“We’re going to hear a lot of polarized rhetoric over the next few months. The Republicans and Democrats will seem to disagree about everything. But there is one huge and important area where there is a possibility – a possibility – of bipartisan action and that’s tax reform.
Most Americans – Republicans and Democrats – dislike the tax code. They’re right to do so. America has what is arguably the world’s most complex tax code. The federal code plus IRS rulings is now 70,000 pages long. The code itself is 16,000 pages. The statist French, for example, have a tax code of only 1,909 pages – only 12% as long as ours. And then there are countries like Russia, the Czech Republic, Estonia that have innovated and moved to a flat tax, with considerable success.
You have to understand, complexity equals corruption.
When John McCain was still a raging reformer, he used to point out that the tax code was the foundation for the corruption of American politics. Special interests pay politicians vast amounts of cash for their campaigns and in return they get favorable exemptions, credits or loopholes in the tax code.
In other countries this sort of bribery takes place underneath bridges and with cash in brown envelopes. In America it is institutionalized and legal but it is the same thing: Cash to politicians in return for favorable treatment from the government.
The U.S. tax system is not simply corrupt, it is corrupt in a deceptive manner that has degraded the entire system of American government. Congress is able to funnel vast sums of money in perpetuity to its favored funders through the tax code without anyone realizing it.
For those who despair at the role of money in politics, the simplest way to get the corruption out of Washington is to remove the prize that members of Congress give away – preferential tax treatment. A flatter tax code with almost no exemptions does that.
The U.S. is the only rich country in the world without a national sales tax. Germany has one at 19%, Britain at 20%, Korea at 10%.
What’s the appeal of a consumption tax?
First, it is efficient. Most studies, including one by the Internal Revenue Service (IRS), suggest that the federal government loses several hundred billion dollars a year to tax fraud. This is much tougher to pull off with a consumption tax.
Second, it provides the government with a more stable form of revenue than income taxes. Income taxes fluctuate greatly between boom and bust years.
Third, American’s consume too much, often using credit and leverage to do so. A consumption tax would moderate this behavior. Government will always get less of a behavior it taxes and more of what it subsidies.
Ironically, the heavy reliance on income taxes makes the American system more progressive than those in Europe. The federal government gets about 43% of its total tax revenue from taxes on individual incomes and profits, compared with only 29% in Germany and 22% in France. The balance for France and Germany comes from the VAT, which is highly regressive. One recent OECD study showed that the top ten percent in America pay a larger share of total taxes, 45.1%, than do the top ten percent in any of the 24 countries examined. In Germany they pay 31% of the taxes, in France 28%.
But the best thing about tax reform is that it kills corruption. So if you ask me what kind of tax code I am in favor of, I am in favor of almost any new tax code that fulfils one requirement: It should fit on two pages.”
President Clinton: “It’s unrealistic that we can basically solve this whole thing (deficit) from cutting spending and just raising upper income taxes. We’re gonna have to have more growth. I think we’re gonna have to have more taxpayers, which is why I favor, in a disciplined way, immigration reform and letting more immigrants come to this country. I think it would make more jobs for people who are unemployed, not fewer.
We’re going to have to look at different tax systems, that are not easily evadable and that make us more competitive. I think they oughta look at a progressive value-added tax, just because — and I think it’s important that the American people understand this — most of our competitors have tax systems like this. If you have a value-added tax, you put a little revenue that’s collected — you lower the income taxes, corporate and personal — and you put a little revenue collector on every stage of sales in a product or service.
But if it is exported you don’t pay the last price…it’s exempt from the value-added tax. And, when a foreign good comes into this country they do pay the last stage of the value-added tax. So, when we export American products to countries with VAT taxes, our products pay that even though our corporations have already paid an income tax, already paid whatever other burdens. So if we could figure out how to do that, it would make us much more competitive with our exports. And, since I believe this cleansing process…this awful process we’ve just been through…gives us a great chance to bring manufacturing back in America, I’d like to see that looked at.
Then I think that the other thing that the other thing you’ve gotta do is you’ve just gotta be more disciplined in controlling spending. You just can’t…but it’s important to recognize that all these things are related. For example, if you don’t want Medicare to eat us alive. Medicare is a much more of a problem than Social Security, by the way. If you don’t want it to eat us alive you’ve gotta do something to stop the cost drivers in healthcare. We can’t keep doubling the cost of healthcare after inflation every decade.
So my view is control spending on an annual basis, work on healthcare costs, get more taxpayers, and try to have the most competive possible tax system. And eventually you’ve gotta really enforce these pay as you go rules. America..the American people have got to take responsibility too. They’ve got to know You just can’t keep saying you want more government than you wanna pay for, and borrowing more money from overseas. It’s just not right. It’s bad for our kids and grandkids. And it puts us in a very vulnerable position going forward.
We’re not, you know…Greece is vulnerable because they’re small, and they’ve been viewed as profligate. But, essentially in an international world where people can put their money in a nano second anywhere they want to, I simply don’t think we can afford to keep exploding this debt. And I think your gonna…the Democrats, we’re more socially progressive, but we’re also gonna have to be more fiscally conservative. I don’t think it’s fair to take any other course.”