Review
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“[C]harming… Reid takes us on a world tour of tax
systems and the efforts to reform them. He approaches this most
disliked specialty of the dismal science of economics with a wry
voice and a light touch… a rich and sturdy fabric of facts
presented in plain English. As a longtime Washington Post foreign
correspondent, Reid knows how to make the distant seem close. His
eye for the telling detail is sharp… Those unfamiliar with
economics, accounting or tax law will be better able to
understand these subjects by reading “A Fine Mess.”… With enough
readers, Reid might even help us to initiate real tax reform by
replacing a tax code so complex it includes the anti-complexity
rule in Section 7803(c)(2)(B).”—David Cay Johnston, The New York
Times Book Review
“A fun book on taxes. It's terrific.”—Fareed Zakaria, CNN's
Global Public Square
“An exploration of the absurd complexity of the American tax
system and an astute comparison to many examples of simpler,
effective tax collection by other governments around the world.
Throughout his well-reported, clearly written exposé of United
States tax policy, [Reid] reveals the follies of the concept of
American exceptionalism and the misguided pride of presidents,
members of Congress, and Internal Revenue Service
commissioners….Though Reid's topic may be anathema to many
readers, he makes it relentlessly revelatory and simple to
understand.”—Kirkus Reviews [starred]
“Highly readable and informative…offers solid solutions and
predicts the time for change has come.”
— Publishers Weekly
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About the Author
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T. R. Reid is a longtime correspondent for The
Washington Post and former chief of its Tokyo and London bureaus.
He is a commentator for National Public Radio and has been a
correspondent for several PBS documentaries. His bestselling
books include The Healing of America, The United States of
Europe, The Chip, and Confucius Lives Next Door.
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Excerpt. © Reprinted by permission. All rights reserved.
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1.
Policy Laboratories
During one of its periodic bursts of anger at the Internal
Revenue Service, the U.S. Congress passed a strict new law
requiring the Treasury Department to reduce the complexity of
America's income tax system. In standard congressional fashion,
this mandate for simplicity-it's known as the "anti-complexity
clause"-was included in a massively complex piece of legislation
that added some thirty thousand words and scores of complicated
new deductions, exemptions, and credits to the bloated
multivolume corpus of the nation's tax law. If you happen to be
browsing through the statute books some restless night, you can
find the anti-complexity clause in Subsection IX of subpart (ii)
of Section 7803(c)(2)(B) of the Internal Revenue Code.
It's classic: Congress decides to reduce the complexity of our
tax code by making it even more complex. It might be funny if the
whole taxpaying process in America weren't so maddeningly
expensive, inefficient, and time-consuming. At the same time
Congress took that principled stand in favor of simplicity, it
also added a clause-that would be Section
7803(c)(2)(B)(ii)(III)-requiring that Treasury file a report each
year on the overall cost of the income tax regime. The reported
burden on U.S. taxpayers turns out to be no laughing matter.
In 2015, the government estimates, American taxpayers spent just
over six billion hours preparing and filing their income tax
returns. They paid $10.1 billion in fees to the booming
tax-preparation industry and another $2 billion for tax software
programs (programs that still require hours of work for the
typical taxpaying household). For an American household earning
the median family income-about $55,000-the average is more than
thirty hours per year gathering documents and filling out forms.
Tens of millions of Americans have to spend the weekend before
April 15-a lovely spring interlude when they should be out on the
golf course or at the kids' soccer game-tearing their hair out
over instructions like this gem from IRS Form 1041-I: "Go to Part
IV of Schedule I to figure line 52 if the estate or trust has
qualified dividends or has a gain on lines 18a and 19 of column
(2) of Schedule D (Form 1041) (as refigured for the AMT, if
necessary)."
The cartoonist Jeff MacNelly used to offer a satire of this
process every April 15:
FPO
It doesn't have to be this way.
If you walk down the street in London, Tokyo, Paris, or Lima,
you won't see an office of H&R Block or any similar firm; in
other nations, people don't need a tax-preparation industry to
file their returns. Parliaments and tax collection bureaus all
over the world have done what the U.S. Congress seems totally
unable to do: they've made paying taxes easy.
In the Netherlands, for example, the Algemene Fiscale Politiek
(in essence, the Dutch IRS) has a slogan: "We can't make paying
taxes pleasant, but at least we can make it simple." It is
certainly simple for my friend Michael, a successful Dutch
executive with a six-figure income and all the economic
complications that come with his family's upper-bracket
lifestyle. An American in the same situation would have to fill
out at least a dozen different forms, some of them six pages long
(or pay somebody to do it for her). Michael, in contrast, told me
that he sets aside fifteen minutes per year to file his federal
and local tax returns, and that's usually enough. But sometimes,
he said, he needs to check some line item on the return, and that
can be time-consuming. At this point, Michael was getting
downright indignant. "I mean, some years, it takes me nearly half
an hour just to file my tax returns!"
