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The U.S. Tax System Needs Fundamental Reform

- August 29, 2017

The U.S. Tax Code Has Not Been Reformed Since The 1980s, And This Relic Is Costing Taxpayers And The U.S. Treasury Billions Each Year

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TOP TAKEAWAYS

  • The last time Congress passed comprehensive tax reform was in 1986.
  • The federal tax code is at least 74,608 pages long, and requires hundreds of pages of supporting documents from the IRS.
  • According to the Government Accountability Office, the tax code is so complex even tax professionals miscalculate returns.
  • The byzantine nature of the tax code results in $265 billion compliance costs each year, while taxpayers collectively spend 6 billion hours each year filing their taxes.
  • The U.S. corporate tax rate is 16.4 percent higher than the worldwide average, incentivizing businesses to store profits offshore and costing the U.S. Treasury billions in lost revenue each year.

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AN OVERHAUL OF THE U.S. TAX SYSTEM IS LONG OVERDUE

Major Tax Reform Has Not Been Achieved Since The 1980s

Congress Last Successfully Passed Tax Reform In 1986. "The last time Congress passed comprehensive tax reform was in 1986 -- and that was a feat that took years." (Ashley Killough, "These Are The Key People Who Control Tax Reform In Congress," CNN , 8/11/17)

Since Then, The Tax Code Has Become Increasingly Convoluted

The Federal Tax Code Is At Least 74,608 Pages Long-187 Times Longer Than It Was A Century Ago. "As they rush to file their taxes by April 18, Americans are rightfully frustrated with the complexity of the 74,608-page-long federal tax code. The federal tax code is 187 times longer than it was a century ago, according to Wolters Kluwer, CCH, which has analyzed it since 1913." (Jason Russell, "Look At How Many Pages Are In The Federal Tax Code," Washington Examiner , 4/15/16)

The U.S. Tax Code Is Four Million Words Long. "But suffice it to say here that a Code consisting of four million words and requiring six billion hours of taxpayer time when meeting their filing requirements is simply too complex to administer well." ("The National Taxpayer Advocate's Vision For A Taxpayer-Centric 21st Century Tax Administration," Internal Revenue Service , Accessed 8/29/17, p. 2)

Since 2001, Congress Has Made More Than 5,900 Changes To The Federal Tax Code-An Average Of More Than One Change A Day. "It has now been more than 30 years since Congress enacted the Tax Reform Act of 1986 to substantially simplify the tax code, and since that time, the code has grown more complex by the year, as evidenced by the fact that Congress has made more than 5,900 changes to the code - an average of more than one a day - just since 2001." ("Annual Report To Congress 2016: Executive Summary: Preface, Special Focus, And Highlights," Internal Revenue Service National Taxpayer Advocate , 12/31/16)

The IRS Currently Publishes 199 Tax Forms Related To The Individual Income Tax." "The IRS currently publishes 199 tax reforms related to the individual income tax." (Demian Brady, "Tax Complexity 2017: As The Burden Grows, Taxpayers' Patience Shrinks," National Taxpayers Union , 4/13/17)

  • For The Affordable Care Act Alone, Taxpayers Must Navigate The IRS's 24-Page Overview, A 19-Page Guide For Penalties, And A 71-Page Guide For Credits. "You can try to figure all this out by looking at the IRS's 24-page Affordable Care Act overview, its 19-page guide for penalties and its 71-page guide for credits. Or you can go to a tax practitioner who is familiar with the thousands of pages of related regulations." (Chris Edwards, Op-Ed. "Our Complex Tax Code Is Crippling America," Time, 4/11/16)
  • The Earned Income Tax Credit Guide Is 37 Pages, And It Is So Complicated That The IRS Reported The Error Rate For That Single Credit Is 27 Percent. "The IRS guide for the earned income tax credit is 37 pages long, and the rules are so complicated that the credit's error rate is 27%, according to the IRS. That amounts to $18 billion of mistakes every year for just for this one credit." (Chris Edwards, Op-Ed. "Our Complex Tax Code Is Crippling America," Time, 4/11/16)

In Their 2016 Report To Congress, The Internal Revenue Service Identified Tax Reform And Simplifying The Tax Code As Necessary To Move The IRS Into The 21st Century. "The National Taxpayer Advocate has attempted to identify and make recommendations to address the challenges the IRS faces to become a 21st century, taxpayer-centric tax administrator. The first and most obvious is the compelling need for tax reform. In our first legislative recommendation, Simplify the Internal Revenue Code Now, we describe in detail the burdens the current, hideously complex Code imposes on taxpayers and the IRS alike." ("The National Taxpayer Advocate's Vision For A Taxpayer-Centric 21st Century Tax Administration," Internal Revenue Service , Accessed 8/29/17, p. 2)

