March 24th, 2012
03:43 PM ET

Zakaria: America needs a 2-page tax code

Editor's Note: Be sure to catch Fareed Zakaria GPS on CNN every Sunday at 10am and 1pm ET.

By Fareed Zakaria, CNN

We’re going to hear a lot of polarized rhetoric over the next few months. The Republicans and Democrats will seem to disagree about everything. But there is one huge and important area where there is a possibility - a possibility - of bipartisan action and that’s tax reform.

Most Americans - Republicans and Democrats - dislike the tax code. They’re right to do so. America has what is arguably the world’s most complex tax code. The federal code plus IRS rulings is now 70,000 pages long. The code itself is 16,000 pages. The statist French, for example, have a tax code of only 1,909 pages - only 12% as long as ours. And then there are countries like Russia, the Czech Republic, Estonia that have innovated and moved to a flat tax, with considerable success.

You have to understand, complexity equals corruption.

When John McCain was still a raging reformer, he used to point out that the tax code was the foundation for the corruption of American politics. Special interests pay politicians vast amounts of cash for their campaigns and in return they get favorable exemptions, credits or loopholes in the tax code.

In other countries this sort of bribery takes place underneath bridges and with cash in brown envelopes. In America it is institutionalized and legal but it is the same thing: Cash to politicians in return for favorable treatment from the government.

The U.S. tax system is not simply corrupt, it is corrupt in a deceptive manner that has degraded the entire system of American government. Congress is able to funnel vast sums of money in perpetuity to its favored funders through the tax code without anyone realizing it.

For those who despair at the role of money in politics, the simplest way to get the corruption out of Washington is to remove the prize that members of Congress give away - preferential tax treatment. A flatter tax code with almost no exemptions does that.

The simplest fix to our tax code would be would be to lower the income tax dramatically, lower the corporate tax, and instead raise revenues through a national sales tax, or a value-added tax (VAT).

The U.S. is the only rich country in the world without a national sales tax. Germany has one at 19%, Britain at 20%, Korea at 10%.

What’s the appeal of a consumption tax?

First, it is efficient. Most studies, including one by the Internal Revenue Service (IRS), suggest that the federal government loses several hundred billion dollars a year to tax fraud. This is much tougher to pull off with a consumption tax. Second, it provides the government with a more stable form of revenue than income taxes. Income taxes fluctuate greatly between boom and bust years. Third, American’s consume too much, often using credit and leverage to do so. A consumption tax would moderate this behavior. Government will always get less of a behavior it taxes and more of what it subsidies.

Ironically, the heavy reliance on income taxes makes the American system more progressive than those in Europe. The federal government gets about 43% of its total tax revenue from taxes on individual incomes and profits, compared with only 29% in Germany and 22% in France. The balance for France and Germany comes from the VAT, which is highly regressive. One recent OECD study showed that the top ten percent in America pay a larger share of total taxes, 45.1%, than do the top ten percent in any of the 24 countries examined. In Germany they pay 31% of the taxes, in France 28%.

But the best thing about tax reform is that it kills corruption. So if you ask me what kind of tax code I am in favor of, I am in favor of almost any new tax code that fulfils one requirement: It should fit on two pages.

soundoff (440 Responses)
  1. cc

    I see no relationship between a flat tax and lack of corruption. I agree that removing the exemptions makes sense but how does a progressive tax cause corruption? A flat tax (whether income, VAT, or sales-these are all flat taxes) benefits the rich and hurts the poor. This is fair? This is the American way? I don't think so.

    March 24, 2012 at 6:55 pm | Reply
    • The Transaction Tax dot Org

      It's not just exemptions, it's exclusions or special treatment. E.g. a person renting a home cannot deduct the rent, but a business can as a "business expense". Many financial transaction don't incur any taxation. See my post above.

      March 24, 2012 at 7:01 pm | Reply
  2. Bert BigDongler

    A sure sign of the apocaplyse. I almost agree with Zakaria. But if we are adding a VAT or national sales tax, we must eliminate the federal income tax. Fareed, look up the fair tax, others have been working on this path for several years now. But it will never pass because the libs have created a society with too many moochers already.

