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 (439 Responses)
  1. Mike

    FairTax = HR 25 & S 13.

    March 25, 2012 at 10:17 am | Reply
  2. WhackyWaco

    Zakaria is a lame brain.

    March 25, 2012 at 10:17 am | Reply
  3. Chris R.

    I agree! Our tax system is WHY to complicated, but that is the way our government likes it. That way, they can put in as many loop holes for those they want to give breaks to. A simple system is way to easy and makes to much sense. Our current government does not have the capability to see this or the will to change to an easy, simple, and short tax system that saves Americans money by decreasing the size of the IRS, and a fair system to where EVERYONE pays their fair share regardless of income, influence, or connections. Sorry, our government is broken and no longer effective so it won't happen.

    March 25, 2012 at 10:18 am | Reply
  4. Sam L.

    I actually disagree. The current income tax and its exceptions are largely what encourage philanthropy in our country. We would see much less of it with a sales tax.

    March 25, 2012 at 10:51 am | Reply
    • leopard19

      Sam l – I think I see your point but if you want to encourage philanthropy why not advocate for minimizing taxes and then let people contribute their windfall to whatever charity they want? Answer: You want to force other people to contribute instead of letting them decide for themselves. The people just cannot be trusted.

      March 25, 2012 at 11:23 am | Reply
    • xavi

      That complicates the issue. If you want to be philanthropic, you can do it on your own.

      March 25, 2012 at 12:37 pm | Reply
  5. Dave USN RET

    Tax code for personnel income tax.

    Total all imcome, earned and un-earned, Send in XX%.

    March 25, 2012 at 10:51 am | Reply
  6. Punisher2000

    All of you worried about copying someone else, consider this: Knowing that nothing is perfect, if you have to choose a system, wouldn`t you choose the system which will cost less to maintain, while decreasing or eliminating all loopholes? If your answer is no, perhaps you should ask Scotty to beam you to anther Planet.

    March 25, 2012 at 11:14 am | Reply
  7. leopard19

    So far so good Fareed...but I notice that you stop before giving us your the rest of your opinion, which is to implement a VAT so that everybody pays, except that then there will be some convoluted refund= give away = vote-buying-pay-off to the "dis-advantaged" poor souls who can't afford to pay the VAT. And then we are right back where we started with coruption – except that now we have an additional revenue stream that can be corrupted and will simply feed the bloated fed gov.

    March 25, 2012 at 11:15 am | Reply
  8. markmark1

    Also, instead of payroll deductions, citizens should have to pay their taxes at the end of the year in a lump sum payment to the IRS. This will bring much needed focus to exactly how much money each individual pays in taxes. Right now people get their "refund" and think its a bonus because they never really know how much they paid out all year long. Sure its on your pay stub, but it doesn't really sink in until you have to write out a check.

    March 25, 2012 at 11:31 am | Reply
    • Eugene Patrick Devany

      Paying taxes is never hard for those who can afford it. Do you expect the guy living hand to mouth to write a check just to feel some political pain?

      March 25, 2012 at 2:15 pm | Reply
  9. Optimus Prime

    You say that 50% of the people don't pay income tax. This shows that you do not know how the tax works.

    The income tax is a hidden tax passed on to the consumer by the business community.

    When a business figures its costs in determining the pricing of its goods or services, the income tax it projects it will pay is one of the costs.

    March 25, 2012 at 11:38 am | Reply
  10. Pat

    finally something Zakaria and I can agree on.

    March 25, 2012 at 11:47 am | Reply
  11. Jim

    2-page tax code (The 1st page being a picture of something)

    Flat 10% across the board!
    No tax breaks for rich OR poor.
    Noo more social engineering by means of tax break rewards.
    ex:
    1) Have more kids and get more money from the government!

    no breaks for anyone means no possibility of corruption.

    March 25, 2012 at 11:57 am | Reply
  12. Dan

    Where on the 2 pages are you going to have the information for filing the hundreds of possible miscellaneous reports such as form 8938 (foreign financial assets) or form tdf 90-22.1 (foreign bank accounts) or even schedule C for self-employed persons including tip income?

    March 25, 2012 at 12:09 pm | Reply
  13. stateschool

    Yes, by all means, let us follow Estonia and the Czech Republic into a brighter future. Coming soon from your government: The Tax Code for Dummies (that's you). Complete with scenes like, "Hey, you, the mother of four whose husband just got killed in that car accident that took your legs! Yeah, you! No exceptions, pay up or move out!"

