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1.
Policy Laboratories
During one of its periodic bursts of anger at the Internal Revenue Service, the U.S. Congress passed a strict new law requiring the Treasury Department to reduce the complexity of America's income tax system. In standard congressional fashion, this mandate for simplicity-it's known as the "anti-complexity clause"-was included in a massively complex piece of legislation that added some thirty thousand words and scores of complicated new deductions, exemptions, and credits to the bloated multivolume corpus of the nation's tax law. If you happen to be browsing through the statute books some restless night, you can find the anti-complexity clause in Subsection IX of subpart (ii) of Section 7803(c)(2)(B) of the Internal Revenue Code.
It's classic: Congress decides to reduce the complexity of our tax code by making it even more complex. It might be funny if the whole taxpaying process in America weren't so maddeningly expensive, inefficient, and time-consuming. At the same time Congress took that principled stand in favor of simplicity, it also added a clause-that would be Section 7803(c)(2)(B)(ii)(III)-requiring that Treasury file a report each year on the overall cost of the income tax regime. The reported burden on U.S. taxpayers turns out to be no laughing matter.
In 2015, the government estimates, American taxpayers spent just over six billion hours preparing and filing their income tax returns. They paid $10.1 billion in fees to the booming tax-preparation industry and another $2 billion for tax software programs (programs that still require hours of work for the typical taxpaying household). For an American household earning the median family income-about $55,000-the average is more than thirty hours per year gathering documents and filling out forms. Tens of millions of Americans have to spend the weekend before April 15-a lovely spring interlude when they should be out on the golf course or at the kids' soccer game-tearing their hair out over instructions like this gem from IRS Form 1041-I: "Go to Part IV of Schedule I to figure line 52 if the estate or trust has qualified dividends or has a gain on lines 18a and 19 of column (2) of Schedule D (Form 1041) (as refigured for the AMT, if necessary)."
The cartoonist Jeff MacNelly used to offer a satire of this process every April 15:
FPO
It doesn't have to be this way.
If you walk down the street in London, Tokyo, Paris, or Lima, you won't see an office of H&R Block or any similar firm; in other nations, people don't need a tax-preparation industry to file their returns. Parliaments and tax collection bureaus all over the world have done what the U.S. Congress seems totally unable to do: they've made paying taxes easy.
In the Netherlands, for example, the Algemene Fiscale Politiek (in essence, the Dutch IRS) has a slogan: "We can't make paying taxes pleasant, but at least we can make it simple." It is certainly simple for my friend Michael, a successful Dutch executive with a six-figure income and all the economic complications that come with his family's upper-bracket lifestyle. An American in the same situation would have to fill out at least a dozen different forms, some of them six pages long (or pay somebody to do it for her). Michael, in contrast, told me that he sets aside fifteen minutes per year to file his federal and local tax returns, and that's usually enough. But sometimes, he said, he needs to check some line item on the return, and that can be time-consuming. At this point, Michael was getting downright indignant. "I mean, some years, it takes me nearly half an hour just to file my tax returns!"
America could learn something from the Netherlands, and from other countries, about how to make the taxpaying process simple. And itÕs not just the complexity problem that we could solve by taking a look at other countries. Almost every government on earth collects taxes (as weÕll see, there are a few lucky nations that get by just fine without taxing their citizens). Many of the developed countries have come up with tax systems that are simpler, fairer, and more efficient than ours. They can show us what to tax, how much to tax it, and how to collect the money thatÕs due.
I traveled the globe looking at tax systems that work better than ours (and some that are worse). I found useful lessons for the United States all over the world. Other countries can show us how to get the same amount of revenue with lower tax rates and how to use the tax code to deal with important national problems, such as the growing inequality of wealth between the richest Americans and everybody else.
Just about every economist and political figure in America agrees these days that our tax code has to be reformed. As Americans elected a new Congress and president in 2016, it appeared that our body politic was finally ready to take on this challenge.
One of the benefits of a comparative study of taxes is that the other countries can serve as policy laboratories for us. In fact, just about every idea that anybody, left or right, has proposed to "fix" the U.S. tax system has already been tried somewhere. For example:
From the right, there have been repeated proposals for a flat-rate income tax, with everybody paying the same rate-about 18%-of their income in tax. Several Republican presidential candidates in the 2012 election, and at least four more in 2016-that would be Ben Carson, Rand Paul, Ted Cruz, and Rick Perry-have backed the flat tax. (Steve Forbes, the publisher who ran for president twice, has been the most prominent advocate of this idea.) Would it work? As it happens, about a dozen countries have actually tried this innovation.
From the left, there have been repeated proposals for a carbon tax, designed to reduce fossil fuel emissions and thus encourage development of "green" forms of energy. As it happens, Australia actually tried this innovation-and quickly gave up on it.
Virtually all economists agree that two of the most widely used deductions in the federal income tax code-the deduction for mortgage interest and the deduction for charitable contributions-cut government revenues by billions of dollars but provide almost no economic benefit. The logical response would be to eliminate them. There are all sorts of proposals floating around Washington, but Congress has never found a politically palatable way to take away these popular write-offs. As it happens, many rich countries have come up with intelligent ways to get rid of these deductions, with minimal impact on home ownership or charitable giving.
The United States provides tax breaks for savings plans, to encourage Americans to put away money for retirement. As with everything else in our tax code, this straightforward idea has become absurdly complex. There's a bewildering variety of different plans, with names that sound like secret code-the 401(k), the 403(b), the 457(b), the SEP, the SARSEP, the ESOP, and so on. There's an IRA, and there's a Roth IRA, which is different, and then there's a myRA, which is different from the other two. There's something called the "nonqualified deferred compensation plan." One of the savings vehicles in our tax code is actually called the SIMPLE IRA, but of course it's not simple at all; the SIMPLE IRA requires two different IRS forms (Form 5304 and Form 5305) and a ten-page book of instructions (Publication 4334). Each different tax-free savings plan has its own rules about who can use it, how much you can put in, how much you can take out, when you can take it out, what you can use the money for, and how much tax you'll owe. To deal with this expanding labyrinth of regulations, a billion-dollar advisory industry has sprung up just to help Americans figure out how to put money in a savings account.
