According to a Bloomberg report, President Obama asked Paul Volcker and the Economic Recovery Advisory Board for a proposal by December 4 to overhaul the tax code.
I almost jumped for joy, but tempered my excitement when I read the details. An overhaul of the tax code is clearly needed, but we don't want one that makes matters worse. Spokesman Tom Gavin said the board has a mandate "to simplify the tax code, protect progressivity in the revenue base, close tax loopholes and find ways to reduce tax evasion and ... corporate welfare."
The tax code is unnecessarily complicated. I am all in favor of simplifying it. It takes the average taxpayer much too long to file a return. In fact, the code has become so complicated that more and more taxpayers have to turn to professionals for help. But simplification must be done in a fair way. Economists used to joke that Bill Clinton wanted to simplify the tax code when he was president. Under the fictitious Clinton plan a tax return would have only two lines: 1. How much money did you make? 2. Send it in. This is the kind of simplification we definitely do not need.
However, we do need to make paying taxes easy and painless. There is no reason why Americans should spend a full weekend or more filing a return. One quick fix is to eliminate all deductions in exchange for significantly lower tax rates. Take the mortgage interest deduction for instance. This deduction exists only because the home building industry has convinced Congress that using the tax code to promote home ownership is a good thing. Unfortunately, this tax subsidy contributed to the housing bubble. Consumers make choices. Whether they choose to buy a house, a car, or more clothing, the rest of us should not be subsidizing that decision.
Of course, I am also in favor of reducing tax evasion. Everyone should pay their "fair" share. However, it is not the stereotypical rich who are evading taxes. Tax evasion is most pervasive among those who work on a cash basis. It is not difficult for them to under report their income. And let us not forget about people engaged in the illegal drug trade. One study estimated that 10 years ago Americans spent $65 billion on illegal drugs. All of it went untaxed.
As for protecting progressivity of the tax code, this is a worrisome sign. While I agree that taxes are a necessity and that those who make more should pay more, a progressive tax code is specifically designed to punish people for doing well. It may be too much to hope that a Democratic administration would understand this, but a tax code that is too progressive reduces the incentive to work hard. At a time when we need to encourage the most productive members of our society to start businesses and employ more people, the last thing we should do is threaten to tax them at higher rates if they succeed.