It’s not simply taxes, however, that have shackled our economy, but the bewildering manner in which they are levied and collected. The best course of action would be to replace the federal income tax with a national sales tax based on consumption.
The economic advantages of a national sales tax have been widely studied. Under the current system, taxes are paid on money you earn, regardless if it is spent or saved. With a national sales tax, however, only the money you spend is taxed, not money that is saved or invested. This is a powerful incentive towards investment, higher productivity and more efficient use of capital.
Beyond the economic benefits, there are the practical ones. Any third grader can understand and figure out a sales tax. It is devoid of the thousands of exemptions, deductions and subjectivity that infests our current bureaucracy which over the years has spiraled into an impenetrable black hole of confusion, favoritism and waste.
Americans collectively spend nearly 7 billion hours a year completing tax forms. That comes out to about two full days for each taxpayer…simply to figure out what they owe. A 1992 study showed that more time was spent on tax compliance than was spent to manufacture every car, van, truck, and airplane built in the US.
We don’t just waste time, but dollars too. It is estimated to cost Americans some $500 billion simply on tax compliance. That’s more than $100 billion more than the entire market value of General Electric.
The reason we spend so much on compliance is that, unlike objective laws, it’s downright impossible for a lay person to comply. According to tax publisher CCH, the tax code contained 400 pages of rules and regulations back in 1913. By 1984, that figure had grown to 26,300 pages. By 2003, the code had doubled to an unfathomable 54,846 pages. Busy pushing papers are the employees of the Internal Revenue Service, who, at over 110,000, amount to more than the staff of all other federal regulatory agencies combined.
Of course, the thousands of rules and regulations require an equally enormous industry of professionals to understand them. There are now 1.2 million tax professionals in the US, which is nearly six times the number of troops serving in Iraq. The percentage of citizens who use a professional tax preparer is at an all-time high.
And lest you think it is only the ultra-rich who are forced to use a tax professional, consider that even back in 1992 about 2/3 of those using a professional tax preparer had incomes below $50,000. In 1991, Money magazine discovered that 70% of the congressmen on the major tax writing committee used professional tax preparers to file their returns. These folks write the laws…and even they can’t figure them out!
That’s the real rub of the current system. Besides the obvious cost…billions of dollars and hours spent figuring out the tax burden, there is the opportunity cost as well.
Thanks to the income tax, the skills and abilities of many of our country’s most intelligent individuals aren’t going into productive achievement, but towards navigating the unimaginably complex forest of IRS rules and bureaucracy. What breakthroughs would our society be able to achieve if all that brainpower could be used in developing new technology, better medicines or innovative products? How many economic decisions, from whom to hire to where to invest, are made for tax purposes, not pure economic ones?
Our standard of living, from economic growth to new job creation, has suffered as a result.
This weekend our Business Block has much more on the national sales tax. Tune in Saturday 10am — noon ET.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC and is a markets columnist for Smartmoney.com. He appears regularly on FNC's business program Cashin' In.