Tuesday, January 23, 2018
Tax Code Simplification, Even Revenue Neutral, Would Still Have Effect of a Tax Cut

WASHINGTON, D.C. Sept. 29 (DPI) – Trump may be a national embarrassment, but the US tax code is so deliberately and needlessly complex that even his administration may be able to legislate much-needed reform in the next few months.

Even Democrats and Republican opponents of Trump acknowledge that the tax code is riddled with inefficiencies – from loopholes and special exceptions to many layers of tax rates, all requiring professional accountants to prepare even the simplest tax returns. In a column this summer, George Will asserted that there are more than 1.2 million tax preparation intermediaries in the country, more than the nation has police officers and firefighters.

On some level the vast tax bureaucracy inhibits the government from collecting what it needs to function, at least the part that isn’t debt. The US government has been funding about 12 percent of its budget through the issuance of debt securities for many years, while tax collection has stalled.

It looks as though some parts of the Trump administration’s broad proposal – cutting corporate and individual rates, cutting the number of individual tax brackets from seven to three, eliminating the estate tax altogether, among others – may actually become law.  Another proposal unlikely to pass: the elimination of the current deduction for state and local taxes, a proposal that would of course positively impact federal tax receipts.

Yes, there are scattered calls for “revenue neutrality” in any tax reform, but with few so-called deficit hawks in Washington these days, it’s unlikely the debate will focus on a fall in tax revenue.

The embedded complexity in the current code raises the question: Do marginal tax rates even need to be cut to stimulate growth? Or would simplifying the tax code enable all tax filers to keep the money they pay in accounting and legal fees, providing some economic stimulus while continuing to pay Uncle Sam what he gets now?

One benefit of a simpler tax code: Greater overall compliance and less tax evasion. Tax evasion is a growing problem – it’s now estimated that the US government loses $500 billion annually, which would be enough to virtually eliminate the use of debt financing.

The most likely scenario may indeed be revenue-neutral simplification – the reduction in the number of tax rates, and the elimination of loopholes and special preferences – as well as a reduction in the corporate tax rate from 35% to 20%. All indications are that the Trump administrations will negotiate on individual tax rates, and keep some level of the estate tax on the super-rich, but the proposal to reduce the corporate tax rate is “non-negotiable.”



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