How to fix Amer­ica’s bro­ken tax sys­tem

The Washington Post Sunday - - BOOK WORLD - RE­VIEW BY ALAN MUR­RAY Alan Mur­ray is chief con­tent of­fi­cer of Time Inc. and co-au­thor with Jef­frey Birn­baum of “Show­down at Gucci Gulch: Law­mak­ers, Lob­by­ists and the Un­likely Tri­umph of Tax Re­form.”

Any lay­man look­ing to un­der­stand the com­ing tax re­form de­bate would do well to read T.R. Reid’s new book, “A Fine Mess.” Reid is a skilled jour­nal­ist, with a knack for mak­ing sense of the most com­pli­cated sub­jects. And few sub­jects are more com­pli­cated than the U.S. tax sys­tem.

Reid’s method is sim­i­lar to that of his 2009 book, “The Heal­ing of Amer­ica.” He be­lieves that by look­ing at the poli­cies of other in­dus­tri­al­ized coun­tries, we can learn what works and what doesn’t. It turns out that in tax pol­icy, as in health-care pol­icy, the United States is no­to­ri­ously in­ef­fec­tive and in­ef­fi­cient. As the world’s rich­est na­tion, the United States has more ca­pac­ity to tax than any other coun­try. But with an overly com­plex tax sys­tem rid­dled with loop­holes, we rank near the bot­tom of in­dus­tri­al­ized na­tions in our ef­fec­tive­ness at do­ing so.

The worst man­i­fes­ta­tion is the cor­po­rate tax, which is nom­i­nally one of the high­est in the world — at 35 per­cent — but sub­ject to such mas­sive game-play­ing that it brings in only a frac­tion of that. Reid de­tails some of the out­ra­geous, but per­fectly le­gal, tax strate­gies em­ployed by com­pa­nies such as Cater­pil­lar, Ap­ple, Google and Mi­crosoft to es­cape tens of bil­lions of dol­lars in taxes each year. He also shines a harsh light on the prac­tice of “in­ver­sion,” which has en­abled many com­pa­nies to re­duce U.S. taxes by mov­ing their head­quar­ters off­shore. The re­sult is the worst of all worlds: a tax sys­tem whose high rates chase busi­nesses and jobs off­shore, while its mas­sive loop­holes drain govern­ment rev­enue. The only peo­ple who ben­e­fit are the ac­coun­tants and lawyers who de­vise the com­pli­cated avoid­ance schemes. “The U.S. cor­po­rate in­come tax,” Reid con­cludes flatly, “is not work­ing.”

Reid also de­votes a chap­ter to the val­ueadded tax, which he calls “the most suc­cess­ful tax­a­tion in­no­va­tion of the last sixty years.” The value-added tax is a levy on con­sump­tion, not in­come, which means it main­tains in­cen­tives to work and in­vest. And be­cause it is charged at each stage of dis­tri­bu­tion, it turns out to be rel­a­tively easy to en­force. Buy­ers get to deduct taxes al­ready paid, giv­ing them an in­cen­tive to en­sure that sellers ac­tu­ally pay the tax. Reid quotes for­mer Fed­eral Re­serve chair­man Alan Greenspan say­ing a VAT is the “least worst” way to raise taxes. “It has been adopted in ev­ery ma­jor na­tion on earth and in most small na­tions as well,” he says.

In the end, Reid comes up with a clear and sim­ple road map to guide tax re­form ef­forts. He would dra­mat­i­cally lower tax rates for all pay­ers and make up for the lost rev­enue in three ways: elim­i­nate the Swiss-cheese-like pro­lif­er­a­tion of de­duc­tions and cred­its in the cur­rent tax sys­tem; im­pose a value-added tax; and im­pose a fi­nan­cial ac­tiv­i­ties tax, a tiny levy on in­di­vid­ual se­cu­ri­ties trans­ac­tions that could slow down ex­ces­sive trad­ing and raise sig­nif­i­cant re­sources.

In ad­di­tion, he rec­om­mends em­pow­er­ing the IRS to use the moun­tains of data it al­ready col­lects to pre­pop­u­late tax re­turns, al­low­ing tax­pay­ers to check them for ac­cu­racy but sav­ing hours of un­nec­es­sary ef­fort. Bri­tain, the Nether­lands, Ja­pan, Den­mark, Swe­den, Spain and Por­tu­gal al­ready do some­thing sim­i­lar, and it seems to work out just fine.

Crit­ics of Reid’s plan, of course, won’t be hard to find. Uni­ver­si­ties, mu­se­ums and other non­profts will go on the warpath to pre­serve char­i­ta­ble de­duc­tions. High-tax states will cry foul over the loss of the state and lo­cal tax de­duc­tion. Real estate de­vel­op­ers — per­haps even President Trump — will be in an up­roar about elim­i­nat­ing the de­ductibil­ity of in­ter­est pay­ments. Con­ser­va­tives will at­tack the value-added tax as a money ma­chine that leads to big­ger govern­ment. Wall Street will cry that the fi­nan­cial ac­tiv­i­ties tax will sti­fle fi­nan­cial in­no­va­tion.

But in the end, the real prob­lem with Reid’s tax plan is not its sub­stance. The na­tion would un­ques­tion­ably ben­e­fit from tak­ing his ad­vice.

Rather, the real prob­lem is that we’ve lost all abil­ity to have a ra­tio­nal dis­cus­sion of such poli­cies. The United States did a pretty good job of clean­ing up its tax sys­tem in 1986. But it was a mas­sively com­plex ef­fort that re­quired com­pli­cated ne­go­ti­a­tion and coali­tion-build­ing among law­mak­ers in both par­ties. In to­day’s badly frac­tured po­lit­i­cal en­vi­ron­ment, it’s hard to imag­ine a re­peat of that process. Fix­ing our tax sys­tem — or for that mat­ter, fix­ing our health-care sys­tem — is un­likely to happen un­til we first fix our pol­i­tics. Maybe Reid should de­vote his next book to that.

A FINE MESS A Global Quest for a Sim­pler, Fairer, and More Ef­fi­cient Tax Sys­tem By T.R. Reid Pen­guin Press. 278 pp. $27

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