    March 25, 2012 at 12:15 pm | Reply
  14. Jason

    I dont know why you people are arguing about this. the people who would be the ones changing the tax system are the same ones that have EVERYTHING to lose by changing it (politicians). Nothing will happen, whine all you want but career pol's are not going to do something to destroy everything they've built for themselves.

    March 25, 2012 at 12:30 pm | Reply
  15. Ron

    Fareed writes: "You have to understand, complexity equals corruption."

    Of course it does, that's why the US tax code has been written that way. Like the designers have told us in other segments of our daily lifes, "let the industries regulate themselves" because that is what works best – yeah, for the industries.

    The funniest thing about the US tax code, which isn't funny at all, is that there is not one single person that understands it all. Again, by design. Take real estate, take health care... there isn't much left that the so-called "job creators" (mega-corps, the super-rich, and their lobbyists) haven't messed with to make American lives more difficult and more expensive. The entire point of US-style capitalism is the transfer of wealth. And when it comes down to it, comparatively speaking, taxes are easier to figure out than most of the other stuff.

    March 25, 2012 at 12:39 pm | Reply
  16. clnee55

    This is an impossible dream. There is no way the corrupted congress will vote themselves out.

    March 25, 2012 at 12:51 pm | Reply
  17. J Geheran

    The goal for filing income tax ought to be the back of a post card, i.e., total income x 15% = tax due. No national VAT.

    March 25, 2012 at 12:57 pm | Reply
  18. Brian D Heaton

    A flat tax and consumption tax is not "regressive." It is equal for all. If all income is taxed at the same rate for all Americans, then we tax all Americans equally. What is wrong with that? Last I checked, I don't get an extra vote for my higher tax bracket.

    March 25, 2012 at 1:05 pm | Reply
    • Don

      What's wrong with it is that we'd still be taxed!

      March 25, 2012 at 1:08 pm | Reply
      • Brian D Heaton

        Taxes are necessary to operate the government and provide services. The extent, distribution, and efficiency of those services is another debate for another time.

        My statement is simply that equal taxation is not "regressive." That is an evil sounding word applied by pundits wishing to push an agenda. Consumption taxes are inherently equal. If person A buys a widget for X cost, they pay the sales tax on that widget. If person B buys the same widget as the same price, they pay the same tax. You can't get much more equal than that.

        Yes, there are income inequalities in the world and in the US. So what? That is how the world works. Attempts to equalize income by takings of property (including wealth) smack of Marxism. We all should know how well that tends to work out.

        March 25, 2012 at 1:56 pm |
      • toogaloom

        How do you expect to drive on roads, have lightpoles maintained or fund a military if no one is taxed?

        March 25, 2012 at 2:07 pm |
      • Don

        Government is evil and unnecessary. Everything should be private. Government is based upon the initiation of force, which makes it no better than someone who robs you at gunpoint.

        March 25, 2012 at 7:08 pm |
  19. TaxPerks

    "Perks" can be taxed. If a corporate exec has the prestige of a private jet perk, that perk has a reasonable dollar value. It is a known fact that dollars do not need exchange hands for a valuable perk to exist. Another kind of perk is the prestige and fame that comes from being a major news anchor or commentator. To the people who pursue such careers, getting the attention they personally crave is worth more than gold. It could all be evaluated, assessed for income-related purposes, and taxed. The value could be, literally, in the millions. Tax it.

    March 25, 2012 at 1:29 pm | Reply
  20. 2-4-8 Tax Blend

    Zakaria is, "in favor of almost any new tax code that fulfils one requirement: It should fit on two pages". The 2-4-8 Tax Blend with the same rates for rich and poor meets the test.

    For the first time in history we have the technology which can fairly and easily tax net wealth, raise more tax revenue and jump start the economy. While a 5% individual net wealth tax could replace current revenue, a modest 2% wealth tax combined with an 8% income tax would produce the same revenue and permit workers to take home 92% of their income – (real consumer power). Rich and poor would pay the same rates for the fairest system on the planet.

    Business tax reform is also needed to shift the economy into high gear and to raise some additional revenue. A 4% tax on $10 trillion in sales would yield another $0.4 trillion in revenue and permit a reduction of the corporate income tax rate to 8% (with no loopholes).

