Taxes don’t have to be so complicated. Why does the US refuse to learn from other countries?

Not looking to learn from others.
Not looking to learn from others.
Image: Reuters/Aaron Bernstein
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The Republicans had an opportunity to do something that literally every person of every creed would love. They could have made taxes simpler. For most Americans, they didn’t.

The financial journalist T.R. Reid is one of the world’s experts on international taxation trends. His excellent recent bookA Fine Mess: A Global Quest for a Simpler, Fairer, and More Efficient Tax System, released in April 2017, was partially intended as as a blueprint for what the US could learn from the rest of the world about how to do tax reform. Now that the Republican’s tax reform bill is on the verge of being signed into law, we wondered how Reid thought the US did.

“I’m disappointed,” said Reid. “It started off pretty well. I liked the initial bill that came out of the [House of Representatives] because it got rid of all sorts of loopholes, but the final product doesn’t do a lot you would hope for in a tax reform bill. It’s really more of a tax cut.”

Most 21st-century rich country tax reforms have been about getting rid of tax exemptions, credits and deductions so that corporate and individual tax rates could be lowered, says Reid, without increasing increasing the deficit. It is what economists call “broadening the base,” getting tax revenues from more economic activities, which allows for lower rates. The Republican bill doesn’t really do this. It simply lowers rates, while hardly removing any loopholes.

Instead, the bill relies on the assumption that cutting rates will make up for the lost revenue through increased economic growth. Reid think this is uniquely American chutzpah. There is no way that this won’t lead to more debt, he says. Nearly every tax policy analyst agrees with him. For example, the non-partisan think tank the Tax Policy Center projects the bill to add almost $1.3 trillion to the national deficit from 2018-2027.

Reid doesn’t think the bill gets everything wrong though. For example, he think lowering corporate tax rates from 35% to 21% was probably a good idea. The US needed to reduce its corporate tax rate to stay in sync with international competitors, like Canada and Germany, which have much lower corporate tax rates. Cutting corporate rates to incentivize business is sensible and follows international best practice. The difference is that other countries have found ways to pay for these cuts, such as by charging a value-added tax.

Another major goal of tax reform is to make taxes easier to pay and collect. In terms of simplification, Reid says the bill is a “mixed bag.”

Unfortunately, the US has not followed the lead of many other wealthy places, like Japan, where the tax authority fills out your taxes for you. This is a big missed opportunity, Reid thinks. But by doubling the standard deduction—the amount of household income that is not taxable if no other deductions are taken—from $6,500 to $12,000 for individuals, the US bill does make it so tens of millions of fewer households will choose to itemize their deductions, a time-consuming process.

On the flip side, the new law will make paying taxes more complicated for some rich households. The bill changes the way business income that goes on to a household’s individual income tax return, technically called pass-through income, is taxed. The new law creates a 20% deduction for such business income. This will have the rich looking for ways to turn their wage income into business income, and keep accountants very busy. Reid says he stands to benefit from the new law, and even as a tax expert, he doesn’t really understand it.

Overall, the US doesn’t appear to have learned much from the rest of the world in how to do taxation. Taxes in the US remain more complicated and full of opportunities for tax avoidance than other rich countries. Reid thinks this is because the US is unusual in how few limits their are on campaign contributions to legislators. “Big money can buy political influence in [US] Congress and that is reflected in the tax laws,” said Reid. “Rich investors, they invest in members of congress, and they get tax breaks from it.”