Book Review: A Fine Mess
Editor's Note: This month our usual book critic, Anne Depue, is off enjoying warmer climes: Italy! To appease your search for mental stimulation this month, we’ve received permission from the League of Women Voters to reprint this great book review, which ran in the October issue of its newsletter The Voter.
BOOK REVIEW A Fine Mess: A Global Quest for a Simpler, Fairer, and More Efficient Tax System, By T. R. Reid
Our federal tax system is “a fine mess,” but in straightforward and friendly prose, Reid describes our absurdly complex system and several ways to make it simpler, fairer, and more effective.
The main problem is that our tax code has become jam-packed with loopholes. “Each year, hundreds of contributors, each with his own pet cause, manage to persuade Congress to insert a particular loophole or exclusion into the Internal Revenue Code.” Mostly it’s the wealthy that can lobby Congress, so it’s no surprise the changes tend to benefit the already well to do.
What kind of tax code would be better? The formula for good taxation is a “four-letter word: ‘BBLR,’” standing for “broad base, low rates.” The idea is that “the total amount of income, or sales or property that can be taxed—is kept as large as possible; then the tax rate . . . can be kept very low.” Reid says, “Virtually all economists and tax experts agree that this is the best way to run a tax regime.”
I was surprised to learn that one popular loophole, the mortgage interest deduction, would no longer exist in a BBLR code. However, Canada and many other countries don’t have a mortgage deduction, yet that seems to have no impact on home ownership.
In the US, that one deduction reduces tax revenue by about $100 billion each year. The tax code therefore has to find that much money somewhere else.
Meanwhile, Reid shows us how the mortgage tax deduction helps a couple earning $200,000 but only modestly helps a couple earning $20,000 and helps a couple earning $10,000 not at all! In effect, this is a tax cut that helps those who are already well off.
He also shows us how the current code has a high (35 percent) corporate tax, which virtually chases both US businesses and jobs offshore to countries with lower rates. He states, “The US corporate income tax is not working,” and therefore suggests Congress lower the rate. If we had a BBLR tax code, we could almost certainly lower the rate of corporate tax without a loss of revenue.
Reid shows us how other countries have taxed their citizens, and what works well and what doesn’t. Regarding a flat tax, he writes, “In practice, you can’t find a single tax rate that is high enough to raise the revenues you need but low enough for average working people to afford.”
One tax that does work is the Value Added Tax, “a levy that is applied to virtually every business transaction but [is easy] to track and hard for taxpayers to duck.” This requires a tax at every stage of production: such as growing wheat, grinding seed into flour, making bread, packaging and selling to the public. When a customer pays the sales tax, it is smaller than the consumer tax paid today. This tax is much admired by economists, who report that the VAT “would increase the fairness and efficiency of our system and reduce its mind-boggling complexity.”
Shockingly, Reid suggests we copy other countries where tax preparation takes only minutes. In those countries, the revenue authorities send you a short note telling you what you owe. If it seems reasonable, you merely pay the amount owed. If not, you discuss the issue with the authorities. My family did this in Japan and found it worked well.
When should we make these changes? Reid points out that every 32 years the US completely changes its tax system. The last time we did so was in 1986. It is time to do so again, and this book tells us it is best to start from scratch.
Now is the time.