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My Two Cents

Adam Smith on taxes

Chris Farrell Apr 15, 2009

April is called the cruelest month. But why? Spring is here, the days are getting longer, the sun feels warmer and, even as far north as the Minnesota tundra, plants are trying to bloom. But today is April 15th, tax day.

We all grouse about taxes. It’s also true that our tax dollars do a lot of good. The money finances roads, supports schools, builds libraries, and backs criminal justice.

But now for my annual harangue against the federal tax code. Like Tom Herman of the Wall Street Journal said in his column today the tax code it’s too complex and byzantine, riddled with too many deductions, credits, exemptions, exclusions, and odd little rules that trip up the unwary. The system is too expensive, too.

I am deeply skeptical about the merits of the more radical tax reform proposals, such as a flat tax or a national sales tax. These plans typically overstate the economic gains and deeply underestimate the risks. The modest size of the long-term payoff doesn’t justify the enormous disruption and turmoil to the economy.

Instead, lets embrace tax simplification. In the Wealth of Nations, Adam Smith proposed four maxims with regard to taxes in general. They are equality, certainty, convenience, and economy. Specifically:

1) The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities….

2) The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person….

3) Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it….

4) Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state…

Paul Volcker is head of President Obama’s tax reform panel. He should go through the current tax code with Adam Smith as its guide. Streamline the tax code. Flatten out the rate structure. Broaden the tax base. Get rid of the difference between ordinary income and capital gains 9which will eliminate most tax abuses right there). Keep the only the most cherished deductions, such as the deduction for charitable giving.

And Congress should focus on what is good for the average taxpayer rather than the interests of the well-heeled K-Street lobbying gang. Republican President Reagan and Democrat Dan Rostenkowski, head of the House Ways & Means Committee, showed that genuine bi-partisanship can overcome the money lavished by Gucci Gulch on Congress.

Then we could all enjoy the beginning of spring.

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