A risible tax system that demands reform

Albert Einstein, a man who understood many things, once said that “the hardest thing to understand in the world is the income tax.” Given Einstein’s status as a pioneer of revolutionary scientific advancements such as his theory of relativity, it is quite remarkable that a seemingly simple tax confused him to such an extent.

In its current state, the American tax system seems to confirm Einstein’s words: it is inefficient, impossible to understand, saturated with loopholes and detrimental to innovation, among other shortcomings. This piece certainly does not have all the answers to cure the American tax system once and for all. Instead, it seeks to point out some of the current system’s more notable flaws, related to both corporations and individuals, that demand reform—regardless of one’s political affiliation.

For example, corporate inversions—where a company incorporates itself overseas in pursuit of lower taxes or less stringent regulations—have become increasingly common in the United States. Burger King’s purchase of Canadian chain Tim Horton’s in 2014 allowed it to re-incorporate north of the border for tax purposes, a maneuver that saved the company as much as $1.2 billion over three years.

Criticism of the prevalence of corporate inversions in the United States resonates on both sides of the aisle. According to Congress’s Joint Committee on Taxation, current corporate inversion practices will cost the United States around $40 billion in tax revenue over the next decade, and Presidents Obama and Trump have both criticized companies that attempt to avoid paying U.S. taxes in this manner.

The current legality of corporate inversions is reflected in the tax code of the United States, which contains more than four million words. The obscene length of the tax code stems, in large part, from America’s system of rebates and deductions, which attempt to attract businesses to a nation with the highest nominal corporate tax rate in the world. This system is so extensive that some companies, including behemoths such as General Electric and Facebook, are sometimes able to pay no taxes at all. Even so, the fact that some businesses nevertheless attempt to invert and leave the U.S. for tax purposes suggests that the current system is still not competitive for many businesses.

Congress could attempt to close the individual loopholes that permit the practice, but a more appealing and enduring solution would be to craft a simplified, reformed tax system that encourages corporate investment in the United States, rather than sending companies fleeing from the country.

As for the individual income tax, both Democrats and Republicans ought to set aside partisan debates on the appropriate levels of taxation for different income groups and condemn the sheer complexity of the tax system levied on individuals. In total, Americans spend 6 billion hours per year filing their taxes, which—even excluding those who do not pay taxes—averages out to 18 hours per citizen. I cannot imagine that there are many Americans who look forward to this annual obligation. For this reason, there must be room for common ground when it comes to reducing the time Americans spend preparing their tax returns, which is excessive by any reasonable measure.

This complexity led to the creation of an industry of tax preparers to guide Americans through the arcane process, which some might see as a job-creating boon. Every year, 90 percent of Americans seek some form of professional assistance; this industry employs more than 70,000 people, according to the Bureau of Labor Statistics. However, just as it is erroneous to smash windows so that someone can be paid to fix them, as in Bastiat’s broken window fallacy, it is also wrong to create an excessively complex tax system just so people will seek professional help to manage it.

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