The deadline for income tax filings is Monday and, as usual at this time of year, panic vies with outrage among the nation's beleaguered taxpayers.
It's no wonder. They're struggling, after all, with a system of such epic complexity that individuals and corporations spend roughly $200 billion a year just to comply. As President Barack Obama's deficit commission put it, "The current income tax is fundamentally unfair, far too complex, and long overdue for sweeping reform."
Yet despite all the pain, the government is always short of money, and giant corporations often seem to get off scot-free.
Maddening, isn't it? But imagine if there were a way to liberate ourselves from the annual filing nightmare, solve our fiscal problems, and renew the faith of Americans and foreigners alike in our nation's future.
As it turns out, there is a way. All we have to do is adopt a saner tax system -- one that simplifies the rules, dispenses with a lot of deductions and loopholes, and gets the government out of the business of micromanaging behavior by means of the tax code. The time to act on this is now.
Of course, it always is. Periodically, in fact, the government takes a significant step in the direction of such reforms, as it did during the Reagan years, when the highest tax rate was slashed and many special breaks were eliminated. Unfortunately, they came back -- as they always seem to do.
But that's no reason to give up. Now that your tax returns are (we hope) complete, let's fantasize for a moment about a better system.
Best of all would be a tax levied on spending rather than earning. Why penalize work? Such a tax might be simplicity itself, since the government can easily determine what you have in the bank at the start of the year as well as at the end, and what you earned in between. It can then tax only what you spent, exempting the sum required to keep a middle-class family alive and applying a rising rate to the rest. This would encourage saving, and nobody should even have to fill out a return.
While such a system might seem fancifal, we could achieve a lot without going quite so far if everyone were willing to give up some cherished breaks in exchange for lower rates and less obscurity. This isn't just about oil wells and accelerated depreciation; the deduction for home mortgage interest alone, popular as it may be on Long Island,costs Uncle Sam around $130 billion annually.
Overall, such tax breaks cost the federal government $1.1 trillion a year. But they also encourage people to do things -- like buying more house than they can easily afford -- that aren't good for anybody.
While we're enacting reforms, let's fix the corporate income tax, a parallel system equally riddled with loopholes and complexity. It encourages corporations to do unfortunate things, like borrow too much (the interest is deductible) or keep profits and operations overseas. And ultimately, the corporate tax falls on a corporation's owners -- often just middle-class retirees, to say nothing of college endowments, pension funds and other non-plutocrats who happen to hold shares of stock.
At 35 percent (plus an average of 4 percent more for state taxes), the United States has one of the world's highest corporate tax rates; comparable countries average just 29 percent. Yet thanks to furious lobbying and the use of legal tax dodges, few corporations here pay the official rate. Last year General Electric, despite $5.1 billion in U.S. profits, paid nothing.
It may seem counterintuitive, but we need a lower corporate tax rate -- with vastly fewer loopholes and deductions. That would cut costs, boost competitiveness and eliminate perverse incentives without sacrificing revenue.
Giving up our cherished tax breaks would be a good deal all around. Obama's deficit panel, the National Commission on Fiscal Responsibility and Reform, found that if we repealed all tax breaks, the top rate for individuals could fall from 35 percent to 23 percent. The corporate rate could go from 35 to 26. And we'd still have an extra $80 billion a year left over for deficit reduction.