America could learn something from the Netherlands, and from
other countries, about how to make the taxpaying process simple.
And itÕs not just the complexity problem that we could solve by
taking a look at other countries. Almost every government on
earth collects taxes (as weÕll see, there are a few lucky nations
that get by just fine without taxing their citizens). Many of the
developed countries have come up with tax systems that are
simpler, fairer, and more efficient than ours. They can show us
what to tax, how much to tax it, and how to collect the money
thatÕs due.
I traveled the globe looking at tax systems that work better
than ours (and some that are worse). I found useful lessons for
the United States all over the world. Other countries can show us
how to get the same a of revenue with lower tax rates and
how to use the tax code to deal with important national problems,
such as the growing inequality of wealth between the richest
Americans and everybody else.
Just about every economist and political figure in America
agrees these days that our tax code has to be reformed. As
Americans elected a new Congress and president in 2016, it
appeared that our body politic was finally ready to take on this
challenge.
One of the benefits of a comparative study of taxes is that the
other countries can serve as policy laboratories for us. In fact,
just about every idea that anybody, left or right, has proposed
to "fix" the U.S. tax system has already been tried somewhere.
For example:
From the right, there have been repeated proposals for a
flat-rate income tax, with everybody paying the same rate-about
18%-of their income in tax. Several Republican presidential
candidates in the 2012 election, and at least four more in
2016-that would be Ben Carson, Rand Paul, Ted Cruz, and Rick
Perry-have backed the flat tax. (Steve Forbes, the publisher who
ran for president twice, has been the most prominent advocate of
this idea.) Would it work? As it happens, about a dozen countries
have actually tried this innovation.
From the left, there have been repeated proposals for a carbon
tax, designed to reduce fossil fuel emissions and thus encourage
development of "green" forms of energy. As it happens, Australia
actually tried this innovation-and quickly gave up on it.
Virtually all economists agree that two of the most widely used
deductions in the federal income tax code-the deduction for
mortgage interest and the deduction for charitable
contributions-cut government revenues by billions of dollars but
provide almost no economic benefit. The logical response would be
to eliminate them. There are all sorts of proposals floating
around Washington, but Congress has never found a politically
palatable way to take away these popular write-offs. As it
happens, many rich countries have come up with intelligent ways
to get rid of these deductions, with minimal impact on home
ownership or charitable giving.
The United States provides tax breaks for savings plans, to
encourage Americans to put away money for retirement. As with
everything else in our tax code, this straightforward idea has
become absurdly complex. There's a bewildering variety of
different plans, with names that sound like secret code-the
401(k), the 403(b), the 457(b), the SEP, the SARSEP, the ESOP,
and so on. There's an IRA, and there's a Roth IRA, which is
different, and then there's a myRA, which is different from the
other two. There's something called the "nonqualified deferred
compensation plan." One of the savings vehicles in our tax code
is actually called the SIMPLE IRA, but of course it's not simple
at all; the SIMPLE IRA requires two different IRS forms (Form
5304 and Form 5305) and a ten-page book of instructions
(Publication 4334). Each different tax-free savings plan has its
own rules about who can use it, how much you can put in, how much
you can take out, when you can take it out, what you can use the
money for, and how much tax you'll owe. To deal with this
expanding labyrinth of regulations, a billion-dollar advisory
industry has sprung up just to help Americans figure out how to
put money in a savings account.
Many other countries also use the tax code to encourage savings,
but no place has made it as convoluted as the U.S. mess. In
Canada, for example, the tax-free savings account is called,
sensibly, a "Tax-Free Savings Account." Anybody can use it; you
can put the money into any bank or investment account; you can
deposit and withdraw at any time, for any reason. The interest
and dividends are always tax-free. The plan is so clear-cut and
so popular that savings have skyrocketed. It is a vastly simpler
way to achieve the same goal that our tax writers have turned
into an inscrutable muddle.
The 535 members of the U.S. Congress-the people who write the
tax laws-have given themselves various tax breaks and deductions
that other Americans don't get. This is probably a natural
tendency among people who write the law. As it happens, though,
some countries have found ways to combat this predictable effort
by legislators to reduce their own tax bills. Slovakia, for
example, has a rule that members of the national legislature and
the prime minister's cabinet always have to pay 5% more in tax
than any other Slovakian with the same income.
