A Tax System That Works

Before trying to identify a new tax system, you have to pinpoint the problems with the current one. Our current tax system has become too large and complex to be practical, with the pages of the actual code nearly doubling in the last thirty years. The tax code is so large and complex that Americans now spend over six billion hours a year simply trying to discern what they owe Uncle Sam. To be blunt, our current tax code no longer makes sense and it is preventing our nation from realizing even greater economic growth and prosperity than we currently enjoy.

In looking to devise a tax system that is more prosperity-friendly, two goals should be kept in mind:

1.) Position tax rates so they don't discourage productive and wealth-enhancing activities.

2.) Eliminate over taxation of investment and savings, so more of both will occur.

To achieve these goals, the most rational direction to move in is towards a flat-tax rate. This would move the focus of taxation from savings and investment towards consumption. For example, this would end the taxation of dividend profits, instead taxing those profits when they are spent on goods. By not directly taxing dividends we would encourage more people to invest in the economy, which in turn would grow the economy.

We should also refrain from taxing savings, which would encourage more people to put away money for their later years, subsequently easing some of the stress that is being put on Social Security.

Moving away from our over complicated, loophole ridden system towards a flat tax rate of around 15-18% would increase national income by 5-10% estimates Harvard Economist Dale Jorgenson. While this may seem overly ambitious on the face of it, it seems less so when you look at real life examples of flat tax rates being implemented. For example, a 15% rate is currently being used in Hong Kong, which has enjoyed robust growth for the last forty years and is one of the economic powers in the world. In Russia, the government now collects more with it's 13% rate than it did when it had a 70% rate.

Reforming the tax code won't be easy, for there are many interests out there who have a loop hole or benefit somewhere in the code that would make it in their interests to stand for the status quo. However, if we as a nation want to secure prosperity for ourselves and our children, than adopting a flat-tax rate simply makes too much sense. As history has taught us, the best way to have a healthy economy that is full of growth is to lessen the role and influence of government. Simplifying our tax code would do just that.

For a more expert and in depth analysis of simplifying the tax code, check out this article, which is the most common-sense set of proposals I have seen.