October 9, 2016
Trump exposed the corruption in the U.S. tax code–How will Hillary Clinton deal with this ?
by Fareed Zakaria
Donald Trump has done America a great public service. No, really. By taking advantage of the country’s tax laws in such spectacular fashion, he has shone a spotlight on the corruption that is at the heart of American politics — the tax code.
When most people discuss taxes, they tend to talk about them in left-right terms. The right says that taxes are too high for everyone. The left worries that the rich don’t pay their fair share. But the facts don’t support either position. The simplest comprehensive way to judge a country’s tax burden is to look at its tax revenue from all levels of government as a percentage of gross domestic product. The United States has the fourth-lowest burden in the industrialized world, ranking 31st out of 34 countries in the Organization for Economic Cooperation and Development. The United States’ percentage is actually lower today than it was in 2000, while the OECD average is about the same.
Nor is it true that the rich don’t pay much in America. Obviously some people manage to arrange their affairs so that they don’t pay many — or, possibly in Trump’s case, any — taxes. But the federal government derives most of its revenue from the income tax, and 70 percent of the federal income tax is paid by the top 10 percent of Americans. Most other countries rely on value-added taxes — a sales tax, often as high as 25 percent — that hit everyone equally. Summarizing the academic research for The Post, Dylan Matthews noted: “The United States has by far the most progressive income, payroll, wealth and property taxes of any developed country.”
The problem with American taxes is something different: their complexity. The United States has the world’s longest tax code. The scholar Sean Ehrlich tabulated its word count at 3,866,392. Germany and France have codes that are less than 10 percent as long. And size makes for burdens. In most international comparisons, the United States scores very poorly on this measure. The World Bank’s Ease of Doing Business index ranks the United States 53rd for its tax system. The World Economic Forum’s Global Competitiveness Report polls executives on the five biggest burdens of doing business in a country. For the United States, Nos. 1 and 2 are tax rates and tax regulations.
Even though America is generally more competitive than other rich countries, its taxation is much more complicated and inefficient. Why this anomaly? The answer is that it is intentional — a feature, not a bug, in the system. The complexity of the tax code exists by design, because it allows for the distinctive feature of the American political system: fundraising.
All these small additions and exemptions to the tax code are terrible economics. They divert business activity into areas that might not make economic sense but provide tax benefits. They are expensive and reward people and businesses for activities that they might have done anyway. And most damaging of all, they are hidden and often eternal, not requiring reauthorization. If Congress wants to fund something, it could do so openly by giving a grant. By providing a complicated tax credit, it ensures that no one realizes that it is giving cash to a company or industry.
There are only two ways to fix this problem. One would be to stop people from paying politicians. But the Supreme Court ruled in Buckley v. Valeo in 1976 that money is speech and thus constitutionally protected. (As far as I know, this is a view shared by no other Western democracy.) That leaves another path — take away what Congress sells.
If the tax code were to be made short and simple, with a handful of deductions, politicians would have little to offer people as a quid pro quo. You could still pay them, for their ideas and personality, but I suspect that the flow of money would slow to a trickle. It is the simple, single solution to the cancer in American politics. And we could thank Donald Trump for highlighting it.