Why is it that America has a ludicriously complicated tax code? Anyone who has ever looked through their personal income tax form knows that the system is absurd and ought to be radically reformed. Neither liberals nor conservatives gain anything from having individuals waste days of their life and hundreds of their dollars filling out forms, uncertain whether they are paying too much or too little and worrying about a potential audit.
John Stossel gets to the root of the problem in an oped today–it’s that politicians do like the tax code since its complexity allows them to give favors and breaks to their favored constituents:
But here’s a problem: Many in Congress don’t really want to reform the tax code. They like things just the way they are. So what if it makes paying taxes a headache for you? It gives them the awesome power to dispense privileges, which helps curry favor with lobbyists.
Congressmen bicker over who gets to hand out these special treats. In 2004, Sen. Olympia Snowe deplored the “financial burden on shipbuilders,” many of whom happen to operate in her home state of Maine, and got them a $310 million tax break. Alaskan Sen. Lisa Murkowski got her state a tax break on contributions for “charitable” whaling activities (whatever that means). And Sen. Saxby Chambliss demanded tax relief for the timber industry in Georgia.
So while business gets its tax breaks and congressmen get their campaign contributions, your spring weekend is devoted to wading through Form 1040 instructions.
Some countries have created simplified flat tax systems and are enjoying the rewards. Stossel highlights the example of Estonia:
Twelve years ago, Estonia became the first country to tax everyone — companies and individuals — at the same flat rate. It started at 26 percent, dropped to 22, and will go to 20 in 2009. There are a few deductions for things like mortgage interest, educational expenses, and charitable donations. Very low incomes are exempt.
Unsurprisingly, Estonia is booming. The former Soviet republic used to be poor, with an average income 65 percent below its European neighbors. Today, Estonians are almost as rich as their neighbors, and their economy is growing more than 11 percent a year.
Corporations like a tax system that is low and simple, too, and that leads them to do more business in flat-tax countries. American companies such as Microsoft, Colgate, 3M, Bristol-Meyers Squibb, and Johnson & Johnson opened businesses in Estonia after the flat tax was adopted. Twelve years ago, foreign investment in Estonia made up only 5 percent of GDP, but today, it’s up to 20 percent. That means there’s more money in the Estonian economy to tax. So while the tax rate dropped, government revenues actually increased.
American deserves a better tax system, but nothing will happen until individuals demand action from their representatives. Something to consider as the primary season heats up.