"The Federal Government "Spends" More Money Through The Tax Code Each Year Than It Spends To Fund The Entire Federal Government." "Add to that the fact that the federal government 'spends' more money through the tax code each year than it spends to fund the entire federal government through the appropriations process. Clearly, the Internal Revenue Code (IRC) is due for an overhaul." ("The National Taxpayer Advocate's Vision For A Taxpayer-Centric 21st Century Tax Administration," Internal Revenue Service , Accessed 8/29/17, p. 2)

A Study By The Government Accountability Office Found That Out Of 19 Tax Preparers They Study Only 2 Calculated The Correct Refund Amount. "GAO found significant preparer errors during undercover site visits to 19 randomly selected preparers-a sample which cannot be generalized. Refund errors in the site visits varied from giving the taxpayer $52 less to $3,718 more than the correct refund amount. Only 2 of 19 preparers calculated the correct refund amount." ("Paid Tax Return Preparers," Government Accountability Office , 4/8/14)

THE TAX CODE IS SO COMPLEX IT COSTS AMERICANS BILLIONS A YEAR TO COMPLY WITH ITS PROVISIONS

The Tax Code's "Mind-Numbing" Complexity Costs Taxpayers Billions Of Dollars And Hours Each Year

The "Mind-Numbingly Complex" And "Unfair" U.S. Corporate Tax System "Is In Desperate Need Of Reform." "The United States corporate tax system is in desperate need of reform, and there are many sources of discontent. The U.S. raises less corporate tax revenue than peer countries do, and the system is mind-numbingly complex, rife with distortion, and widely perceived to be unfair." (Kimberly Clausing, "The Real (And Imagined) Problems With The U.S. Corporate Tax Code," Harvard Business Review , 12/06/16)

It Costs The "Median" Taxpayer More Than $250 A Year To Comply With The Tax Code. "The monetary compliance burden for the median taxpayer (as measured by income) comes to more than $250 a year." ("Introduction: Legislative Recommendations," Internal Revenue Service , Accessed 8/29/17)

In 2005 The Cost Of Compliance With The Federal Tax Code Was $265 Billion, Projected To Rise To $482 Billion By 2015. "The cost of compliance was about $265 billion-22.2 percent of federal revenue-in 2005. The study then projected ten years in the future, calculating that the figure would be $482 billion in 2015, based on an estimate of 20.7 percent of expected revenue." (Glenn Kessler, "John Boehner's Misfire On The Cost Of Tax Compliance," The Washington Post , 11/16/11)

American Taxpayers Spend A Total Of Six Billion Hours Each Year Filing Taxes. "In our first legislative recommendation, Simplify the Internal Revenue Code Now, we describe in detail the burdens the current, hideously complex Code imposes on taxpayers and the IRS alike. But suffice it to say here that a Code consisting of four million words and requiring six billion hours of taxpayer time when meeting their filing requirements is simply too complex to administer well."("Annual Report To Congress," National Taxpayer Advocate , 2016)

THE UNITED STATES' CORPORATE TAX RATE IS ONE OF THE HIGHEST IN THE WORLD, RESULTING IN CORPORATE INVERSIONS THAT LEAD TO BILLIONS IN LOST REVENUE

The United States Has One Of The Highest Corporate Tax Rates In The World

The Statutory U.S. Corporate Tax Rate For Most Major Companies Is 34 To 35 Percent . "34 percent of so much of the taxable income as exceeds $75,000 but does not exceed $10,000,000, and (D) 35 percent of so much of the taxable income as exceeds $10,000,000." (26 U.S.C. § 11)

The U.S. Corporate Tax Rate Is 16.4 Percent Higher Than The Worldwide Average. "The U.S. tax rate is 16.4 percentage points higher than the worldwide average of 22.5 percent and a little more than 9 percentage points higher than the worldwide GDP-weighted average of 29.5 percent. Over the past ten years, the average worldwide tax rate has been declining, pushing the United States farther from the norm." (Kyle Pomerlau, "Corporate Income Tax Rates Around The World, 2016," Tax Foundation , 08/18/16)

The U.S. Has The Highest Statutory Corporate Income Tax Rate Among G20 Countries As Of 2012. ("International Comparisons Of Corporate Income Tax Rates," Congressional Budget Office , 3/01/17, p. 2)

