Laffer: Simplifying Tax Code Essential For Full Recovery

Wednesday, 20 Apr 2011 12:06 AM

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Economist and former Reagan adviser Arthur Laffer says that simplifying the tax code should be a top priority.

"Regardless of the reform approach taken, the U.S. economy will be enhanced greatly by significantly reducing the complexity of the current tax code," Laffer writes in The Wall Street Journal.

"In a time of global economic competition, we cannot afford the luxury of a Byzantine tax system."

According to Laffer, the costs of complying with the tax code collecting taxes amount to a staggering $431 billion annually.

“This is a cost markup of 30 cents on every dollar paid in taxes,” says Laffer, adding that, as of 2009, the income-tax industry employed more workers than are employed at the five biggest employers among Fortune 500 companies.

“The fact that there is such a large compliance markup in our tax system indicates that the tax system has gone awry,” notes Laffer. “All of these hours could have been used for something a lot more productive than just making sure our taxes are filed and paid correctly.”

Tax-compliance costs, says Laffer, also change behavior.

“Taxpayers, whether individuals or businesses, respond to taxes and tax-compliance costs by changing the composition of their income, the location of their income, the timing of their income, and the volume of their income,” he observes.

“So long as the cost of changing one's income is lower than the taxes saved, the taxpayer will engage in these types of tax-avoidance activities.”

According to the IRS, agreeing to host a foreign exchange student in 2010, going whaling in Alaska and expenses connected to adopting a child are all tax deductible.

“It shows you how complex the tax code is,” Mark Steber, chief tax compliance officer for Jackson Hewitt Tax Service tells Bloomberg. “It’s a deduction when it’s for you, it’s a loophole when it’s for that other guy.”

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