Tax overhaul: what the US can learn from other countries
FOR all the controversy US President Donald Trump can stir up, there is one thing he wants to accomplish that many people favor: cleaning up the complex — and many would argue, unfair — US tax system. That doesn’t mean the task will be easy, of course. While most of us hate the system we have, we don’t agree about what we’d like to replace it with. Further, for every loophole, deduction or benefit, there’s a constituency (with lobbyists) that will fight to the bitter end to protect it. Even its annoying complexity has powerful defenders. It’s a monster — and its size makes it hard to kill.
You may therefore be happy to learn that even though they are a political nightmare to pull off, US tax overhauls have happened on a schedule — like clockwork, and the timer happens to go off again next year. Given that history and necessity are about to collide, Washington Post reporter T.R. Reid got curious about what tried-and-true solutions America could implement to make that next version of our tax system better. To find out, he traveled the world see what has worked best elsewhere, and brought those ideas home in his new book, A Fine Mess: A Global Quest for a Simpler, Fairer and More Efficient Tax System. He joined the Knowledge@Wharton Show on SiriusXM channel 111 to talk about what he learned. An edited transcript of the conversation follows.
Knowledge@ Wharton: What are some of the things that other nations are doing with their tax codes that we’re not?
T. R. Reid:
Our system is unique in the world, and it’s crazy. It’s 73,000 pages. I asked the Commissioner of Internal Revenue if anybody at the IRS has read the whole thing. He laughed. He laughed at the very idea. It turns out that other countries have done what our Congress can’t seem to do, and that is made it simpler. Americans spend 6 billion hours gathering the records and filling out forms. We pay tax preparers $ 10 billion a year. An average family at the median income — about $56,000 — spends 12-1/2 hours just doing their taxes, and they spend about $260 getting somebody to do it, on average. Guess what? In other democracies, it takes 15 minutes and $ 0 to pay your taxes. We could do that, too.
Knowledge@ Wharton: You bring up an interesting point in your book, that about every 32 years, the tax code gets so massive, so expansive, that it has to be pared down. And we’re coming up on that point in the cycle. But to pare down that code seems like a massive undertaking, and a very hard thing to do.
Reid: It’s hard to do, but it has to be done. I think it’s going to happen because nobody defends our current tax code. Republicans, Democrats and the president all say we have to fix it. We’ve seen this pattern in history. The federal income tax started in 1913, and it was a very popular tax then. We hate it today, but at that time, it only taxed the Rockefellers and the Vanderbilts, so people really liked it.
In 1922, Congress wrote a comprehensive tax code. Over the next 30 years, lobbyists and accountants came in and added all sorts of exemptions and credits and loopholes. The thing was a total mess. In 1954, it was such a mess that they threw it out and started over. That’s the Internal Revenue Code of 1954. Guess what? Thirty years later, it was a mess. They threw it out and started over. That’s the Internal Revenue Code of 1986. The pattern there is every 32 years we have to do this, and the 32 years is up in 2018. And guess what? Our code is a monster. Nobody can defend it. History repeats itself. The time has come to throw it out, get rid of all the loopholes, lower the rates and start over. I think we’re going to do it.
Knowledge@ Wharton: What are some of the loopholes you think could be fairly easily removed from the system?
Reid:
Well, at the moment, there are hundreds of them for specific corporations, that give a credit to one corporation. But for individuals, we give tax breaks for taking a night school course, growing sugar cane, replanting a forest, insulating the attic, paying off a mortgage, destroying old farm equipment, employing Native Americans, commuting to work by bicycle — but only specific bicycles. Here’s one I really like: What if the president went to Congress and said, “Why don’t we send a check for $7,500 to any American who buys a $138,000 BMW hybrid?”
You know, we’d never pass that. Give a tax break to rich people for buying a German car? But we did it. It’s in the tax code. The tax code is just laden with hundreds of these giveaways. Most people don’t even know they’re in there, and they cost $1 trillion a year in lost revenue. That’s money we could use to treat veterans or reduce the deficit.
Knowledge@ Wharton: Some countries have it so simple that it only takes people a few minutes to file their taxes. The Dutch, about 15 minutes, on average. Britain and Japan, five minutes. A lot of what makes that possible, I’m guessing, is they don’t have a lot of these extras in their tax