Friday, July 30, 2004

Occam's tax code razor?

From the Cato Institute, Democrats' Challenge on Tax Complexity:

"After the GOP assumed power in 1995, Ways and Means Committee Chairman Bill Archer promised to 'rip the income tax out by its roots.' In a 1996 report, Bob Dole and Newt Gingrich argued: 'The current tax system is indefensible. It is overly complex, burdensome, and severely limits economic opportunity for all Americans. We made clear on the very first day of the 104th Congress that our top priority would be to change the status quo . . . there is no status quo that needs more fundamental changing than our tax system.'"

"Unfortunately, it was all talk with little action: The GOP has not moved major tax reform legislation through Congress. Republicans did enact tax cuts in 1997, 2001, and 2003 that included pro-growth reforms. However, many features of these bills increased tax code complexity. For example, the 1997 bill included 11 narrow education tax breaks including a tuition tax credit, an education IRA, and a student loan interest deduction."

"The result has been that tax complexity has spiraled upward... After a decade of GOP rule, the number of pages of federal tax rules (tax code, regulations, and IRS rulings) has increased almost 50 percent. Tax forms and instructions are longer, individuals are spending more on tax advice, and there are more social engineering provisions in the code."

"Yet there is no shortage of simplification ideas that might gain bipartisan support. In 2001, the Joint Committee on Taxation issued a 1,300-page report full of reform proposals, such as abolishing the alternative minimum tax, a complex add-on tax that will hit 30 million households by 2010. Steny Hoyer recently noted that "we need to obviously deal with the AMT." The GOP ignored the JCT report when it came out, but now they should challenge Hoyer and the Democrats to help them repeal the AMT and pursue other reforms."

"In the 1980s, tax reform was a bipartisan concern. Prominent Democrats, such as Dick Gephardt, and liberal think tanks, such as the Brookings Institution, proposed some serious reform plans. Democrats introduced flat tax legislation long before Dick Armey proposed his plan in 1994. Within months of economists Robert Hall and Alvin Rabushka unveiling the original flat tax in 1981, Senator Dennis DeConcini of Arizona and Representative Leon Panetta of California introduced versions in Congress."

You can find some of Hall and Rabushka's thoughts in their book The Flat Tax, available online. Such a tax code already exists in some of the former communist countries in Eastern Europe.

Personally, while I see the flat tax as a nice thought, it might not be such a good idea anyway. Still, there's a need for a less complicated tax code, both in the United States and in Sweden. But I'm not very optimistic, it seems like there always some problems that the politicians want to "correct" through taxation, not least notably income distribution.