The voices of Tax Policy Center's researchers and staff
Republican presidential candidates say they want to slash the tax code. It is too big, too complicated, and too laden with provisions to help special interests. They are right. But in today’s world, cutting the statute to a few pages would only result in ceding massive new authority to the Treasury Department and, gasp, the IRS. And somehow, I don’t think that’s what these candidates have in mind.
Presidential hopeful Carly Fiorina wants to shrink the revenue code to three pages from what she says are 70,000. “We need to actually reform the tax code,” said in the Republican debate the other night. “Go to a three-page tax code.”
Another candidate, Senator Ted Cruz (R-TX), has a slightly different version of the same trope. He says, “There are more words in the IRS code than there are in the Bible and not a one of them is as good.”
They are both reliable applause lines. Cruz may have lifted his from yet a third candidate, Louisiana Governor Bobby Jindal, who according to the Washington Post’s Michelle Ye Hee Lee, used it back in 2005.
Let’s leave aside the matter of whether the words in the Bible are as “good” as those in the Internal Revenue Code. I’m not going there. And let’s stipulate that the big point Cruz, Fiorina, and Jindal make is correct: The tax code is too complicated, and often needlessly so.
But could we get the code down to three pages? And, if we could, what would happen?
Let’s start by clarifying some language. When my lawyer friends say tax code, they mean the statute itself, not the regulations, letter rulings, legislative history, and court decisions that accompany the code. In a 2014 Tax Notes article, Andrew L. Grossman, legislation counsel for the Joint Committee on Taxation, reported the actual tax code was less than 3,000 pages, not the 70,000 pages in the CCH Standard Federal Tax Reporter.
Fiorina would probably say I’m missing the point. Even 3,000 pages are way too many. And we can get it down to three. As evidence, she points to language drafted years ago by Bob Hall and Alvin Rabushka, authors of a well-known flat tax. Their plan, first developed in the early 1980s, was a 19 percent consumption tax collected from individuals (after a large personal exemption) and all businesses. It repealed all tax preferences. Here is their three-page code if you’d like to read it.
Their tax is certainly simple. But it is simple because it has no individual and few business deductions. Would voters be willing to swap their deductions for mortgage interest, charitable giving, state and local taxes, etc for three-page tax code they'd never read? I’m not so sure.
And keep in mind that the vast bulk of today’s law governs the taxation of businesses, not individuals. And businesses are very complicated.
Let’s take one small example.
The Hall-Rabushka code says this:
Sec. 105. Business taxable income defined
Business taxable income is business receipts less the cost of business inputs, less compensation paid to employees, and less the cost of capital equipment, structures, and land.
Sec. 103. Cost of business inputs defined
(a) In general. The cost of business inputs is the actual cost of purchases of goods, services, and materials required for business purposes.
Seems straight-forward enough. But here’s a question that might be familiar to Mrs. Fiorina from her CEO days: What does “actual” cost mean? Is it market price? Or some artificially high price paid to a related party in order to maximize the deduction?
It isn’t hard to imagine the disputes between companies and the tax collector over that one six-letter word. If it is not defined in the law (bye-bye three page code) it will inevitably be defined by regulation, litigation, and other interpretations. Indeed, firms and the IRS have been battling over this very issue, called transfer pricing, for decades.
Similarly, the Hall-Rabushka code says this:
Sec. 301. Exempt organizations
Organizations exempt from the business tax are (1) State and local governments, and their subsidiary units (2) Educational, religious, charitable, philanthropic, cultural, and community service organizations that do not return income to individual and corporate owners
You may have noticed that there has been something of a debate in Washington about what qualifies as a tax-exempt organization. Indeed, a group of House Republicans wants to impeach the IRS commissioner because they so strongly disagree with the way the agency chose what political organizations are exempt. But in the absence of a clear statute, the IRS would end up with more discretion.
And therein lies one horrible case of unintended consequences.
If the code does not define what “actual cost” or “exempt organization” means, it inevitably will be left to the regulators or the courts. It would take thousands of pages of regs for the IRS to enforce a short--but vague—statute, for compliant taxpayers to understand their obligations, and to prevent abuse by those who would cheat.
Fiorina might keep her pristine three-page tax code. But the price she’d pay is granting vast new power to regulators and judges. I’m not sure she, or many GOP voters, would think that’s such a great idea.
Posts and Comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.