It's Time to Kiss the Tax Code Goodbye

Mike Brownfield

Ready for a new year and another bout with the Internal Revenue Service, deductions, exemptions, pens and pencils, calculators, receipts, 1040s, W-2s, accountants, Quicken, TurboTax, and more? If you’re like most Americans, that laundry list of income tax jargon, paraphernalia, professionals and their fees is enough to set your head spinning — and even if it isn’t, the thought of paying Uncle Sam your annual dues will certainly do the trick.

America’s tax code needs reform, plain and simple. The current tax system discourages saving, investment, and entrepreneurship. It’s a drag on productivity, job growth, international competitiveness, and wages. It’s complicated beyond belief, and it needs to change. The good news is that there’s a solution that would spell the end of America’s convoluted tax code once and for all: The Heritage Foundation’s “New Flat Tax.” It’s as easy as one, two, three, and here’s what you need to know about it: 1) The New Flat Tax is simple, coherent, and comprehensive.

Under the New Flat Tax, American taxpayers will pay a single, simple tax rate–roughly 28 percent. It replaces all federal income taxes, as well as the death tax, payroll taxes, and all excises not dedicated to a trust fund. It also includes a $3,500 health insurance tax credit for low and middle-income families who purchase policies, it includes an anti-poverty tax credit for low-wage workers, and it includes deductions for higher education, charitable contributions, and an optional home mortgage interest deduction.

In his new paper, J.D. Foster, the Norman B. Ture Senior Fellow in the Economics of Fiscal Policy at The Heritage Foundation, explains how such a system will benefit all Americans and make for a stronger economy:

The design of the New Flat Tax is based on the need for a more coherent tax system. An even greater priority than policy coherence is the need to eliminate, insofar as possible, any loss of economic performance due to federal taxation.

Unnecessarily high tax rates combined with ill-advised tax rules distort the economic decisions of businesses and families. In turn, the economy is left much weaker by these distortions. A stronger, larger economy is the primary goal of the New Flat Tax, which would achieve this goal by implementing an economically neutral tax base and by lowering rates as much as possible.

2) Seniors will see great relief under the New Flat Tax system.

For non-seniors, the New Flat Tax is as easy as one, two, three–one rate, two credits, three deductions. For seniors on Medicare, one of the two credits–for health insurance–is replaced by an extra deduction. The plan includes Social Security and Medicare measures to ensure that no senior is left in poverty, protects the Social Security and Medicare trust funds, and it encourages seniors to stay in the workforce longer by excluding the first $10,000 of a senior’s wages and salary from tax. As Foster explains, that provision is especially important for low-income and middle-income seniors.

3) Businesses and job creators will benefit from a new, simplified system.

The United States must remain competitive on the global stage, particularly as countries like China and India become economically stronger. Unfortunately, today’s tax code negatively impacts businesses and distorts their decision making, produces an uneven playing field that benefits some while harming others, and creates hurdles for business growth, development, and investment. And that leads to a weaker economy.

Under the New Flat Tax, businesses will achieve much-needed relief, including measures that reduce the business tax rate to the level of the individual rate over time, fully eliminate double taxation, repeal special provisions and tax credits in existing law while maintaining the research and experimentation credit, and makes the taxation of international commerce fairer. Foster explains that the sweeping reforms will pay dividends for the U.S. economy:

The New Flat Tax levies a simple tax on businesses’ domestic net cash flow so all compensation provided to employees and all purchases from other businesses are deducted from gross domestic receipts. This treatment applies to all business entities. In addition to the great simplification this system provides over the income tax, it also means businesses can deduct purchases of new equipment immediately, thus eliminating a crucial tax bias against business investment.

America’s taxpayers–individuals and businesses alike–perpetually suffer under the tax code, its complexities, its burdens, and its consequences. It’s high time that Congress reform the federal tax system, and Heritage’s New Flat Tax is the answer. It simplifies the system, provides transparency, and opens the door for the economic growth that America so desperately needs.

Quick Hits:

The federal government may be facing a shutdown as negotiations over extending the payroll tax holiday stalled in the Senate.
With only two days before temporary government funding expires, Republicans have introduced a $915 billion spending bill in the House of Representatives as part of their effort to force Democrats to finalize legislation to keep the government operating.
Today the U.S. military formally ended its mission in Iraq and made preparations to leave the country.
The Associated Press reports that “the U.S.-Russia “reset” is sputtering,” despite the Obama Administration’s “much-touted effort to patch up relations with the Kremlin.”
Politics pays, at least for some. House Minority Leader Nancy Pelosi (D-CA) has pushed for a piece of legislation that would directly enrich her financially. Read more at Foundry.org.