Conversations about taxes usually focus on who gets what and who pays what, but we need to start thinking much broader than that.  We should design a tax system that matches our ambitious vision for America’s future.

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The time has come to change the American growth model completely. Adam Smith, the author of The Wealth of Nations, once said taxes should be efficient, predictable and convenient.  Our current method is the exact opposite.

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The U.S. tax code is still arbitrary and ridiculously complicated, which makes the entire mess inefficient, unfair and outdated.  It’s also super easy to cheat. 

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A hard-to-believe report from the Internal Revenue Service (IRS) revealed that: “The gross tax gap is the amount of true tax liability that is not paid voluntarily and timely [The tax gap provides a rough gauge of the level of overall noncompliance and voluntary compliance.]  The estimated gross tax gap is $441 billion.  The net tax gap is the gross tax gap less tax that subsequently will be paid, either paid voluntarily or collected through IRS administrative and enforcement activities; it is the portion of the gross tax gap that will not be paid.  It is estimated that $60 billion of the gross tax gap eventually will be paid resulting in a net tax gap of $381 billion.”

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Additionally, the IRS estimates that the American public reports less than half of income that doesn’t require third-party verification (i.e., a W-2).  The New York Times puts it this way: “Unreported income is the single largest reason that unpaid federal income taxes may amount to more than $600 billion this year, and more than $7.5 trillion over the next decade. It is a truly staggering sum — more than half of the projected federal deficit over the same period.”

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To start, we need to simplify the tax code in order to promote fairness and encourage economic growth.  Within the current system, there are numerous tax expenditures which are, in reality, just more spending (a tax expenditure is revenue that the federal government does not receive because of a special exclusion, exemption, deduction, special credit, preferential rate of tax, or deferral of tax liability).

 

Tax expenditures cost us a fortune.  For example, in late December 2020, Congress finally came to an agreement on a second stimulus package in response to the economic fallout from the coronavirus pandemic.  The 5,593-page spending bill contained numerous tax breaks for various industries.  The Joint Committee on Taxation estimates these “tax extenders” — which are made to look temporary but are actually renewed year after year — will cost $100 billion over the next ten years.

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The Tax Policy Center reports that “the value of the tax breaks for homeownership, although reduced by the 2017 tax act, still exceeds total spending by the U.S. Department of Housing and Urban Development (HUD).”

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The thirteen largest tax expenditures — which range from tax exclusions for employer-sponsored health insurance TO reduced rates of tax on dividends and long-term capital gains TO credit for children and other dependents — were estimated to cost the United States over a TRILLION DOLLARS in 2021.  That’s trillion, with a T.

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Really think about that for a second.  That’s more than the annual budget of every single department in the United States government besides the Department of Health and Human Services and the Social Security Administration.