Time to Liberate the Taxpayer

Printed and stacked, America's tax code stands as tall as an average man. It's a marvel of confusion and waste. Picture a store clerk who tosses 50 cents in the trash for each dollar he puts in the register. For each dollar wage earners and companies pay in tax, they spend nearly 25 cents in time and fees figuring out how much (or little) to pay, while another 25 cents, reckons the Treasury, goes uncollected due to cheating.

Yet strip this wretched stack to a few pages and you'll find our perfect tax. Liberated, it would require no yearly filing of forms and would ensure everyone pays their bit.

It's a tax on income. Some would replace this with a bigger tax on purchases, but the experience of other nations has shown that a high national sales tax spurs illegal trade, just the sort of market perversion a good tax avoids. Our tax takes a greater share from high incomes than low ones. Advocates of a flat tax call that a punishment for success and that's a fair objection, but taxes that tilt in favor of the poor at least acknowledge how much more difficult it is to save up that first thousand dollars than the thousandth thousand. And our tax, although it should surely be smaller, is already comparatively modest. Americans, on average, pay a quarter of their income to the government. That's 10 percentage points less than the average for rich nations.

This tax takes just a few pages to explain, and even it can be made simpler and better. We have six tax rates, but would do fine with three. We tax dividends and capital gains at lower rates than wages, but should call all of them ordinary income, for reasons I'll explain in a moment. And we leave it to Congress to propose rate changes. These proposals should be made each year by the nation's independent accounting office, based on whether the government spent more or less than the tax it took the year before. Congress would still have the final vote, so it could overspend in a pinch. But parties would compete to reduce spending to lower the next year's rate. Politicians would no longer trumpet tax cuts while quietly borrowing to pay for them. (The additional $1.7 trillion or $11,000 per taxpayer in public debt our government has run up since 2002 comes to mind.)

And what of the rest of the stack? Most of it we'll be better off without. Some of it is worth keeping, but must be moved.

First, the pages that belong in the bin. Some taxes have nothing to do with wealth creation, like rich people dying (1% of government revenue). Others burden the poor more than the rich. There's an enormous "payroll" tax (35% of revenue), for example, which applies only to wages below $100,000 or so. These taxes should be folded into the income tax, thereby spreading the burden among all taxpayers.

Some pages tax money that hasn't even been pocketed. The word "corporation" might conjure an image of rich people in suits, but corporations are entities that distribute money to rich and poor alike. They pay wages and perks to workers and profits to owners, whether in the form of cash (dividends) or rising share prices (capital gains). We already tax that money wherever it lands. We shouldn't tax it in transit, too. And we're not good at taxing corporations, anyway. The rates we present to them are among the highest in the developed world, so they cheat, leave or pretend to be individuals. Ones that stay as corporations scramble for loopholes, but still pay rates that are several percentage points higher than the average for rich nations. And for all of it, what do we get? Corporate tax receipts have dropped to 15% of government revenue, from 25% in 1950. And we have lost good jobs.

Better to turn America into the world's largest tax haven by abolishing the corporate tax. We'll make up the lost revenue by taxing dividends and capital gains at the same rate as wages, and in doing so, we'll treat the shareholder and mill worker as equals. Manufacturers that have fled will return. New ones will join them. They'll bring better jobs and higher wages.