The outlook for American taxpayers is pretty grim. The federal tax code is getting more complex, the president is proposing tax hikes on high-earners, businesses, and energy consumers; and huge deficits may create pressure for further increases down the road.
Despite promises by President Obama and other politicians to simplify the federal tax code, it gets more complicated every year:
- The number of pages of tax rules skyrocketed from 40,500 in 1995 to 70,320 in 2009. Congress is increasingly micromanaging society with special tax incentives for education, energy, and other activities.
- Federal tax paperwork consumes 7.6 billion hours of time annually, which is like having a full-time "tax army" of 3.8 million people.
- There are about 500 changes to the tax code every year as Congress and the Treasury churn out a never-ending stream of laws and regulations.
- The share of taxpayers requiring professional help keeps rising, with 62 percent of returns completed by professionals in 2007.
Aside from the compliance burden, tax complexity creates other problems:
- It complicates decision-making in the economy, for example by confusing family financial planning and generating uncertainty for businesses.
- It encourages an invasion of privacy by the government. Each new tax incentive requires special documentation, which exposes people to scrutiny by the IRS.
- It results in frequent errors by taxpayers and the IRS. Individuals and businesses can get locked into battles with the IRS for years because of uncertain tax rules.
- It encourages tax evasion. High tax rates combined with complexity fosters aggressive tax dodging, which prompts Congress to pass even more complex tax regulations.
The solution to all these problems is to rip out the income tax and replace it with a low-rate flat tax, as two dozen other nations have done.
A flat tax would simplify financial planning, help preserve privacy and civil liberties, and would reduce tax avoidance activities. Taxpayers would win, and so would the government, because administration would be much easier.
Alas, there are few supporters of tax reform in Congress these days, and the Obama administration's tax policy focuses on social engineering and revenue-raising.
Adding to the problem is that 43 percent of U.S. households don't pay any income tax as a result of all the low-income benefits in the code. Those people perceive federal spending to be costless, and thus they are little interested in tax reform or budget restraint.
The trends on the business side of the tax code are equally troubling. Even though we are in the worst recession in decades, President Obama is proposing to hike corporate taxes, which will encourage companies to cut their investment and reduce jobs.
While Canada and Korea have responded to the recession with business tax cuts, U.S. politicians seem unable to comprehend that having the world's second-highest corporate tax rate at 40 percent is a damaging policy.
The total federal tax grab as a share of the economy is currently the lowest it has been in years, but that is an illusion caused by the recession temporarily reducing collections.
Looking ahead, many of President Bush's tax cuts expire at the end of 2010 and Obama's huge spending increases will likely cause him to hunt for higher revenues anywhere he can find them.
Obama has already hiked taxes on cigarette consumers—particularly harming lower-income families—and his budget contains a tax hike on energy consumers of about $80 billion per year.
There are anti-tax "tea parties" planned across the nation for April 15, hopefully signaling growing resistance to the dangerous fiscal direction being taken in Washington. High taxes are bad economics. They empower an overbearing government, and they reduce individual freedom.
Federal policymakers need to change their spendthrift ways and give Americans the low and simple tax code that they deserve.