It’s a destructive, confusing mess because definitions of income, earnings and losses are at the whim of wholly unqualified legislators who almost always have one eye on friendly tax lobbyists. Worse, the power over the tax code inspires those on the left and the right to dabble in social and economic engineering that, piled one atop another, hobble our economy.
If you want to find economic “headwinds” look no further than the self-inflicted wounds created in our counter-productive tax code. We tax everything that makes the economy grow. To add insult to substantial economic injury, ten experts will give you ten different answers on what the tax code actually means.
The income tax code is so indecipherable that Tim Geithner, the outgoing Secretary of Treasury, failed to pay taxes on part of his income because he misunderstood the rules on earnings abroad.
The former chairman of the House Committee tasked with creating tax law, Rep. Charlie Rangel, claimed he, too, was confused and failed to pay taxes on his rental income.
If they are confused, where does that leave the rest of us?
From small businesses to mega-corporations, it leaves us scrambling for context with receipts, deductions, exemptions, accelerated depreciation tables and special exceptions that require an expensive tax consultant to understand.
Even more damaging, we now also have the dubious distinction of having the highest corporate tax rate in the world. This is promoted to citizens as only right because big businesses really should pay “their fair share”. But do corporations really have some pot of money to pay taxes or do they just pass along that cost to consumers? In truth, they don’t pay their fair share at all—that’s a liberal lie—we pay their fair share. In truth, businesses just collect and pass along more government taxes.
But when American employers are taxed at such a high rate they raise the price of goods and services, becoming increasingly uncompetitive with foreign corporations who are unburdened by the American income tax code. In fact, many foreign businesses don’t pay corporate taxes on their sales here so they have a built-in price advantage over the “Made in America” label. We tax capital and we tax labor. Our tax code, because of its design, punishes American businesses.
In his recent inaugural speech, President Obama asserted that we are not taking enough from the business sector. It is the usual — and, sadly, usually effective — class war argument that pits American consumers and employees against American businesses and employers. In reality, this is a form of national cannibalism inspired by cynical political calculation and built upon a general misunderstanding of how our income tax system actually works.
There are solutions that would jump start our economy and almost immediately create millions of jobs but the uniquely Washington power structure surrounding and defending the income tax would have to be dismantled. Both a national consumption tax with progressive features, called the FairTax, and a Flat Tax with progressive features have gained little traction with legislators.
Either would be better for the nation but neither would be better for the political class who profit politically by skewing the tax code toward contributors and supporters. Healing our broken tax code will have to come by way of citizen pressure for fundamental tax reform that puts the nation ahead of the self-interests of Washington.
Hoagland is chairman of Restore America’s Voice Foundation.