    March 24, 2012 at 6:59 pm | Reply
    • Patrick

      Hey dingdong, what are your sources?
      Who are the "others?"

      March 24, 2012 at 7:22 pm | Reply
  3. Rob

    Your article shows your complete ignorance of the complexity of todays economy and financial instruments. We don't live in a simple world of cash in and cash out. There are complex transactions for which the amount and timing of the tax requires many rules. Think before you write to appeal to the masses.

    March 24, 2012 at 7:01 pm | Reply
  4. Stefan

    I come from a Eastern European country with flat tax and very high corruption. I have lived in US 13 years now and can say one thing – the American people are robbed daily because of the laws that are made just for the rich. I believe this country is much more corrupt than any other 'known-for-its-corruption" country because it is done legally like Fareed says. But that is exactly why this will never change. The rich will keep getting richer and these lobbyists will make sure of that.
    And to misinformed people like Ted – Fareed is from India. Don't confuse names with race or religion. Idiot!

    March 24, 2012 at 7:02 pm | Reply
    • Patrick

      So you say you are European and you go to America, presumably for a better life. You live there for 13 years enjoying the freedom, healthcare, free speech,... And now, you repay your new country with slimy stabs in the back and trying to sow dissent.
      You should go back to wherever you belong, because it ain't here. That's for sure.

      March 24, 2012 at 8:35 pm | Reply
      • Cliff

        Shut up. He's just telling you his experience. Dont be such a pig headed elitist.

        March 25, 2012 at 12:01 am |
      • Patrick

        Cliff, Abdul, hehehe...

        March 25, 2012 at 9:00 am |
  5. edvhou812

    A two page tax code will never happen, and the notion that we have one that is so short shows that Zakaria doesn't know much about taxes. Of course the code doesn't need to be like a phone book, and there needs to be less loop-holes, but lets not go to one extreme in order to get away from the opposite extreme.

    March 24, 2012 at 7:04 pm | Reply
    • The Transaction Tax dot Org

      It won't change as long as people follow the political party leaders and candidates. Once people quit listening to what they want to hear and study different ways to study problems to find the best and then demand it through the ballot box, then change can happen.

      March 24, 2012 at 7:10 pm | Reply
  6. David

    A flat tax would be great every one pays the same percentage no matter what they make and no tax exemptions, and it fits on one page.

    March 24, 2012 at 7:16 pm | Reply
  7. Clandestine

    Fareed, One big flaw in your argument. Reforming the tax code would be up to those very politicians that rely in the current code for their payola. Kinda like asking bank robbers to reform bank security, eh?

    March 24, 2012 at 7:34 pm | Reply
    • The Transaction Tax dot Org

      Find candidates, regardless of party, who will commit to reforming the tax code and vote them into office. If they don't succeed replace them.

      March 24, 2012 at 7:48 pm | Reply
  8. Mike in SA

    I'm absolutely floored. Zakaria finally articulates an opinion that doesn't have more holes than Swiss cheese! Give credit where credit is due...Zakaria finally supports an intelligent idea! Way to go Fareed!

    March 24, 2012 at 7:39 pm | Reply
  9. Art

    A flat tax could have some very drastic unintended consequences. People may start barter trading and practically stop the tax revenue flow which may leave congress out in the cold and they may become burglars.

    March 24, 2012 at 7:47 pm | Reply
    • The Transaction Tax dot Org

      Tax avoidance should have such a high penalty that nobody is tempted. If the rate is so low it is "rounding error" (e.g. The Transaction Tax at 0.35%) it is painless to pay (and automatic).

      March 24, 2012 at 7:50 pm | Reply
      • Art A Layman

        Having spent months haranguing with ATT folks, a few years back, I find it funny the malarkey hasn't changed. While the technological ability to invoke the tax is possible it is a huge undertaking fraught with possible errors along the way. Not being current I wonder what has happened to the "cash" transactions argument. Originally Dr. Feige proposed a punitive rate for dealing in "cash" as it subverts the process. Of the non-business class who is most likely to be "innocently" dealing in "cash"?

