The broken tax code
W ell, here we go again.
President Joe Biden last week launched a full-throated defense of his tax plan built around two points: The rich are cheating and the IRS can’t catch them. As a result the top 1 percent has evaded $160 billion in taxes, he said.
Tax evasion occurs, but so does tax avoidance, which is legal and the result of a messy, confusing and at times contradictory tax code.
But whose fault is that? The rich? A struggling middle class? Low-income Americans? The answer is Congress, Republicans and Democrats alike, and for more decades than we can count.
Over the past two decades, Congress has gutted the Internal Revenue Service’s enforcement muscle, and some Republicans have called for the elimination of the IRS, as if no IRS would mean no taxes. We agree that many Americans are overtaxed and underserved. But the government has to operate on something, and revenue collection by any other name is still revenue collection.
The tax code will remain a fertile battleground for powerful lobbyists unless Congress is willing to change the conversation to make the tax code simpler and fairer, while also raising sufficient revenue for the nation to operate and be competitive internationally.
These goals don’t have to be mutually exclusive. Some tax provisions are worthy and some are of questionable merit, and that applies to virtually every income level.
The Biden administration and progressive Democrats can’t continue to look at taxpayers as victims and victimizers, nor can Republicans view necessary taxation to support government function as anti-capitalist or even anti-American. The existing tax system rewards narrow political considerations that distort tax policy and economic decisions, and it increases opportunities for tax evasion, avoidance and misreporting.
Leadership on tax reform requires more than dickering around with tax rates and brackets. In an opinion piece earlier this year, former Treasury secretaries Timothy Geithner, Jacob Lew, Henry Paulson, Robert Rubin and Lawrence Summers warned that legally owed, but uncollected, taxes amount to about $600 billion annually. That’s roughly two-thirds of nondefense discretionary spending, and it is on pace to reach $7 trillion over the next decade, say the five men who worked for Democratic and Republican presidents.
The tax code must be reformed to streamline deductions and reduce complexity to smartly encourage investment, improve compliance and reconnect Wall Street with Main Street. Otherwise, tax battles will be increasingly bitter and divisive.