By Andrew L. Yarrow
Author of Forgive Us Our Debts (The Intergenerational Dangers of Fiscal Irresponsibility)
Marie Antoinette is said to have asked Louis XVI’s finance minister," What are you going to do about the deficit?" To which, the good minister—not unlike many an American politician today—purportedly answered: "Nothing Madame. It is too serious."
With a national debt of $9.3 trillion and rapidly growing, federal debt is serious, and failing to balance spending with revenues portends serious long-term pain for the American people, economy, and government if nothing is done.
The elephant in the room is entitlement spending, but it is worth considering the role of our tax system, not tax rates, in exacerbating America’s debt. Liberals and conservatives can disagree about tax rates or types of taxes, but few disagree that how the United States collects taxes could not be much more dysfunctional.
Almost no one likes taxes, despite Oliver Wendell Holmes’ injunction that they are the price for a civilized society. Moreover, almost no taxpayer, expert, or politician likes the current U.S. tax system, which is insanely complex, grossly unfair, and horribly inefficient.
There are several basic problems: 1) filing taxes wastes stunning amounts of time and money; 2) huge amounts of owed taxes go uncollected because of rampant tax cheating; 3) too many Americans pay no taxes; and 4) many tax subsidies are corporate and special-interest welfare.
Income taxes, with 900 or so IRS forms, devour 3.4 billion hours of Americans’ lives every year, or 25 hours per taxpayer. They cost the average filer $200 in out-of-pocket expenses, the U.S. economy untold billions in lost productivity, and IRS compliance costs are one-tenth to one-seventh of the amount of taxes collected. Between the costs of preparing taxes and the lost income from time that could be spent productively, or more enjoyably, paying taxes costs our country between $240 billion and $600 billion in 2005, according to the Government Accountability Office – all to raise about $2 trillion.
Secondly, as Will Rogers once said, "The income tax has made more liars out of the American people than golf has." About $300 billion in taxes owed – more than recent deficits – go uncollected, as polls have found that at least one-fifth of Americans publicly say that it’s OK to cheat on your taxes. That’s only those who admit, in essence, to being liars.
In addition, one-third of Americans pay no income taxes, up from one-fifth in the mid-20th century. While many are low-income, there are good citizenship reasons for all Americans to pay taxes, even if this is not a big revenue-raiser.
The fourth arena – called "corporate welfare" by Ralph Nader liberals and Cato Institute conservatives – involves hundreds of billions of dollars in forfeited revenues from market-distorting tax breaks to business and special interests. Maya MacGuineas of the Committee for a Responsible Federal Budget says that these $800 billion a year in "tax expenditures are really spending programs designed to look like tax cuts." These range from farm subsidies to the $225 billion-a-year exclusion for employer-based health care, which exempts corporations and individuals from paying taxes on the value of health insurance.
These four issues are areas where bipartisan agreement would be relatively easy. While the devil may be in the details, tax simplification is a no-brainer. We could eliminate most forms for most taxpayers; go to return-free filing, putting the onus on the government, as Grover Norquist has suggested; and/or adopt a Simplified Income Tax proposed by the Urban Institute’s Leonard Burman, with a single family credit, a refundable work credit, a 15 percent mortgage credit, no state or local tax deduction, and a built-in 401(k).
To collect owed taxes, honesty could be encouraged and we could beef up enforcement, as the audit rate falling from 2.15 percent in 1978 to 0.58 percent in 2001. The employer health-care exclusion and many agricultural and corporate subsidies are often seen as prime candidates for elimination.
Reducing long-term debt requires many other reforms—notably of entitlement spending—but we could address much easier, tax-system reforms that could win broad support across the political spectrum.
— Andrew L. Yarrow, Washington director and vice president of Public Agenda, a nonpartisan think tank, is a professor of U.S. history at American University, and the author of Forgive Us Our Debts, a book about the causes, consequences, and cures for America’s national debt, published by Yale University Press this spring. Yarrow's book Forgive us Our Debts is available from Yale University Press