        Like it or not, barter transactions will increase. In the US it is often not so much the money saved but the pleasure gained from beating the system. This is also a flaw in Zakaria's thinking.

        If memory serves me, the elimination of FICA, Excise, etc., taxes will be phased in over not necessarily a short period of time. State income taxes was another huge hurdle dependent on numerous variables.

        Feige originally envisioned, preferred, a worldwide ATT. Absent that any number of tax avoidance vehicles are available by trading and earning vast sums overseas, bringing home only that piddlin' amount one desires for living standards.

        As with most "simple answers", simplicity is in the eye of the beholder.

        March 26, 2012 at 9:04 am |
      • Art A Layman

        Pardon me, I stopped too soon. One other issue in the ATT and Zakaria's ideas, and I can hear the cries of "serves them right", is we employ, publicly and privately, tens of thousands of folks working in tax related professions. These are, generally, well paid individuals who will not take kindly to jobs at the local Walmart.

        March 26, 2012 at 9:14 am |
    • Patrick

      The barter system has always been active.
      Ask Harlon Katz to research barter sites using Google and other search engines. hehehe...

      March 24, 2012 at 8:48 pm | Reply
  10. keith1952

    Asking the crooks to beef up security seems a little silly. Congress passes at least one tax law per week. Every one of them are to help some friend or business.

    We will never get honest government as long as we are the United
    States of Graft and Corruption. Revolution is the only answer to such a corrupt system. We will never vote our way to an honest government.

    March 24, 2012 at 7:48 pm | Reply
  11. The Transaction Tax dot Org

    Targeted taxes pick winners and losers. One simple, low, rate.

    March 24, 2012 at 7:51 pm | Reply
  12. jason

    "Simple" tax laws is a code word for regressive taxes. Make the poor pay more, the rich less, increase the staggering rich/poor devoid. You can close the loopholes without making it very "simple" and hence grossly unfair.

    March 24, 2012 at 7:57 pm | Reply
  13. Mike

    I understand that our system is more progressive than many other tax systems, but the proposed tax code here is regressive. The flat income tax would be neutral, but raising taxes via the sales tax system creates a regressive system as the tax on every item is a larger % of poorer American's income than it is on more wealthy American's. Further, the argument that the revenue is more stable is just bogus. A decrease in income leads to a decrease in spending, which would decrease tax revenues proportionately. The only real positive that comes out of sales taxes is that it's easier to track and the government won't miss out on revenue from fraud.

    March 24, 2012 at 8:10 pm | Reply
  14. I'd agree but...

    I'd agree except a flat tax is only simple until you try answering one question: What would be considered income?

    From there it just get's more complicated. What about child support payments? Does the Father pay tax on the income used to make a payment? Does the Mother have to pay the tax on the payment itself? Would I pay tax on business dinners the company pays for me? What about hotel/flight when traveling to do company business?

    March 24, 2012 at 8:14 pm | Reply
    • The Transaction Tax dot Org

      If you quit taxing people's income and consumption and simply tax the movement of money, at an extremely low rate, with no exemptions or loopholes, those questions go away.

      March 24, 2012 at 10:23 pm | Reply
    • Publius 13

      What about the cost of goods sold? What about supplies and salaries paid by businesses.

      March 24, 2012 at 10:57 pm | Reply
      • The Transaction Tax dot Org

        Under The Transaction Tax, those don't matter when it comes to taxes paid. It's simply an extremely small tax rate every time money changes hands. You buy supplies, worth $1000, your account is automatically debited $3.50, the seller is automatically debited $3.50. You pay someone $100,000 in salary, you are automatically debited $350, and the person being paid is automatically debited $350. That's it, no profit/loss/expense/gain calculations - no income tax, no payroll taxes (which currently require $7650 for the employer and $7650 for the employee), etc. no forms to fill out and file, no tax specialists to pay. (If we included health care under the tax, that would save around $8000-10,000+ a year in benefits expense for the same employee.)

        March 24, 2012 at 11:46 pm |
  15. Kumar

    There is another great advantage for such a tax code. Legislators will save the huge amount of time they now spend on tax debates and wrangling.

