One of the most pressing policy issues of our time is taxes. With the United States and several state and local governments teetering on the edge of financial disaster, policymakers are clamoring for ways to raise even more revenue.
But as the Supreme Court stated in the 1874 case Citizens’ Savings and Loan Assn v. City of Topeka, “Of all the powers conferred upon government, that of taxation is the most liable to abuse.”
That’s why lawmakers must carefully observe sound principles of tax policy. Unsound tax policy abuses taxpayers through audit and collection hardships, imposes high administrative costs, and chokes out jobs and economic production.
So The Heartland Institute and I have teamed up to produce Ten Principles of Federal Tax Policy. The principles point specifically at federal taxation, but they apply equally to state governments.
Principles of Sound System
Heartland has been promoting commonsense legislative policies for more than two decades. I have been fighting for beneficial tax reform for more than two decades. We now bring our combined experience to bear upon tax policy.
The Ten Principles booklet elaborates on the cornerstones of any sound tax system. Here they are:
1. Simplicity—Lawmakers owe citizens a tax code that is easy to understand and comply with. The simpler the law, the wider the perception of fairness. Our current tax code is a quagmire of arbitrary rules, redundancy, and contradictions that nobody can understand.
2. Non-invasiveness—Government should raise the necessary revenue in the least invasive manner. This means policymakers need to find ways to reduce tax collection points, filing requirements, and information reporting requirements. A highly invasive system chills compliance and forces administrators to spend billions of dollars and man-hours enforcing the laws.
3. Efficiency—The tax system ought to collect revenue in the most efficient manner. That means the law must impose the least reporting and other compliance requirements possible. Our current federal tax system could not be more inefficient. The National Taxpayer Advocate (whose office is a part of the IRS) estimated in 2008 that Americans spend about $193 billion annually on tax return filing alone. This does not include the costs of dealing with IRS enforcement actions, which are even greater.
4. Stability—Citizens have a fundamental right to apply sound financial planning principles to their personal and business lives. For that reason, tax laws must be constant from year to year and generation to generation. Our tax laws couldn’t be more unstable. For example, just during the decade of the 1980s Congress changed tax laws more than 100 times. But that was just a warmup. From 2001 through 2008, there were more than 3,250 changes to the tax code, an average of more than one per day.
5. Visibility—Taxpayers must be able to easily see and readily know how much they are paying for government. Transparent taxes tend to stay both low and stable. This is because taxpayers can easily spot rising tax rates. On the other hand, with hidden taxes, taxpayers often don’t know what they are paying. This hides the true cost of government.
6. Neutrality—Tax laws must be applied in a neutral and uniform manner. The more the tax law benefits or penalizes one segment of society over another, the more unfair it is. Moreover, tax laws should never have the impact of picking winners and losers. Otherwise, the only businesses with a chance of success are those willing to pay the influence peddlers who infest Congress and state legislatures.
7. Economic growth—All taxes cause some market distortion and tend to inhibit growth. That is why three presidential commissions in the past 15 years insisted a sound tax system is mindful of the harm taxes have on the economy. Only taxes that cause the least distortion should be considered. Taxes should never be imposed on the engines of economic growth.
8. Broad-based—Sound tax policy dictates the tax base be as broad as possible, which in turn allows tax rates to be held as low as possible. Current tax policy generally involves narrowing the base while raising rates. That is why currently the top 20 percent of income earners pay more than 70 percent of all federal taxes while the bottom 20 percent pay less than one-half of one percent. This unfairly focuses tax burdens on a shrinking segment of the population while fewer people have a stake in holding rates low.
9. Equality—Our tax code practices invidious discrimination against certain elements of society while favoring others merely because of their economic standing. Much of the tax code is arbitrary, based on no sound economic principle or constitutional standard. Americans know this is fundamentally unfair and must be corrected.
10. Constitutionality—Taxes should be imposed only to fund the legitimate functions of government as expressed in the Constitution. Since the 1930s, tax laws have been used to impose somebody’s idea of social justice by taking from some and giving to others. There is no legal or moral authority to do this. Indeed, the Supreme Court, in the Citizens’ Saving and Loan case mentioned above, referred to this practice as “robbery.”
Dan Pilla ([email protected]) is a tax litigation consultant and author of 11 books on IRS defense strategies. He runs the TaxHelpOnline.com Web site.
Ten Principles of Federal Tax Policy: http://www.heartland.org/budgetandtax-news.org/article/28542