Zakaria: Tax Law Complexity Equals Corruption

For much of my career, I worked as a tax lawyer and a corporate tax executive. If there was anything I understood, it was the complexity of the U.S. tax code, regulations, rulings, and case law--at least those parts of it I dealt with most. To be really competent in tax practice, you do have to specialize in one area of practice, or a few at most. It's nothing short of byzantine. And many companies and industries have their special tax breaks or "incentives." They also have their lobbyists, both "in house" and on K Street, who are well paid to protect those competitive tax advantages. (And, it can hardly be surprising that tax lawyers, tax accountants, and financial products architects view each new and more complex iteration of the tax code as tax professionals' full-employment legislation.)

But most of those tax breaks provide no additional incentives for companies to do more of what they are already doing to maximize their profits in their chosen area of commercial endeavor. Not really. They are just thinly veiled, indirect government payments to one industry or another, or one company or another. They are created and sustained by congressmen and senators eager to help their constituent companies, or other companies, for which they have developed sympathetic support--and that sympathy is most often engendered through the financial and political support those companies provide the politicians.

In addressing the 9-9-9 tax plan of Republican presidential contender Herman Cain, Fareed Zakaria finds merit in the underlying ideas, even if the particulars are difficult to support or defend. But in taking on the most basic element of the plan--tax law simplicity--he exposes one of the principal unspoken realities of tax law complexity: political corruption. Mr. Zakaria: 

I am going to defend not Cain's specific policy proposals but their general thrust. His plan is sloppy and, in parts, bizarre. But the impetus behind it--tax simplification and reform--is not. Most Americans believe that the federal tax code is highly complex and fundamentally corrupt. They are right. The federal code (plus IRS rulings) is now 72,536 pages in total. The code itself is 16,000 pages.  

Complexity equals corruption. When John McCain was still a raging reformer, he pointed to the tax code as the foundation for the corruption of American politics. Special interests pay politicians vast amounts of cash for their campaigns, and in return they get favorable exemptions or credits in the tax code. In other countries, this sort of bribery takes place underneath bridges and with cash in brown envelopes. In America it is institutionalized and legal, but it is the same--cash for politicians in return for favorable treatment from the government. The U.S. tax system is not simply corrupt; it is corrupt in a deceptive manner that has degraded the entire system of American government. Congress is able to funnel vast sums of money to its favored funders through the tax code--without anyone realizing it. The simplest way to get the corruption out of Washington is to remove the prize that members of Congress give away: preferential tax treatment. A flatter tax code with almost no exemptions does that.

---"Complexity Equals Corruption," Fareed Zakaria, Time Magazine (10.31.11)

This is not the first time I have posted on this topic, as some of you know. It is a subject I was passionate about for much of my professional life, and that passion has not abated. It is just so logical and so right. If Mr. Cain's particular proposal is not viable --and it is not, in my view--he has embraced the right idea in simplification.

And after Mr. Zakaria works through the other elements of Mr. Cain's plan, he offers his own own variation on a 9-9-9 type of approach. It is still simple enough, although not as simple as Mr. Cain's. We can be thankful for that. But it is clearly more thoughtful and defensible. It, too, may have elements that one or another of us will take issue with, but on the whole it is much closer to a workable set of particulars. Again, Mr. Zakaria:

My version of Cain's proposal would be flatter but not flat: 9% for the first 90% of Americans, 18% for the next 9% (incomes starting at $150,000) and 27% for the top 1% (incomes starting at about $500,000). I would keep a few straightforward deductions--state and local income taxes and charitable contributions. I would lower the corporate rate to 18% and impose a VAT of 9%. Finally, I would enact a 50% inheritance tax, because nothing is more un-American than an inherited elite that perpetuates itself. So my proposal is a bit more complex--the 9-18-27-18-9-50 plan. Don't expect it to catch fire on the campaign trail anytime soon.

The full article is worth reading, not just for the analysis of the particulars, but for the policy discussion as well. It can be accessed through the following link:

http://www.time.com/time/subscriber/article/0,33009,2097396,00.html