    Capital gains, estate and gift taxes would not be necessary. Qualified retirement funds would retain a tax exemption until withdrawn so that seniors could preserve a modest retirement.

    March 25, 2012 at 1:41 pm | Reply
  21. dabble53

    Two pages is WAY too long. Want a simple and fair tax code? How about this.
    Every person gets a personal deduction (figure $20,000, adjusted for inflation each year).
    All income is treated the same, regardless of source. (I.e., capital gains and dividends are the same as earned wages, including any from foreign investments and business dealings. Corporations are now considered people, so all rules apply to them as well.)
    15% tax on income above personal deduction up to $500,000 (pick a number), then 30% on all above that. You get credit for any taxes paid to a foreign country, but you don't get out of taxes altogether.
    Businesses deduct reasonable costs of business (wages, materials used in manufacturer, etc., pretty much like now, but upper management pay in excess of 10 times the lowest worker hourly wage is not deductible. You can still pay it, just can't deduct it as a reasonable cost of business.)
    If I write small, I can even fit it all on a 4×6 note card.

    March 25, 2012 at 1:55 pm | Reply
  22. tacc2

    The other nice thing about a tax on consumption that isn't mentioned in the article is that a consumption tax will be able to tax black market money. If I make my money on the black market, right now, I don't pay any federal taxes. Only state and local sales taxes when I use the black market money to buy things. A national sales tax would collect billions on currently tax free money.

    March 25, 2012 at 1:57 pm | Reply
  23. George Hunt

    My respect for Frareed's intelligence dropped a notch today when he stated that the US tax code is more progressive than Europe's because the richest 10% pay a larger share of total taxes than they do in any of the other nations surveyed. This is a failure of logic, as it neglects the fact that the US also has the least equal income and wealth distributions among those countries. Our richest pay more taxes because our richest are MUCH richer. Note in the list of countries, among the least "progressive," by Fareed's definition of spreading the tax burden, are Scandinavian nations where income equality is highest in the world. Anyone not grasping this concept?

    March 25, 2012 at 2:02 pm | Reply
    • Mike

      The US tax code IS more progressive than Europe's. It relies more on income tax, which is progressive, than consumtion taxes, which are regressive. High income earners bear a higher percentage of the tax burden in the US because more US government revenues come from income taxes. It's not a failure of logic, it's logic.

      In this case the word "progessive" doesn't mean "liberal," it means that higher tax rates apply to higher tax bases.

      Income inequality isn't something that governments should be "fixing" anyway. More government means more corruption and less freedom, even when the additional government is created in the name of "equality" or "fairness."

      March 25, 2012 at 2:25 pm | Reply
      • George Hunt

        Mike, thanks for your reply. I see what you're saying; my comments pertain to income, not to taxation. You're clarifying what FZ said, that our tax policies are more progressive, whereas I was introducing income and wealth distribution into the discussion. I still think his list showing the share of total taxes paid by the top 10% in 20+ nations is deceptive for the reasons I stated - they leave one with the impression that the reason for this discrepancy is entirely due to tax policy. It isn't. If we had a tax system identical to that of Sweden, the richest 10% would still be paying a much larger share of total taxes than they do in Sweden because our richest are much richer relative to theirs. Inequality of income/wealth always results in inequality of tax revenue. Whether or not governments should address income equality is a huge issue so I won't get into it here.

        March 25, 2012 at 2:53 pm |
  24. toogaloom

    Can someone explain this claim that 50% pay no taxes? I ran a business and had to withhold income and submit tax payments for every employee, no matter how much they made, to cover FICA and federal payroll taxes. Even unemployment benefits are taxed. So, who exactly are these 50% – or is that claim just cherry-picked political spin? Thanks for any clarification.

    March 25, 2012 at 2:02 pm | Reply
    • Brian D Heaton

      For 2009, approximately 47% of American taxpayers paid no personal income taxes. For those taxpayers, any taxes withheld would likely have been refunded when a return was filed. It is important to keep in mind the difference between "Taxpayers" and "Americans." You can find the stats on the National Taxpayers Union web site among other.

      March 25, 2012 at 2:12 pm | Reply
    • Mike

      The claim is that 50% of Americans pay no income taxes. Income taxes and payroll taxes aren't the same thing.

