Book Review - A Fine Mess - Washington Post

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johnkarls
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Book Review - A Fine Mess - Washington Post

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Washington Post – 5/5/2017


Of course the U.S. tax system is broken: here’s how to fix it

Review by Alan Murray -- Chief Content Officer of Time Inc., and coauthor with Jeffrey Birnbaum of “Showdown at Gucci Gulch: Lawmakers, Lobbyists and the Unlikely Triumph of Tax Reform.”


Any layman looking to understand the coming tax reform debate would do well to read T.R. Reid’s new book, “A Fine Mess.” Reid is a skilled journalist, with a knack for making sense of the most complicated subjects. And few subjects are more complicated than the U.S. tax system.

Reid’s method is similar to that of his 2009 book, “The Healing of America.” He believes that by looking at the policies of other industrialized countries, we can learn what works and what doesn’t. It turns out that in tax policy, as in health-care policy, the United States is notoriously ineffective and inefficient. As the world’s richest nation, the United States has more capacity to tax than any other country. But with an overly complex tax system riddled with loopholes, we rank near the bottom of industrialized nations in our effectiveness at doing so.

The worst manifestation is the corporate tax, which is nominally one of the highest in the world — at 35 percent — but subject to such massive game-playing that it brings in only a fraction of that. Reid details some of the outrageous, but perfectly legal, tax strategies employed by companies such as Caterpillar, Apple, Google and Microsoft to escape tens of billions of dollars in taxes each year. He also shines a harsh light on the practice of “inversion,” which has enabled many companies to reduce U.S. taxes by moving their headquarters offshore. The result is the worst of all worlds: a tax system whose high rates chase businesses and jobs offshore, while its massive loopholes drain government revenue. The only people who benefit are the accountants and lawyers who devise the complicated avoidance schemes. “The U.S. corporate income tax,” Reid concludes flatly, “is not working.”

Reid also devotes a chapter to the value-added tax, which he calls “the most successful taxation innovation of the last sixty years.” The value-added tax is a levy on consumption, not income, which means it maintains incentives to work and invest. And because it is charged at each stage of distribution, it turns out to be relatively easy to enforce. Buyers get to deduct taxes already paid, giving them an incentive to ensure that sellers actually pay the tax. Reid quotes former Federal Reserve chairman Alan Greenspan saying a VAT is the “least worst” way to raise taxes. “It has been adopted in every major nation on earth and in most small nations as well,” he says.

In the end, Reid comes up with a clear and simple road map to guide tax reform efforts. He would dramatically lower tax rates for all payers and make up for the lost revenue in three ways: eliminate the Swiss-cheese-like proliferation of deductions and credits in the current tax system; impose a value-added tax; and impose a financial activities tax, a tiny levy on individual securities transactions that could slow down excessive trading and raise significant resources.

In addition, he recommends empowering the IRS to use the mountains of data it already collects to prepopulate tax returns, allowing taxpayers to check them for accuracy but saving hours of unnecessary effort. Britain, the Netherlands, Japan, Denmark, Sweden, Spain and Portugal already do something similar, and it seems to work out just fine.

Critics of Reid’s plan, of course, won’t be hard to find. Universities, museums and other nonprofts will go on the warpath to preserve charitable deductions. High-tax states will cry foul over the loss of the state and local tax deduction. Real estate developers — perhaps even President Trump — will be in an uproar about eliminating the deductibility of interest payments. Conservatives will attack the value-added tax as a money machine that leads to bigger government. Wall Street will cry that the financial activities tax will stifle financial innovation.

But in the end, the real problem with Reid’s tax plan is not its substance. The nation would unquestionably benefit from taking his advice.

Rather, the real problem is that we’ve lost all ability to have a rational discussion of such policies. The United States did a pretty good job of cleaning up its tax system in 1986. But it was a massively complex effort that required complicated negotiation and coalition-building among lawmakers in both parties. In today’s badly fractured political environment, it’s hard to imagine a repeat of that process. Fixing our tax system — or for that matter, fixing our health-care system — is unlikely to happen until we first fix our politics. Maybe Reid should devote his next book to that.

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