Should we double the tax on sugared soda pop as a way to combat
obesity? Should we impose a tax of 0.0001% on every Wall Street
transaction? Should we tax commuters for driving to work when
traffic is terrible? Should we give companies a tax break for
raising wages? Should we tax oline at $4 per gallon? Should we
triple the tax? In each case, other countries have
given these ideas a test run.
This is not to suggest that tax systems in other nations are all
simple, efficient, and rational. Because the tax code in any
democracy is a political animal, there are strange anomalies of
taxation everywhere.
Most countries, for example, tax income at a graduated rate;
that is, the more income you have, the higher rate of tax you
have to pay. But Great Britain, for reasons that evidently made
sense to Parliament, has imposed a tax rate of 60% on incomes of
$160,000 per year but 45% on incomes of $230,000 or more.
Similarly, there's a strange quirk in the tax structure in the
Netherlands. The sales tax (actually, value-added tax) on dog
food is 19%, but the tax on rabbit food is 12%. Dutch bunny
lovers apparently have more lobbying clout than puppy owners.
It used to be that other countries around the world studied our
tax code. In the 1980s, the United States was a recognized policy
leader on tax issues. When our 1986 tax reform produced a huge
drop in income tax rates, virtually every other developed
democracy followed our example with major rate reductions.
Today, though, the United States is well behind the curve on tax
innovation. Indeed, we've completely missed the boat on the most
important taxing invention of the last half century-that is, the
value-added tax (VAT), a new form of the familiar retail sales
tax. Economists love this tax because it doesn't punish people
for working hard and making money; it taxes spending, not earning
or saving. Governments love the VAT because it is easy to collect
and hard to evade. This innovation is so useful, fair, and simple
that some 170 countries have adopted it in recent decades, often
using revenues from the VAT to cut income tax rates. The only
places that don't use a VAT are a handful of poor countries and
the world's richest country, the United States. We've missed out
on a powerful new technology. When it comes to taxation,
Americans are still pounding out letters on typewriters and
dropping them in the mailbox, while the rest of the world has
moved on to e-mail and texting.
I looked at the VAT, and variations on the VAT, in several
countries. New Zealand, for example, has a broad form of this tax
called the GST-the goods and services tax. Graham Scott, the
Finance Ministry bureaucrat who designed the New Zealand system,
told me that the tax has to be paid on anything that is
purchased-from a manufacturing buying basic commodities to
a consumer buying the finished product in a department store.
"The GST applies to all the services, too," Scott told me.
"Lawyers, dentists, plumbers, architects-they're all taxed." New
Zealand is one of several countries that have recently legalized
the sex trade. So I asked if a prostitute working in a brothel is
expected to collect sales tax from the customers. "Why, yes, of
course," he said, as if the answer were the most obvious thing in
the world. "We haven't figured out whether it's a good or a
service, but we know it's taxable."
Taxation experts constantly predict that the United States will
establish a value-added tax, which would make it possible to
reduce income tax rates for every individual and corporation.
"The VAT makes so much economic sense that even the U.S. Congress
will eventually recognize its value," says the UCLA Law School
professor Eric Zolt, who has helped design tax codes for about
forty countries. "Mark my words," Zolt says forcefully, "the
United States will have a VAT within five years. Of course," the
professor concedes, "I've been saying that for the last twenty
years."
These days, when Congress takes up tax reform, the ÒreformÓ
generally makes things worse. A Congress that produces something
like Section 7803(c)(2)(B)(ii)(IX) in the name of reducing
complexity hardly seems likely to agree on any serious changes
that would improve the system. Even with one party controlling
both Congress and the White House, tax reform would be a stretch
in our ic political atmosphere. So how could Congress and the
White House agree on serious changes to the tax code when our
country is ferociously divided?
The fact is, we've done it before, in a time of severely divided
government. In the mid-1980s, a strong conservative in the White
House and a strongly liberal Speaker of the House-that is, Ronald
Reagan and Tip O'Neill-reached agreement on the biggest
transformation of the federal income tax since the tax was
created in 1913. The Tax Reform Act of 1986, passed by a divided
Congress and signed by a Republican president, was widely
admired; it was precisely the kind of change that almost all tax
experts favored. That reform was based on principles that have
been adopted by countries around the world. If we go back to
those fundamental principles, the United States could achieve
serious tax reform, even in our current state of political
gridlock.
Another benefit of looking at other countries is that
comparative analysis can tell us where Americans stand relative
to the rest of the world when it comes to how much tax we have to
pay. During his campaign for the presidency in 2016, Donald Trump
repeatedly said, "The United States is the highest-taxed country
in the world." Was he right?
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