April 18, 2015


We Tax Small Businesses More Than Big Businesses And Other Reasons We Need Tax Reform (Ed Feulner,  April 18, 2015, Daily Signal)

We need to start by asking what we want tax reform to achieve. Here are five basic objectives, courtesy of tax experts Curtis Dubay and David R. Burton:

First, lower tax rates on individuals and businesses. It never hurts to state the obvious, especially when dealing with such a fundamental step, but yes, the first major component of true tax reform starts with lowering rates. In particular, the top marginal rates are too high, discouraging work, saving and investment.

Second, establish the right tax base. You can lower rates all you want, but if you're taxing the wrong thing, it won't do much good. We can encourage economic growth by moving toward a consumption tax--one that taxes income that is spent, not income that is saved or invested. Our current system is tilted far too heavily toward the latter, and we all end up paying the price--literally--with a more sluggish economy.

Third, eliminate the bias against saving and investment. Yes, the right tax base helps in this regard. Gone, for example, would be the double taxation of capital gains and dividends under a consumption tax. But we also need to lower our corporate tax rate, which at 39.1 percent is the highest in the developed world.

It's worth noting that, under our current system, the tax rate on small businesses is even higher than it is for large ones. Thanks in part to the 2013 tax increases and to Obamacare, the top federal rate on small business income is 43.4 percent, versus 35 percent for large corporations. This needs to change.

Fourth, get rid of tax preferences. Simply put, our tax system should be neutral. It shouldn't pick winners and losers. A key part of any serious reform will be eliminating the current polyglot system of deductions, credits and exemptions.

Fifth, simplify the system. One of the main reasons so few Americans think our tax system is working well is the fact that it's so ludicrously complicated. But we need simplicity not only to reduce aggravation and errors--we need it because reducing the size and scope of government without transparency is practically impossible.

"Because of income and payroll tax withholdings, and the hidden costs of corporate, employer payroll, and excise taxes, most Americans have little idea how much they are paying to fund the federal government or how proposed policy changes will affect them," Dubay and Burton write. "The sheer complexity of the system makes it difficult to understand the true impact of the tax system. Tax reform should strive to make that cost explicit to taxpayers."

One of the keys to an effective consumption tax is that it be a separate line item on your bill, not just so you see what tax burden we place on ourselves as a society, but so you see what you could save by not making the purchase and investing the money instead.

Posted by at April 18, 2015 6:27 AM

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