海角大神

Republican presidential candidates say they want to slash the tax code. It is too big, too complicated, and too laden with provisions to help special interests. They are right. But in today鈥檚 world, cutting the statute to a few pages would only result in ceding massive new authority to the Treasury Department and, gasp, the IRS. And somehow, I don鈥檛 think that鈥檚 what these candidates have in mind.

Presidential hopeful Carly Fiorina wants to shrink the revenue code to three pages from what she says are 70,000. 鈥淲e need to actually reform the tax code,鈥� said in the Republican debate the other night. 鈥淕o to a three-page tax code.鈥�

Another candidate, Senator Ted Cruz (R-TX), has a slightly different version of the same trope. He says, 鈥淭here are more words in the IRS code than there are in the Bible and not a one of them is as good.鈥�

They are both reliable applause lines. Cruz may have lifted his from yet a third candidate, Louisiana Governor Bobby Jindal, who according to the聽Washington Post鈥檚聽Michelle Ye Hee Lee, used it back in 2005.

Let鈥檚 leave aside the matter of whether the words in the Bible are as 鈥済ood鈥� as those in the Internal Revenue Code. I鈥檓 not going there. And let鈥檚 stipulate that the big point Cruz, Fiorina, and Jindal make is correct: The tax code is too complicated, and often needlessly so.

But could we get the code down to three pages? And, if we could, what would happen?

Let鈥檚 start by clarifying some language. When my lawyer friends say tax code, they mean the statute itself, not the regulations, letter rulings, legislative history, and court decisions that accompany the code. In a 2014聽Tax Notes聽article, Andrew L. Grossman, legislation counsel for the Joint Committee on Taxation, reported the actual tax code was less than 3,000 pages, not the 70,000 pages in the CCH Standard Federal Tax Reporter.

Fiorina would probably say I鈥檓 missing the point. Even 3,000 pages are way too many. And we can get it down to three. As evidence, she points to language drafted years ago by Bob Hall and Alvin Rabushka, authors of a well-known flat tax.聽Their plan, first developed in the early 1980s, was a 19 percent consumption tax collected from individuals (after a large personal exemption) and all businesses. It repealed all tax preferences.聽聽Here聽is their three-page code if you鈥檇 like to read it.

Their tax is certainly simple. But it is simple because it has no individual and few business deductions. Would voters be willing to swap their deductions for mortgage interest, charitable giving, state and local taxes, etc聽 for three-page tax code they'd never read? I鈥檓 not so sure.

And keep in mind that the vast bulk of today鈥檚 law governs the taxation of businesses, not individuals. And businesses are very complicated.

Let鈥檚 take one small example.

The Hall-Rabushka code says this:

聽聽聽聽聽聽聽聽聽聽Sec. 105. Business taxable income defined

Business taxable income is business receipts less the cost of business inputs, less compensation paid to employees, and less the cost of capital equipment, structures, and land.

And this:

Sec. 103. Cost of business inputs defined

(a) In general. The cost of business inputs is the actual cost of purchases of goods, services, and materials required for business purposes.

Seems straight-forward enough. But here鈥檚 a question that might be familiar to Mrs. Fiorina from her CEO days: What does 鈥渁ctual鈥� cost mean? Is it market price? Or some artificially high price paid to a related party in order to maximize the deduction?

It isn鈥檛 hard to imagine the disputes between companies and the tax collector over that one six-letter word. If it is not defined in the law (bye-bye three page code) it will inevitably be defined by regulation, litigation, and other interpretations. Indeed, firms and the IRS have been battling over this very issue, called transfer pricing, for decades.

Similarly, the Hall-Rabushka code says this:

Sec. 301. Exempt organizations

Organizations exempt from the business tax are (1) State and local governments, and their subsidiary units (2) Educational, religious, charitable, philanthropic, cultural, and community service organizations that do not return income to individual and corporate owners

You may have noticed that there has been something of a debate in Washington about what qualifies as a tax-exempt organization. Indeed, a group of House Republicans wants to impeach the IRS commissioner because they so strongly disagree with the way the agency chose what political organizations are exempt. But in the absence of a clear statute, the IRS would end up with聽more discretion.

And therein lies one horrible case of unintended consequences.

If the code does not define what 鈥渁ctual cost鈥� or 鈥渆xempt organization鈥� means, it inevitably will be left to the regulators or the courts. 聽It would take thousands of pages of regs for the IRS to enforce a short--but vague鈥攕tatute, for compliant taxpayers to understand their obligations, and to prevent abuse by those who would cheat.

Fiorina might keep her pristine three-page tax code. But the price she鈥檇 pay is granting vast new power to regulators and judges. I鈥檓 not sure she, or many GOP voters, would think that鈥檚 such a great idea.

The post聽Could We Get the Tax Code Down to Three Pages? Why Would We Want To?聽appeared first on聽TaxVox.