    March 24, 2012 at 8:23 pm | Reply
  16. Chuck

    Some interesting points, but all superflous until the huge lobbyists representing the legal and accounting "professions" are neutralized/eliminated. Of course we need a simpler tax code. That's been the case for decades. But when a serious discussion arises, it only causes the lobbyists coffers to swell. Those responsible for writing the laws do so only after they protect their own interests.

    March 24, 2012 at 8:35 pm | Reply
  17. Niclas

    I think mr Zakaria is comparing oranges to apples abit to be honest, in the case of germany for example the income inequality is much smaller and the "band" for what you consider middleclass encompass most people, yes there is still super rich and dirt poor people but far more are simply considered well off than in the USA. Add to this germany also has stuff like socialized medicine which provides a safty net without more added cost for a family. The examples mr Z also put up is missleading at best: yes more wealthy americans pay more % wise then wealthy germans but thats only because there is far more wealthy americans and more poor who cannot pay taxes at all, it shifts the burden. Germany does not have that isssue to the same extent, since most people are decent off they all can pay taxes.

    If one started to nest into the root causes of it you somewhere get to the part where in the usa working without a collegge degree simply tends to be to underpaid, when a job pays 8$/hour in the usa but 16$/hour in lets say sweden, the same job you can see why one country works and the other does not. It comes into how capital is piled and dispersed, how capitalism works in reality only for people with a capital they can risk (which excludes the clear majority of american families) money makes more money but only if you have the money to start it more or less. It comes down to how labour is vallued, minimum wage etc etc.

    Personally i dont think there is a or even a 100 quick fixes to get the country on the right keel, usa needs a cleanslate and reboot more or less in its financial and political system.

    March 24, 2012 at 8:35 pm | Reply
  18. Brad

    The Federal Income Tax Law was never ratified by enough states to make it legal. No one realizes this.

    March 24, 2012 at 8:45 pm | Reply
    • Publius 13

      Your left antenna is bent.

      March 24, 2012 at 10:56 pm | Reply
  19. hjkhjkh666h

    Completely remove any income tax, and the whole bureaucracy that goes with it.

    Replace with sales tax. 0% on necessities(unprepared food, rent, utilities, clothing up to $50 per single item, first car(up to $30,000, medical bills(cosmetic or not dont really care), first home up to $1.5 million). Any current or state taxes on any of the excempt items should be removed as well. Apply a tier 1 sales tax on other things, prepared food(ie all restaurants), liquor/tobacco/any other legal recreational drug, entertainment(games, cds, phones, computers, movies, concerts, you name it). Lets say any item under $5000 gets the tier 1 tax(off the top of my head cant thing of anything that would need to be an exception). Most things 99% of the people buy would fall under the tier 1 tax And a tier 2 sales tax that is DRASTICALLY higher on luxury items yachts, 2nd+ homes, private airplanes, all that kinda stuff. Apply the same tax on any imports, so you cant go across the border and buy it instead. I dont know want percentage the tier 1 rate should be, someone woudl have to crunch the numbers and find out, 10-20% is likely. Tier 2 rate should be more like 25%-1000% on a sliding scale based on the cost of the item(a million dollar item should be taxed a lot higher then a $50,000 item).

    Flesh that out onto 2 pages and done!

    March 24, 2012 at 8:46 pm | Reply
  20. roy

    Currently our 2-page tax code is pretty simple : page 1 for middle class who pay everything and page 2 for the rich who hide behind loop holes and built-in tax breaks.

    March 24, 2012 at 9:26 pm | Reply
    • Tr1Xen

      Oh, actually I think you mean the rich who pay much, much, much higher taxes than most of us do. You've been listening to too much Occupy rhetoric!

      March 24, 2012 at 9:43 pm | Reply


    March 24, 2012 at 9:29 pm | Reply
    • Julnor

      Uh, your CAPS LOCK is on.

      March 24, 2012 at 10:17 pm | Reply
  22. Tr1Xen

    Herman Cain knew what he was talking about with his 9-9-9 plan, which included a 9% federal sales tax. I think it's a wonderful idea, although it's unlikely to happen any time in the near future. After all, politicians tend to look out for their own interests first.