The U.S. Average Corporate Tax Rate Is More Than 10 Points Higher Than That Of Australia, Canada, Germany, And The United Kingdom. ("International Comparisons Of Corporate Income Tax Rates," Congressional Budget Office , 3/01/17, p. 2)

U.S. Companies Have Shifted Trillions Of Dollars Offshore To Avoid Domestic Taxes, Costing The United States Billions In Tax Revenue

The High Corporate Tax Rate Incentivizes Corporations To Shift Profits Overseas In Order To Avoid High Domestic Taxes. "Lawmakers say the current tax code incentivizes profit shifting overseas because of the high 35 percent U.S. corporate income tax rate and rules that allow companies to hold profits abroad tax free until returned to U.S. soil." (David Morgan, "Republicans Debating Remedies For Corporate Tax Avoidance," Reuters , 6/18/17)

Corporations Shift Assets Abroad To Countries With Lower Tax Rates. "Many schemes seek lower corporate tax bills through 'transfer pricing' - using transactions between business units to shift income abroad. The shift often coincides with the transfer of intangible assets such as intellectual property to low-tax nations where companies can expect single-digit tax rates." (David Morgan, "Republicans Debating Remedies For Corporate Tax Avoidance," Reuters , 6/18/17)

According To Capital Economics, U.S. Firms Shifted $2.5 Trillion Overseas In 2015 Due To "The Substantial Tax Bill Most Firms Would Face" If They Brought The Money To The U.S. "The cash held overseas by US firms has continued to grow at a rapid pace, rising to almost $2.5tn in 2015. The substantial tax bill most firms would face if they attempted to bring this cash home, however, means that it is still very unlikely to ever be repatriated under the current system." (Paul Ashworth, Michael Pearce, and Andrew Hunter, "Firms Continue To Hoard Cash Overseas," Capital Economics , 09/19/16)

According To Independent Analysis, The Government Misses Out On $100 Billion In Tax Revenue A Year, Roughly One Third Of Annual Corporate Tax Income As A Result Of Corporations Using "Tax Reduction Maneuvers." "Independent analysts estimate the federal government misses out on more than $100 billion a year in corporate tax revenues as a result of tax reduction maneuvers. That is equal to one-third of the $300 billion in annual corporate tax revenues." (David Morgan, "Republicans Debating Remedies For Corporate Tax Avoidance," Reuters , 6/18/17)

TAX REFORM WOULD SPUR ECONOMIC GROWTH AND HELP AMERICAN BUSINESSES

Comprehensive Tax Reform Would Encourage Economic Growth And Revitalize American Businesses

A 15 Percent Corporate Tax Rate, As Proposed By President Trump, Would Spur Economic Growth And Make The United States A More Attractive Place To Do Business. "Supported by economic theory and American sentiments, a 15 percent business tax rate, as proposed by President Trump, would reverse some of the negative economic consequences of the current system and help spur economic growth. At 15 percent, the U.S. could have a tax rate well below the average of our major trading partners and would be a more attractive place to do business. A lower rate alone could mean an economy that is permanently 4.3 percent larger, according to a Tax Foundation estimate." (Adam N. Michel, Op-Ed, "Focusing On Economic Growth In Tax Reform," The Hill , 5/16/17)

Business Leaders Are Optimistic That President Trump's Platform, Including Tax Reform, Will Spur Economic Growth. "'Managers remain optimistic that the Trump Administration's platform of deregulation, tax reform, and infrastructure spending will eventually boost economic growth,' David Kostin, Goldman's chief U.S. equity strategist, said in a note Monday." (Fred Imbert, "CEOS Still Optimistic About An Economic Acceleration Under Trump, But Have Yet To See It," CNBC , 8/15/17)

Leonard E. Burman, Professor Of Public Affairs At Syracuse University Stated "A Better Tax System Would Be Good For The Economy," And That Tax Loopholes Incentivize Businesses To Make Bad Decisions And Therefore Make Them Less Productive Than They Could Be. LEONARD E. BURMAN: "A better tax system would be good for the economy. Loopholes, complexity, continuing deficits, and high marginal tax rates all entail an economic cost. Loopholes and preferences sap the economy because individuals and businesses are spurred to make bad economic decisions solely because of the tax rewards they bring. Thus businesses are less productive than they could be." (Committee On The Senate Budget, U.S. Senate, Hearing 3/1/12)


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