Fixing the Broken US Tax Code

Republicans’ Budget Gamble

The current government budget, as proposed by Senate Republicans, aims to extend President Trump’s tax cuts without making any significant cuts to spending. This would balloon interest payments on the national debt, making the deficit worse. Such an approach has little to do with reducing the size of government and more to do with avoiding the political consequences of tax cuts.

• A flawed tax code contributes to the growing deficit and puts the US on a path to national debt crisis.
• Senate Republicans’ proposal attempts to justify the extension of tax cuts by claiming they were always intended to be permanent.

  What’s Wrong with the Current Tax Code?

  The American tax code is riddled with tax expenditures, credits, and deductions that favor certain groups and behaviors. These provisions distort the tax base, making the system more complex, less neutral, and less growth-oriented than it should be.

  1. “Tax expenditures” include credits, deductions, and loopholes that benefit specific groups and behaviors.
  2. These provisions make the tax code more complicated, less neutral, and less growth-oriented.
  3. They shift the burden onto unfavored groups, requiring higher rates to make up for revenue lost to carveouts.

  “Our tax code reflects no coherent philosophy,” says economist David Bradford. “It’s a patchwork of exceptions and preferences designed more by lobbyists than by public servants.”

  Many tax expenditures serve no purpose other than to enrich powerful interest groups. Policymakers claim they encourage savings, promote fairness, or aid the poor, but in reality, these provisions often have no purpose beyond lining the pockets of special interests.

  A Flat Consumption Tax

  A flat consumption tax, like the one proposed by Robert Hall and Alvin Rabushka, is a more straightforward and effective way to tax income. Under this system, income is taxed only once, at the point of consumption, and saving is not penalized.

  1. A flat consumption tax would tax income only once, at the point of consumption.
  2. This system would not penalize saving and would encourage investment.
  3. The only remaining tax expenditure would be a personal allowance to exempt essential consumption.

  This approach would simplify the tax system, making it more transparent and fair. It would also provide powerful pro-growth incentives, encouraging businesses and individuals to invest and innovate.

  Fixing Flaws in the Current System

  To make immediate progress, it’s essential to evaluate each tax expenditure based on clear principles. This includes ensuring tax neutrality, preventing double taxation, and rewarding politically connected industries.

  1. Evaluate each tax expenditure based on clear principles.
  2. Retain provisions that prevent or enable double taxation, ensure tax neutrality, or reward politically connected industries.
  3. Eliminate provisions that distort investment, transfer wealth upward, or favor the wealthy.

  Some provisions, such as lower tax rates on capital gains and dividends, and exclusions for life insurance payouts funded with after-tax income, are not handouts and should be retained.

  However, many other tax expenditures should be repealed or replaced. For instance, the mortgage interest deduction benefits the wealthy while inflating housing prices, and energy tax credits and corporate loopholes distort investment and transfer wealth upward.

  A Path Forward

  To illustrate the potential for tax reform, my colleague Jack Salmon and I produced a website that categorizes America’s 170-plus tax expenditures. This website highlights the revenue available to offset Trump’s tax cuts and other popular spending programs.

  For example, ending just two Inflation Reduction Act tax breaks could pay for all of the best tax cuts. Reforming the tax code won’t be easy, but the benefits are enormous: lower tax rates, greater economic growth, and a more principled, transparent system.

  Fixing the US tax code is a crucial step towards a more equal and just society. It’s time to rethink our approach to taxation and ensure that the tax code reflects the values of a free society.