Broaden The Base, Lower The Rates May Sound Good But Never Works Long Term
As the midnight hour approaches for filing your taxes, I wanted to talk about a Leonard Lopate interview with Washington Post reporter T.R. Reid who has written a book advocating a total revamping of our tax system.
Reid points out that our tax code has been massively overhauled every 32 years, starting in 1922, again in 1954, and finally in 1986. If things hold true to form, then 2018 should be the year to do it again. And it seemed with the ascension of Trump and Republican control of the legislature, we were on track to do it again. But Trump’s incompetence and the war within the GOP caucus makes the possibilities of that happening more remote.
But Reid makes the important point that it takes about 20 or 20 years of legislating special tax breaks and exemptions for specific industries, companies, or policies until the tax code becomes unmanageable. And we are clearly at that point again.
In general, tax overhaul has usually involved eliminating deductions and exemptions. By doing so, you can raise more revenue and therefore you can lower the rates. Reid’s term for this is BBLR, which stands for Broaden the Base, Lower the Rates. He notes that the 1986 tax reform bill eliminated many deductions, lowered the rates, and still brought in as much or more money than before. If you count the tax credits in current tax law as actual government spending instead, it would be the largest expenditure in the US budget, coming in at $1.17 trillion.
And it is an appealing idea. He points to New Zealand where there are virtually no deductions or exemptions and where the top rate is only 17%. In addition, with hardly any deductions available and a simpler tax code, most Americans could actually do their own taxes. In fact, in Japan and the UK, the government actually has all the information about your taxes already and merely sends you a completed form. Your obligation is to check that form and accept it or make the necessary changes. But most of the time, the government’s number are correct. Tax returns in Japan usually take about 5 minutes to complete.
Here in the US, the IRS could perform the same function for the majority of US taxpayers, saving millions of us time and money. But that idea is continually blocked by Congress that caves in to the pressure from the tax prep industry, primarily H&R Block and Intuit, maker of the TurboTax program. Those companies complain that it would be “unfair competition” from the government should the IRS do that.
Reid makes it very clear that lowering the rates alone does not do the trick. It must be accompanied by broadening the base. He says, “The idea that you can cut tax rates and bring in more revenue sounds great but it just doesn’t work”. And he is a strong believer in the graduated rates that we have, saying we should be taxing those groups that can best afford it. As he admits, the two greatest boom periods in the postwar US economy were the 1950s and the 1990s. In the 1950s, the top rate was 90% and taxes were raised twice in the 1990s. Higher tax rates are not incompatible with strong economic growth and anecdotally they may even help create a stronger economy.