    March 24, 2012 at 9:40 pm | Reply
  23. Mike Rotchitches

    Fareed is an advocate for the NWO: World Bank, IMF, etc.. He can't be trusted.

    March 24, 2012 at 9:48 pm | Reply
  24. Les

    Taxes are like weeds - no matter what variety, they will grow. Current system is broken but in play/stable. As stated before me, it all comes down to "what" that tax is calculated on. So, a flat consumption tax of 10%. Taxpayer A, single/young, makes $5M, spends $1M to live and pays $100K in taxes versus Taxpayer B, married with 3 kids, makes $30K, spends everything he makes and pays $3K in taxes. Since this seems unfair/regressive, you start giving exemptions or exempting low income levels or number of kids and once again, the weeds are growing...... No good answers but good spirited conversations... And all this during one of the lowest income tax rate structures since the 1950's..... The future does not bode well.....

    March 24, 2012 at 10:03 pm | Reply
    • AJ

      I prefer not using the word "unfair" in these discussions since its so individualized. Everyone has such a different definition. Les – In the situation you described, I don't feel your original case is such a bad outcome. Life is about choices and I feel the government shouldn't penalize or reward people's life choices nor force people to pay for other's choices. In the case you present, I don't think Taxpayer A should have to pay a higher percentage of taxes because of the life choices of Taxpayer B. Now if we feel Taxpayer B or others like him needs help, that can be handled by strengthening the safety net but I don't think we should force Taxpayer A to pay more.

      March 24, 2012 at 10:33 pm | Reply
      • Taxman

        But AJ, if you look at the numbers, Taxpayer A paid 2% of his gross income via the flat 10% consumption tax whereas Taxpayer B paid 10%! I think Mark Twain had it right about "lies, damn lies and statistics...." I just don't see a consumption tax working in favor of the lower middle class or hard working lower income Americans. And I agree that once you start "playing" with the rules, you're back to square one. Personally, I don't like the current system but I don't see a better one that is without it's own set of problems and faults.

        March 24, 2012 at 11:54 pm |
      • AJ

        Taxman – I agree with you, that the poor and middle class will end up paying a larger % of their earnings in taxes. i misread his comments on the consumption tax as a commentary on income tax. Although, i would say this that i would prefer a consumption tax that had that outcome (as described by Les) vs a consumption tax that then allowed numerous exemptions on goods and income.

        March 25, 2012 at 12:34 am |
      • garyschnid

        I don't see what is unfair about a VAT (federal sales tax). Those with money will buy more "toys" and thus pay more in taxes. This applies to NEW goods, so if you are buying at a second hand, you wouldn't be paying the tax. The working poor don't have the disposable income will only buy what they need and pay the least in taxes, where the wealthy will be paying more. I am not sure how foreign and internet purchases would come into play on this. As for the percent creaping up, there is a tipping point where the tax becomes too much and people will stop buying. A consumption tax would slow the economic recovery, and promote savings once again. I am unsure if this is a good thing at the moment. There are already people avoiding state / federal taxes by traveling to other areas to make their purchases. I read an article the other night about southern California people traveling to Mexico to buy gas since it is in the $1.50 range per gallon. If you live near a border, you have that luxury.

        March 25, 2012 at 12:53 am |
  25. Taxman

    Let me be first to thank the 22 year old Congressional staff members who currently write the tax code and regulations, the IRS for their incomprehensible explanations thereof and the federal tax court rulings for making the U.S. income tax system as complex as it is today, thus affording me and many other CPAs the opportunity to make a living in a completely unnecessary field, especially when those 22 year old staff members ignore the ever present "Law of Unintentional Consequences"......

    March 24, 2012 at 10:11 pm | Reply
    • Julnor

      300 million Americans will always find a way to outsmart 535 Congressmen.

      March 24, 2012 at 10:33 pm | Reply
    • Publius 13

      If you were really a CPA, you would know that:

      1. The Joint Committee on Taxation, which writes all tax legislation, is not staffed by 22-year olds. The JCT staff is highly educated, experienced, and dedicated.

