A Fine Mess

I just finished reading “A Fine Mess: A global quest for a simpler, fairer, and more efficient tax system.”, by T.R. Reid. It may not seem like a page turner, but for a policy wonk like me, it was not bad.

Tax reform is no doubt high on the priority list for the Trump administration. Americans spend an estimated 10 billion dollars and billions of hours preparing their taxes every year. A simple, fairer, tax code has been the goal of nearly every President of the 20th and 21st century.

The author T.R.Reid points out the time may be right for a major overhaul of the tax code, it seems every 32 years tax reform gets done. It happened in 1922, then again in 1954 and then 1986. So, 2018 is the 32nd year. The last major tax reform took place when I was a kid in 1986.

The driving principle behind the last big tax reform was summed up with the acronym LRBB, which stood for low rate broad base. Members of Congress realized that numerous tax breaks and loopholes have two negative consequences. The longer the tax code the more complicated and time consuming for taxpayers to comply with it. Secondly, more tax breaks and write-offs lead to higher rates. If taxpayers can write off state and local taxes, mortgage interest, charitable deductions, and a hundred other things, tax rates will have to go up to make up the difference. And since 1986 lobbyists succeeded in adding hundreds of pages to the tax code.

A few takeaways from the book:

America has a high corporate tax rate at 35 percent. And it applies not just to money US corporations make domestically but it also applies to money they make overseas. But the money is only taxed when it comes back to the US. So, it has been estimated that US corporation have some 2.3 trillion dollars parked overseas.

Naturally the US treasury would like to get some taxes out of it, but at a 35 percent tax rate it will probably remain overseas. Many on Capitol Hill want to lower the rate to increase Federal revenue and stimulate the economy. The process for getting the money back to the US is commonly called repatriation. The author cites a study that says the treasury can lower the rate all the way down to 9 percent and get as much in tax revenue as they are getting now at 35 percent.

One way corporations avoid paying the high corporate tax is through a method called inversion. A well-known example took place a couple years ago when Burger King bought a Canadian company, Tim Hortons, which mostly sell coffee and doughnuts. They have great doughnuts BTW. After the sale Burger King claimed to be a Canadian company, which enabled them to bypass Uncle Sam.

The book also describes the VAT tax and GST tax. Both are known as hidden taxes. A VAT, which stands for a Value added Tax, is where a product is taxed as it is being made, not just at the time of sale. For example, let’s say you buy a book. Here you pay the tax at the cash register. But the way a VAT works is the tax is added as the book is being made, printed, published. There is a tax on the paper, the ink for the print, etc.… The problem with this tax is that it is hidden. Economists agree that taxes should always be known to the consumer. The tax collector likes the tax because they get their money whether the book sells or not.

The GST stands for goods and services tax. It is a similar concept of the VAT. I could support those taxes in exchange for getting rid of the sales tax, but not as an additional tax.

Other than the corporate tax rate the author confirms that America is relatively speaking a low taxed country. Americans give more to charity than other countries, but he argues that one reason for this higher level of giving is that taxes are lower here. And many other governments do what we relegate to private charities.

The author spends a lot of time talking about inequality of taxes. He believes that the tax code should promote redistribution of wealth. I have never heard a good economic argument for government redistribution of wealth. The free market redistributes wealth every day.

In making his point for an inheritance tax is cites an example:

“If some rich American leaves 100 million to his granddaughter, she might have to pay 41 million, but it still leaves the lucky kid 59 million.” He then went on to claim her inheritance was a windfall. But the grandfather paid taxes all his life. The 100 million was his estate after he paid his taxes. So the government confiscated 41 million after tax dollars simply because he died. Inheritance taxes to me never seemed right. I have always questioned the morality of them. But to people like Reid inheritance taxes offer a great opportunity to redistribute wealth.

He also opposes a flat tax because he claims it is unfair. But what could fairer than everyone paying the same rate?

The author also defended IRS agents as good civil servants who simply enforce the rules that congress writes into the tax code. I agree with him, Congress is to blame not the IRS. He makes the point that every few years Congress calls up a bunch of IRS agents and before the cameras berates them. Members of Congress think it is great PR. He cites an example of an IRS agent responding bluntly, “But Congressman we are simply enforcing the laws you guys created.”

In telling that story he cited the impeachment attempt of IRS commissioner John Koskinen in 2015. The author seems to imply that the attempt to impeach him had to do with the complexity of the tax code. What the author didn’t mention is that Congress tried to impeach him over a scandal where the IRS tried to silence tea party groups by delaying their nonprofit filings.

The IRS destroyed the servers with possibly incriminating emails, and for good measure had the servers buried in a landfill. Why a landfill? My guess is that Koskinen and others at the IRS were worried that erasing the hard drives might not be sufficient.

Overall a good informative book. I agree with Reid now is the time for Congress to overhaul our tax code.