Lost in all the shouting over tax rates is the fact that our complex filing burden is itself a de facto tax. Right now, individuals and businesses spend huge sums to avoid running afoul of the IRS. That’s money that isn’t going to savings, consumption or job creation. If Republicans want to use the tax code to boost the economy, making it simpler would be a fabulous way to start.
Just ask my friend. He’s a part-owner of a modest white-collar business that employs a couple hundred people. They have a building in an office park, with desks, computers, ordinary office stuff. No high-tech gizmos.
Filing their corporate taxes involves a two-inch-thick stack of documents — and that’s just for depreciation!
My friend’s one-word summary of the situation: ludicrous.
The money his company spends to assemble those two inches of dead trees is money it’s not spending on expanding its business. I see this as a tax, because the government requires those documents as a price the company must pay for the privilege of existing.
Now, I’ve got nothing against tax accountants, but the aim of our tax laws should be to foster economic growth for everyone, instead of providing full employment for CPAs.
Microeconomics tells us it’s worth it to spend $9,999 on CPAs to avoid a $10,000 tax bill (just ask GE, which supposedly employs 975 tax pros). But we also know a company could find better things to do with that $9,999. The economic term for this situation is “highest-and-best use”; thus, funds diverted for tax compliance costs are an economic loss because the firm isn’t using that money to further develop what it is best at doing.
Ronald Reagan (who was an economics major at Eureka College) understood this. Dinesh D’Souza’s biography of him recounts an on-topic conversation between the president and his Treasury secretary, Don Regan. Regan asked his boss if he knew what GE had in common with Boeing, General Dynamics and a host of other big firms. President Reagan was shocked to learn the answer was: they paid no taxes. This spurred Reagan to push for tax simplification, and after winning the “Showdown at Gucci Gulch” (referring to expensively shod lobbyists’ fight for tax breaks) he got the bipartisan Tax Reform Act of 1986.
Sadly, Reagan’s tax reform legacy has slipped away. Some estimates put the number of tax law changes since 1986 at a staggering — and ludicrous — 15,000. The changes include reinstating many loopholes Reagan’s law had eliminated.
October 22nd will mark the 25th anniversary of Reagan’s tax reform act. The most meaningful way to commemorate it would be to end our current ludicrous system and have a concerted, bipartisan effort to restore our tax code in accord with Reagan’s principles of “fairness, simplicity, and incentives for growth.”
Joanne Butler is a senior economics fellow at the Caesar Rodney Institute of Delaware. You can email her at joanne-butler@comcast.net.