Hasson: Tax reform: getting the junk out of the trunk

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Isaac Hasson, Columnist

Last week was tax week, and since millions of Americans have sent their tax returns to the IRS, it’s worth considering the burdensome way in which they are collected. There are 1,137 words in the Declaration of Independence and 561,093 words in “War and Peace.” The U.S. tax code contains 3.8 million words.

Our poorly designed tax code diverts billions of dollars from the productive sectors of the economy in order to fund an army of lobbyists, accountants and lawyers who serve no purpose other than servicing an insane tax code. Compliance alone costs Americans an estimated $107 billion a year. Collecting the same amount of taxes in a simpler way will create billions of dollars of economic growth and millions of jobs.

Tax reform is as contentious as anything, but the stars are aligning in a way that makes an overhaul more likely than ever before. Sen. Ron Wyden (D-Ore.) is the newly elected chairman of the Senate Finance Committee and Rep. Paul Ryan (R-Wis.) is the clear frontrunner for the chairmanship of the House Ways and Means Committee.

On the surface, Wyden and Ryan are an odd couple, but they arguably have a stronger working relationship than any other House Republican and Senate Democrat. Despite being very liberal, Wyden is universally recognized as one of the Senate’s most effective dealmakers. Wyden represents a dying breed of legislators who are more concerned with writing good policy than being foot soldiers in an ideological movement. Ryan, a man with unimpeachable conservative credentials is one of the few House Republicans with the standing to whip enough votes to get a compromise through the House of Representatives. Ryan and Wyden have collaborated before, coming up with a bipartisan blueprint to reform Medicare in 2011.

Americans need a few things from tax reform. The United States has a corporate tax rate of 35 or 39.1 percent when combined with the average state corporate tax rate, the highest in the developed world. But the effective tax rate of U.S. corporations varies wildly. In 2010, General Electric filed a 57,000-page tax return, enabling it to pocket $14 billion in profits without paying a cent of taxes. UPS in comparison paid an effective tax rate of 34 percent.

Large corporations have employed an army of lobbyists on K Street to slice and dice the tax code in order to shift the tax burden onto smaller firms. This is not capitalism. A more efficient tax code will remove the loopholes and deductions and lower the corporate tax rate in a revenue neutral way, leveling the playing field between established businesses and smaller firms. The 24 percent flat corporate tax proposed by Wyden and Judd Gregg (R-N.H.) in 2010 is a good starting point.

Income taxes also need the kind of base-broadening, rate-lowering reform called for by bipartisan proposals like Wyden and Gregg, which will reduce the number of deductions in return for lower rates and a far simpler tax code. Tax reform also ought to increase the amount of pretax money that Americans can save for retirement and education. Finally, a bipartisan consensus is emerging around a larger earned income tax credit. This is an extremely good idea, which will put more money in the pockets of lower income Americans without creating a disincentive for working like other welfare programs. The result of these reforms will be a simpler, fairer tax code that will increase GDP growth anywhere between 0.1 and 1.6 percent and employment between 0.4 and 1.5 percent over the next ten years, an opportunity we can’t afford to miss.

Isaac Hasson is a Weinberg senior. He can be reached at [email protected]. If you want to respond publicly to this column, send a Letter to the Editor to [email protected].

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