Many other countries also use the tax code to encourage savings, but no place has made it as convoluted as the U.S. mess. In Canada, for example, the tax-free savings account is called, sensibly, a "Tax-Free Savings Account." Anybody can use it; you can put the money into any bank or investment account; you can deposit and withdraw at any time, for any reason. The interest and dividends are always tax-free. The plan is so clear-cut and so popular that savings have skyrocketed. It is a vastly simpler way to achieve the same goal that our tax writers have turned into an inscrutable muddle.
The 535 members of the U.S. Congress-the people who write the tax laws-have given themselves various tax breaks and deductions that other Americans don't get. This is probably a natural tendency among people who write the law. As it happens, though, some countries have found ways to combat this predictable effort by legislators to reduce their own tax bills. Slovakia, for example, has a rule that members of the national legislature and the prime minister's cabinet always have to pay 5% more in tax than any other Slovakian with the same income.
Should we double the tax on sugared soda pop as a way to combat obesity? Should we impose a tax of 0.0001% on every Wall Street transaction? Should we tax commuters for driving to work when traffic is terrible? Should we give companies a tax break for raising wages? Should we tax gasoline at $4 per gallon? Should we triple the cigarette tax? In each case, other countries have given these ideas a test run.
This is not to suggest that tax systems in other nations are all simple, efficient, and rational. Because the tax code in any democracy is a political animal, there are strange anomalies of taxation everywhere.
Most countries, for example, tax income at a graduated rate; that is, the more income you have, the higher rate of tax you have to pay. But Great Britain, for reasons that evidently made sense to Parliament, has imposed a tax rate of 60% on incomes of $160,000 per year but 45% on incomes of $230,000 or more. Similarly, there's a strange quirk in the tax structure in the Netherlands. The sales tax (actually, value-added tax) on dog food is 19%, but the tax on rabbit food is 12%. Dutch bunny lovers apparently have more lobbying clout than puppy owners.
It used to be that other countries around the world studied our tax code. In the 1980s, the United States was a recognized policy leader on tax issues. When our 1986 tax reform produced a huge drop in income tax rates, virtually every other developed democracy followed our example with major rate reductions.
Today, though, the United States is well behind the curve on tax innovation. Indeed, we've completely missed the boat on the most important taxing invention of the last half century-that is, the value-added tax (VAT), a new form of the familiar retail sales tax. Economists love this tax because it doesn't punish people for working hard and making money; it taxes spending, not earning or saving. Governments love the VAT because it is easy to collect and hard to evade. This innovation is so useful, fair, and simple that some 170 countries have adopted it in recent decades, often using revenues from the VAT to cut income tax rates. The only places that don't use a VAT are a handful of poor countries and the world's richest country, the United States. We've missed out on a powerful new technology. When it comes to taxation, Americans are still pounding out letters on typewriters and dropping them in the mailbox, while the rest of the world has moved on to e-mail and texting.
I looked at the VAT, and variations on the VAT, in several countries. New Zealand, for example, has a broad form of this tax called the GST-the goods and services tax. Graham Scott, the Finance Ministry bureaucrat who designed the New Zealand system, told me that the tax has to be paid on anything that is purchased-from a manufacturing plant buying basic commodities to a consumer buying the finished product in a department store. "The GST applies to all the services, too," Scott told me. "Lawyers, dentists, plumbers, architects-they're all taxed." New Zealand is one of several countries that have recently legalized the sex trade. So I asked if a prostitute working in a brothel is expected to collect sales tax from the customers. "Why, yes, of course," he said, as if the answer were the most obvious thing in the world. "We haven't figured out whether it's a good or a service, but we know it's taxable."
Taxation experts constantly predict that the United States will establish a value-added tax, which would make it possible to reduce income tax rates for every individual and corporation. "The VAT makes so much economic sense that even the U.S. Congress will eventually recognize its value," says the UCLA Law School professor Eric Zolt, who has helped design tax codes for about forty countries. "Mark my words," Zolt says forcefully, "the United States will have a VAT within five years. Of course," the professor concedes, "I've been saying that for the last twenty years."
These days, when Congress takes up tax reform, the ÒreformÓ generally makes things worse. A Congress that produces something like Section 7803(c)(2)(B)(ii)(IX) in the name of reducing complexity hardly seems likely to agree on any serious changes that would improve the system. Even with one party controlling both Congress and the White House, tax reform would be a stretch in our acidic political atmosphere. So how could Congress and the White House agree on serious changes to the tax code when our country is ferociously divided?
The fact is, we've done it before, in a time of severely divided government. In the mid-1980s, a strong conservative in the White House and a strongly liberal Speaker of the House-that is, Ronald Reagan and Tip O'Neill-reached agreement on the biggest transformation of the federal income tax since the tax was created in 1913. The Tax Reform Act of 1986, passed by a divided Congress and signed by a Republican president, was widely admired; it was precisely the kind of change that almost all tax experts favored. That reform was based on principles that have been adopted by countries around the world. If we go back to those fundamental principles, the United States could achieve serious tax reform, even in our current state of political gridlock.
Another benefit of looking at other countries is that comparative analysis can tell us where Americans stand relative to the rest of the world when it comes to how much tax we have to pay. During his campaign for the presidency in 2016, Donald Trump repeatedly said, "The United States is the highest-taxed country in the world." Was he right?
