholes for, say, multinational corporations and ethanol production, special interests are us. The costliest deductions are for mortgage interest, retirement savings and job-based health insurance.

Eliminate it all and you could have a tax code simple enough that most people could file on a postcard. But it would take political courage to kill popular breaks - and steely-eyed diligence to make sure they stayed dead. After all, what kind of person doesn't want babies breastfed?

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