100 million unnecessary returns : a simple, fair, and competitive tax plan for the United States : with a new introduction

To most Americans, the United States tax code has become a vast and confounding puzzle. In 1940, the instructions to the form 1040 were about four pages long. Today they have ballooned to more than a hundred pages, and the form itself contains more than ten schedules and twenty worksheets. The complete tax code totals about 2.8 million words—about four times the length of War and Peace. In this intriguing book, Michael Graetz maintains that our tax code has become a tangle of loopholes, paperwork, and inconsistencies—a massive social program that fails tests of simplicity and fairness. More important, our tax system has failed to keep pace with the changing economy, creating burdens and wastes of resources that weigh our nation down. Graetz offers a solution. Imagine a world in which most Americans pay no income tax at all, and those who do enjoy a far simpler tax process—all this without decreasing government revenues or removing key incentives for employer-sponsored health care plans and pensions. As Graetz adeptly and clearly describes, this world is within our grasp. 100 Million Unnecessary Returns: A Simple, Fair, and Competitive Tax Plan for the United States 4 Contents 8 Introduction to the Paperback Edition 10 Prologue 20 Part I: Why We Need Tax Reform 26 I The Case for Fundamental Reform 28 The Mess We’re In 30 Governance by Deduction 35 II The Broken Politics of Taxation 42 The Beast That Will Not Starve 43 The Last Serious Attempt at Reform—And What Went Wrong 48 The President’s Panel 52 For Politicians, Difficult Choices and Small Rewards 55 III Of Pleaders, Zealots, and the Rest of Us 59 The Would-Be Populists 60 FairTax Follies 67 Special Pleading 72 The Road Ahead 75 IV Until the Second Child Speaks: First Principles of Responsible Reform 77 The Progressive Intuition 79 Part II: Funding a Competitive America 84 V Tax Spending 86 The Value-Added Tax 88 Avoiding the Mistakes of the Past 95 Beware of Imitators 102 A Major Problem with the Alternatives: They Do Not Work Well Internationally 104 VI Shrink the Income Tax 109 Back to the Future 110 The Crisis of Compliance 112 Complexity, Part I: Turning the Tax Collector into a Benefit Agency 114 Complexity, Part II: “Targeted Tax Cuts” and the Alternative Minimum Tax 116 Rate Cuts at the Top 118 The Big Picture:Where the Changes Have Left Us 121 The Big Picture:Where the Changes Have Left Us 121 Radical Surgery 123 VII Reduce the Corporate Income Tax Rate 133 The Shape of the Problem 134 The Relationship of Corporate and Individual Income Taxes 136 Noncorporate Business Entities and Tax Variations Across Industries 138 Corporate Tax Shelters 139 The Future of the Corporate Income Tax 142 VIII Keep the Wage Tax to Help Fund Social Insurance 151 Rising Costs and the Impact on Savings 153 “Politics All the Way Through” 158 Securing Retirement 163 Problems Tax Reform Alone Cannot Solve 167 IX Tax Great Wealth but Protect Farmers and Small Businesses 174 Small Tax, Big Benefit 175 Why We Should Retain a Modified Estate Tax 178 What Lies Ahead for Taxes on Wealth 182 X Protect American Workers from a Tax Increase 186 Sharing the Burden: How to Handle the Consequences of a Consumption Tax 189 The Fair Tax “Prebate” 192 A Consumption Tax, Fair and Practical 195 A “Smart Card” Alternative 203 XI Bring the States Along 207 The States’ Diminished Influence 208 The Consequences for the States of Fundamental Reform 212 Advantages of the Competitive Tax Plan 213 The Road Ahead 219 XII The Plan in Brief 222 1. Enact a Value-Added Tax 225 2. Eliminate the Income Tax for Most Americans 226 3. Lower the Corporate Income Tax Rate 227 4. Retain the Estate and Gift Taxes 228 5. Introduce a Payroll Adjustment or “Smart Cards” to Protect Low- and Moderate-Income Workers 228 6. Create Incentives for States to Adopt a Similar Model 228 Why the Major Alternatives for Fundamental Reform Fail 229 The Key Advantages of the Competitive Tax Plan 233 Appendix 1: Revenues 240 1. The VAT 241 2. The Individual Income Tax 241 3. The Corporate Income Tax 242 4. Payroll Adjustments and VAT Regressivity Offsets 242 5. Retaining the Estate Tax with a Higher Exemption 243 6. Other Potential Revenue Sources 243 Appendix 2: Earned-Income Credit Forms and Worksheet 244 Notes 250 Prologue 250 1. The Case for Fundamental Reform 250 2. The Broken Politics of Taxation 252 3. Of Pleaders, Zealots, and the Rest of Us 253 4. Until the Second Child Speaks 255 5. Tax Spending 255 6. Shrink the Income Tax 258 7. Reduce the Corporate Income Tax Rate 260 8. Keep the Wage Tax to Help Fund Social Insurance 262 9. Tax Great Wealth but Protect Farmers and Small Businesses 264 10. Protect American Workers from a Tax Increase 267 11. Bring the States Along 270 12. The Plan in Brief 270 Appendix 1 272 Glossary 274 Acknowledgments 278 Index 280 Maintains that our tax code has become a tangle of loopholes, paperwork, and inconsistencies, a massive social programme that fails tests of simplicity and fairness; more importantly, our tax system has failed to keep pace with the changing economy, creating burdens and wastes of resources that weigh our nation down. To most Americans, the United States tax code has become a vast and confounding puzzle. This text maintains that the US tax code has become a tangle of loopholes, paperwork, and inconsistencies, a massive social programme that fails tests of simplicity and fairness.