President Bush’s pledge to reform the federal tax code was welcome news to anyone who has recently labored over a form 1040. Simplifying the code is much easier said than done. It is also troubling that to many reforming the tax code means lowering taxes. These are two separate issues and should remain so.
There are now 529 different tax forms and federal tax rules now run to more than 60,000 pages, up from 40,000 pages in 1995. Some of the new instructions are needed to see if one qualifies for recently enacted tax breaks.
No wonder 62 percent of Americans now hire someone to help with their taxes. Half the population did a decade ago. Completing a 1040 and the accompanying schedules took more than 28 hours in 2004, up from 21 hours in 1995. In total, Americans spent 6.5 billion hours on their taxes last year. According to the Tax Foundation,
tax compliance will cost U.S. individuals, businesses and nonprofits nearly $224 billion this year.
President Bush has appointed a commission to look at tax reform prospects. It will report its finding this summer.
Standing in the way of reform, however, are a growing federal deficit, the need to fund the government and special interests that support every loophole lawmakers may try to close. The federal deficit is now more than $4 trillion. Federal tax revenue has fallen $100 billion while President Bush has been in office. Spending has risen $400 billion during that time. Further reducing taxes would only exacerbate the problem.
It is worth considering whether lowering taxes is the economic cure-all many politicians would have us believe. In a recent New York Times column, Anna Bernasek debunks the notion that taxes harm the economy. “There is surprisingly little evidence that tax rates are an important factor is determining the nation’s economic prosperity,” she writes.
Over the last 30 years, economists have done hundreds of studies on the effect of taxes on the economy. The conclusion? “The evidence that tax rates matter for growth is disturbingly fragile,” according to William Easterly of New York University and Sergio Rebelo of Northwestern University, two economists who reviewed the
literature in 1993.
Ms. Bernasek also refers to the work of Joel Slemrod, a tax specialist at the University of Michigan. He found that in the 20th century, a rising tax burden was coupled with rising prosperity. Professor Slemrod and Jon Bakija wrote “Taxing Ourselves: A Citizen’s Guide to the Debate over Taxes.” They found that between 1950 and 2002, the periods of strong productivity growth occurred at times when the tax burden was highest. In addition, countries with the highest taxes are generally the most affluent.
The taxman isn’t going away, but it should be easier to pay him.
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