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March 5, 2014

A Tax Code for the 6 Percent


Rasmussen recently released a survey revealing that a mere 6 percent of those surveyed thought the U.S. has the best tax system in the world. That’s half the number of those who approve of Congress. Turns out that the 94 percent of doubters are right; our tax system fails us at every turn.
After years of watching companies flee the country, the United Kingdom aggressively reformed its corporate tax code by lowering the corporate tax rate from 28 percent to 24 percent. Next year that rate will drop to 20 percent for an overall tax decrease of nearly 29 percent. But the Britons didn’t stop there. They have also exempted foreign earned profits from almost all U.K. taxes. The result is that companies are returning to the U.K.
 Meanwhile, the U.S. has taken a decidedly different approach. The 40 percent U.S. corporate tax rate, a tabulation including state and local taxes on average, remains the highest in the world. The U.K. will have a corporate tax rate that is literally half the U.S. rate, plus U.K. companies’ overseas profits will be free of any additional U.K. tax on top of the taxes already paid in the country where the income is earned.
The U.S. is losing companies to other countries, including to the U.K., and losing investment as corporations leave their overseas profits parked abroad for investment there—all while we struggle with an anemic economy.
But the U.S. is a stand out in another area. The Tax Foundation recently reported that at 28.7 percent the U.S. has one of the highest capital gains tax rates amongst OECD countries, more than 55 percent higher than the 18.2 percent average.
Combine that federal rate with state rates and the U.S. has the highest capital gains tax rate in the world. To take one example, California has a top marginal rate that alone makes it the third highest in the industrialized world.
Remember, this is a tax on already taxed income, a double tax that discourages saving or investing. The reduced investing ultimately results in decreased economic growth, which in turn leads to decreased employment opportunities. As the capital gains tax increases, corporations have more difficulty raising capital, because there are better options. They will ultimately seek to move to markets where capital formation is easier, taking jobs and opportunity with them.
Personal income taxes are no better. As the Rasmussen survey highlighted, people doubt that they are treated fairly by the personal income tax system and doubt that others are taxed appropriately. This can hardly come as news to anyone who has even briefly considered the burden of the U.S. personal income tax system on taxpayers.
The labyrinthine tax code is inherently unfair because of the burden it places on individuals for compliance that even tax professionals find challenging. The code is written and enforced by government for the benefit of government with little thought given to the complexity that an average taxpayer can barely understand.
The treatment has become so bad that H&R Block has made an advertising campaign out of it. That $1 billion a year that is not claimed by taxpayers is nothing more than a tax levied on Americans who are befuddled by the complication.
Likely no single act of Congress would be more beneficial to the U.S. economy than reform of the personal and corporate tax codes. It should be easier to understand, fairer, flatter and a globally competitive tax code.


  • TaxBytes-New

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