      2. Regulations are written by the Treasury.


      March 24, 2012 at 10:54 pm | Reply
  26. Julnor

    While the VAT has the advantage that EVERYONE will pay taxes, I cannot agree with it. First, America is a free country. Tax my income, not what I choose to do with it. Second, the US is a consumer economy. When you tax something you get less of it. A VAT means less consumer spending. And, most importantly, third, a VAT would be like giving a big ol' pile of cocaine to a bunch of crack heads. The VAT would just creep up and creep up. You'd never actually know how much you pay in taxes, so adding another 1% won't make a difference. It would start at 15% and be at 25% before you know it. Just a bad idea.

    March 24, 2012 at 10:14 pm | Reply
  27. Julnor

    The tax code is complex for one reason: accountants are the only people who can scrw lawyers and most Congressmen are lawyers. Think about it. It's true.

    March 24, 2012 at 10:15 pm | Reply
  28. sgurdog

    I am totally in favor of a simpler tax code. But I am not in favor of a regressive system that would shift more of the burden on those who make the least. Given the potential for wealthy investors to shop internationally for products or services with lower taxes, how patriotic of a system would that be? One could simply make his money in the US and spend it elsewhere and generate tax revenue for that country. Would investment income be treated as income or would it be considered a purchase of financial products? I am in favor of leveling the playing field and removing so many unfair exemptions that penalize people like me for not having children or for being a renter instead of an owner of property. I have friends at work who make more than I do but who actually get a tax refund in the thousands where I am left owing several thousand more to subsidize their refunds. That's not fair, that's not right.

    March 24, 2012 at 10:28 pm | Reply
    • Julnor

      I agree with you. This is a free country. You are free to make your own choices about how you live your life. Your choices in life should affect your taxes. That includes how you spend your money. Tax my income, not what I choose to do with it. No VAT.

      March 24, 2012 at 10:32 pm | Reply
      • Julnor

        Typo: Your choices in life should NOT affect your taxes.

        March 24, 2012 at 10:39 pm |
  29. Julnor

    With the VAT, you will never know exactly how much you pay to the federal govt (unless you tally every receipt for an entire year). That is a very dangerous thing for a taxpayer.

    March 24, 2012 at 10:35 pm | Reply
    • Publius 13

      Julnor, you don't know how much federal tax you're paying now. I didn't agree with Ronald Reagan on much, but he spoke the truth when he said this: "Corporations don't pay taxes. Only people pay taxes." And unlike Romney, Reagan didn't believe corporations were people. The point is, all corporate taxes, of all kinds, are passed through to the consumer. No difference from the VAT. You may or may not have a point about the danger of not knowing how much tax you are paying, but in that regard, a VAT is no better or worse that our current system.

      March 24, 2012 at 10:47 pm | Reply
      • Julnor

        You are correct that corporations don't pay taxes, they merely collect them. However, that tax is extremely indirect and based upon how well a company is run. A VAT is a direct tax on me, one that would be far more onerous. If a company makes 10% profit on a sale and they pay 35% tax, that's still only 3.5% and typically it would be far less.

        March 24, 2012 at 11:03 pm |
      • The Transaction Tax dot Org

        And you can choose not to buy that corporation's product!

        March 24, 2012 at 11:48 pm |
      • Patrick

        Once upon a time, the corporate income tax generated a significant share of tax revenues; now, it’s bumping along in the 2%-of-GDP range. Yes, the marginal rate of corporate income tax is high, at 35%.

        March 25, 2012 at 8:17 pm |
  30. Julnor

    Instead of a VAT, a better suggestion is to have two new taxes. One is equal to one ten billionth of federal spending (not including SS and Medicare which have dedicated tax streams). The other is equal to one one hundred billionth of the federal debt. The first is about $250, the second about $150. They would be due on October 15 and every American 18 and older would have to pay. This is six months from the income tax and 3 weeks before election day. We need a tax that has a direct link between spending, debt and our wallets. Only then will there be an incentive to reduce both. If you get money and services from the govt and don't pay income tax, why wouldn't you want more spending?

    March 24, 2012 at 10:39 pm | Reply
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