Taxes, Trump, and Shifting the Economy out of Neutral

With the “across-the-board” tax cuts that came during the George W. Bush administration, every American who paid income taxes got a tax rate cut. Compare that with the “fiscal cliff” rate changes under Obama that raised tax rates on barely more than 1 percent of income taxpayers. To generalize, Republicans like to cut taxes for everybody while Democrats like to hike taxes only for the super-wealthy.

It’s perhaps a bit ironic that the top tax rate for the “evil” One Percent is the Clinton-era rate, while the rates for the “good” 99 Percent are the Bush-era rates. Why not have the Clinton-era income tax rates for everyone? Let the Democrats campaign on that!

Democrats (i.e. progressives) don’t want to change the basic structure of the federal income tax system. You see, the U.S. Tax Code is their bread and butter. The Democrats’ big idea is to have very high statutory tax rates coupled with a vast array of exceptions which allows the taxpayer to deduct and exempt large portions of his income from taxation. So if you do what the Democrats want you to do -- insulate your house, buy an electric car, buy an ObamaCare insurance policy -- you don’t pay as much tax. What that means is that tax rates must be high in order to offset all the exceptions. Or to put it another way, exceptions must be substantial in order to soften the blow of high tax rates.

All the noise about fundamentally changing the federal income tax system comes from Republicans (i.e. conservatives and libertarians). And their big idea is to rid the Tax Code of exceptions so that tax rates can be lowered; it’s the exact opposite of the Democrat idea. It is the exceptions that make the Tax Code so damned complex.

On August 13 in “Donald Trump to Kansas City-based H&R Block: ‘I want to put you out of business,’” Kansas City Star columnist Yael Abouhalkah reported:

Donald Trump didn’t make any friends with Kansas-City based [sic] H&R Block the other day.

In a TV interview, the GOP presidential candidate said the nation’s tax system is a complicated mess.

Amen to that, many Americans will respond.

But then Trump said this: “I want to put H&R Block out of business.”

Uh, wait a minute.

That would wipe out 80,000 jobs of people who work for the tax preparation business at thousands of franchise locations in America -- and at the downtown Kansas City headquarters.

Mr. Abouhalkah calls this “stabbing H&R Block employees in the back.” But if income taxes were radically simplified and the complex exceptions were deleted from the Tax Code, there’d be no need for those 80,000 employees. So, for the sake of the tax preparation industry, Abouhalkah would keep taxes insanely complex for 300,000,000 Americans.

For each exception in the Tax Code, whether it’s the home mortgage deduction or whatever, there is a constituency. But there is one constituency for all the exceptions in the Code: the tax preparation industry.

Mr. Trump is exactly right about the tax preparation industry. If the divisions of the IRS that police exceptions are parasitical, then the tax preparation industry is parasite feeding off another parasite. Both justify their existence by making our taxes far more difficult than they should be.

One of the more recent additions to the complexity of income taxes is ObamaCare. In fact, Congress reportedly hired 2,700 to 16,500 new IRS functionaries to process all the new forms and worksheets required by ObamaCare. In Obamaland, you buy insurance and your taxes get gnarly.

If you use a tax preparation outfit to figure and file your income taxes you might not be familiar with the 1040 instruction booklet. But if you go to page 100 of the 1040 instructions for 2014, you’ll see a chart that shows where federal revenue comes from. The chart shows that 38 percent of all federal “income” (revenue) comes from “personal income taxes,” while “corporate income taxes” account for only 8 percent of it.

I’ll do the math for you: The chart shows that in 2013 the individual income tax accounted for 4.75 times as much revenue as did the corporate income tax. Even in good years like 2006 and 2007, the corporate income tax was only 13 percent of all federal revenue. Despite that, reforming the corporate income tax may be more important to the health of the nation than reforming the individual income tax.

American business is saddled with one of the highest statutory corporate income tax rates in the world. You don’t have to be a Donald Trump to see that that’s stupid. And just as with individual income taxes, offsetting those high tax rates necessitates libraries of exceptions: write-offs, loopholes, and even provisions in the Code that apply to only one company.

It’s true that the effective income tax rate of U.S. corporations is much lower than the statutory rate. But to get their effective rate down, corporations must alter their behavior, hire more accountants and lawyers, and jump though the hoops Congress has provided just for them.

In March at Forbes Martin Sullivan opined: “As most any economist will tell you, the corporate tax is our most economically damaging tax.” So if we want to get the economy going and “make America great again,” we must reform corporate taxation.

Democrats have conditioned half of America to think that only the other half should be required to pay income taxes. Democrats have also gotten a lot of Americans thinking that burdening those big, evil corporations with high tax rates and evermore regulations isn’t going to hurt the economy.

What Republicans should be pledging in their 2016 campaigns is serious income tax simplification -- especially for corporations. Unfortunately, that’ll mean job layoffs at H&R Block and other tax preparation outfits. Maybe even the IRS could cut personnel. But we need to get the economy going, and an impediment to that are high tax rates and the maze of exceptions that go with them. To borrow from The Donald: Let’s make America a great place to do business again.

Jon N. Hall is a programmer/analyst from Kansas City. 

If you experience technical problems, please write to