To get rid of loopholes, Flatten the tax code

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Opinion Zone,Jeremy Skog

April is the time of year when Americans realize how complex our tax code has become, and after finally completing the necessary calculations, many are left with a feeling of unease that there’s some clever money-saving deduction that they’ve missed.
 
Those feelings are only enhanced by stories of wealthy taxpayers and big businesses paying less in taxes than their secretaries. A prime example is a recent article in The Nation which highlights an interesting tax dodge: the wealthy owners of large and expensive properties avoid paying taxes on them by having them legally declared “farms.” This allows them to take advantage of an old quirk written into the tax code to prevent  farmers from being gentrified off their property.
 
As mid-twentieth-century suburbanization spread out from the cities it raised the property values of nearby farmland. The accompanying rise in taxes was more than the farmers could afford, and they began to sell their land to developers, continuing the suburban spread. Politicians thought that this change in land-use was wrong and decided to use the tax code to fix it. The result is that anyone today, whether corporation or part-time resident, who can find the right way to use their property will get a significantly reduced tax bill.
 
But the article missed the most important lesson: all laws have unintended consequences. After the worst of those consequences become clear politicians attempt to fix them by passing more laws, each of which inevitably has its own loopholes and consequences inspiring yet more laws. In the end society ends up choking for air as it continues on this legalistic treadmill.
 
The other truism of taxes is that all taxes on “the rich” eventually become taxes on the middle class. The Alternative Minimum Tax, unpopularly known as the AMT, is the classic example. It went into effect in the 1970s to deal with the reported problem of a couple hundred high-income citizens who were paying very low tax rates, and sometimes no taxes at all. But, as just its most famous flaw, the income levels weren’t indexed to inflation and the number of people feeling the tax bite has grown as the dollar has weakened. In 2008, the AMT hit almost 4 million taxpayers, almost a third of whom earned less than $200,000. While not poor, these people are hardly idle heirs who spend their time jetting off to their tax-sheltered ranches
 
One wonders what complex work-around the editors of The Nation would propose to counteract the perceived problem of country squires and their suburban farms and fears the consequences that it would inevitably have for everyone else.
 
The reason these situations keep recurring is because the incentives never change. People respond to incentives, and an opinion writer's "loophole" is just a taxpayer's "incentive" to keep more of their hard-earned money. The people who respond most strongly to these loopholes, who will spend time seeking them out and pay people to do so are those with the most to gain - the wealthy. This is always going to be true and it’s time to stop requiring every American to be an accountant just so that politicians can get good press.

The real solution to preventing this behavior is simple: eliminate tax loopholes. And the best way to do this is a simpler tax code. Luckily Wisconsin’s Paul Ryan has taken up the call of Obama’s deficit commission and  proposed something very similar in his new budget: fewer tax rates, fewer deductions and fewer hours spent with a calculator. But abandoning our current system would require politicians to stop using the tax code as a means to alter people’s behavior or to give handouts to their preferred groups. Given our nation’s growing debt burden, this should be a mark of seriousness.

It’s all to easy for politicians to respond to calls of “there ought to be a law.” Sometimes it takes real courage to understand that what ensures a fair legal system is fewer, and simpler, laws.

 

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