With Tax Day approaching April 18th, the political sideshow will shift from cutting the fiscal 2011 budget to raising the debt ceiling. Republicans will demand limits on out-of-control spending, Democrats will accuse Republicans of holding America’s credit rating hostage to an extremist agenda. Americans have heard it all before. We will gladly pay more taxes if Congress will just shut up.
In 2005, the Government Accountability Office estimated that Americans spent between $67 and $100 billion to prepare their individual tax returns. Splitting the baby in two, one-half of these tax preparation expenses roughly equals $40 billion, the amount cut from the fiscal 2011 budget. Americans will gladly pay $40 billion more in taxes if Congress saves them another $40 billion by eliminating tax preparation expenses. Can you say win-win? How about moderate compromise?
Sound difficult? Not at all, Congress must simply quit spending through the tax code. Virtually every complication associated with tax preparation is tied to a tax expenditure: health insurance and medical deductions, home mortgage deductions, retirement savings deductions, etc… If Congress eliminates tax expenditures and lowers tax rates to remain revenue neutral, income tax could simply be deducted from paychecks just like social security taxes. Maybe we will still need an IRS, but it will not need a $12 billion dollar budget.
Ironically, the poor stand to gain the most from this deal, and many of them do not pay income tax. Tax expenditures skew incentives for low income earners by imposing an overall effective marginal tax rate that approaches 50%. Reduced tax rates will reduce the disincentive to work inherent to an income tax. Reduced tax code complexity will save the poor tax preparation fees and IRS audits.
The greatest benefit to low income earners would come from the return of market forces to areas of our economy long thrown out of balance by tax expenditures. For example, Congress subsidizes health insurance for the wealthy with a $150 billion plus annual tax expenditure. No reason exists for this tax expenditure if Congress requires Americans to purchase health insurance, as Obamacare has done. If the tax expenditure subsidy for health insurance disappeared, Americans would cancel their so-called Cadillac plans and instead seek high deductible plans that cost less. Demand for medical services would drop, as would prices, making health care more affordable for America’s less well-off.
Tax simplification should be a liberal issue. Can the Democrats show leadership for a change and put us on a path towards a sane tax code?