      March 25, 2012 at 2:14 pm | Reply
  25. Mike

    As usual, Zakaria's preferred solution involves more government. Giving government another tax to raise only creates more opportunity for corruption and as Zakaria points out, a consumption tax is highly regressive.

    What's even more interesting is that Zakaria recognizes in this piece that the complexity of a government program leads to government corruption, but he still wants the US to have a Medicare-style health care system for all Americans. Why doesn't he see the opportunity for corruption in that idea?

    March 25, 2012 at 2:12 pm | Reply
    • George Hunt

      I got the impression that FZ was arguing for LESS government, by simplifying the tax code, getting rid of the schemes used for corrupting policy and policy-makers; he came out in favor of a flat tax! That was startling for me, as it is generally considered to be a very conservative point of view. As for a VAT tax, raising and lowering it would affect so much and would be so blatant, and it would affect everyone, it's simply not possible to use a political toy. Once a rate is established, changing it is a monumental feat. Lastly, I don't think a VAT tax would be regressive at all if certain necessities are exempt. At the very least, food should not be taxed. Of course I'm just guessing, it would be another matter to prove my assertion by crunching numbers!

      March 25, 2012 at 2:46 pm | Reply
      • Mike

        I agree that a flatter tax code is generally a conservative point of view, but I don't think many conservatives would agree that we should add a consumption tax to a flatter income tax.

        I don't think I would agree with your point that changing a VAT rate would be very difficult, though "difficult" is a relative term. I think changing the rate would be easier than establishing a VAT in the first place, and I think raising a VAT rate would be easier for most politicians than cutting spending.

        I agree that a VAT could be made less regressive by making certain things exempt, but then you create the same opportunity for corruption that already exists in the tax code. Politicians will trade VAT exemptions for votes, and the people who lack political influence will end up paying a disproportionate share of VAT.

        March 25, 2012 at 3:32 pm |
  26. Neeneko

    The problem is, simplicity also results in corruption. Simple solutions usually end up getting really complicated as people start to ask exactly what parts mean, and find ways to make sure that their wealth falls outside the 'simple' rule.

    March 25, 2012 at 2:17 pm | Reply
  27. John Moormans

    Wow, that's actually unlucky! You really need to do the groundwork and study these tax debt relief firms before employing one. I stumbled across ConsumerTaxReports.org, which really lays it all out available for you: company web pages, Better Business Bureau ratings, ordinary charges ... When you have to pay the Internal Revenue Service, you must consider their website (http://www.consumertaxreports.org). I do think it'll definitely guide you straight!

    March 25, 2012 at 2:22 pm | Reply
  28. sarahseaver

    Thank you, Farheed, for pointing out how the current tax code is a form of corruption. This is the first time I have heard this association, but I agree completely.

    Another aspect of the current tax code is that tax of time on me as a business owner to do the financial tracking, reporting, research and time with a tax agent. I am further taxed the cost of the tax agent because I can't possibly know all that I need to for doing the taxes. I favor the flat tax VERY much.

    I thought that there is a law against double taxation; but it seems to me that there is double, triple or quadruple taxation on an individual's income. When the federal government gets paid, say 30% of income (for a renter), then self-employment tax, gas tax and phone tax, aren't these all going against the same income?

    I disagree that a national sales tax is the way to go, You make business owners tax collectors and put a whole new burden of tracking and reporting on them. Also, you provide a strong incentive for smuggling. With income taxes, income is also used as a basis for loans -; loans for housing or business or stock margin limit - so there is a counter-balancing force for income reporting. I don't think there is any counter-balancing force for trying to buy things without paying sales tax. I'm familiar with the academic position that VAT is the best taxation strategy but I don't agree. It's a case of ivory tower thinking that does not consider all forces involved, does not consider common sense.

    I would like to see a law that sets a ceiling on taxation.

    March 25, 2012 at 2:23 pm | Reply
    • Patrick

      Sarah, Sara habibji, nowhere in the 4 times Fareed wrote the word "corruption" did not say that "the current tax code is a form of corruption."
      1. "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."
      2. 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.
      3. 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.
      4. But the best thing about tax reform is that it kills corruption.

      Reread the article, and, if you need help understanding the meaning implied, ask me.

      March 25, 2012 at 2:53 pm | Reply
    • Art A Layman

      Fareed, in suggesting the tax code causes corruption minimalizes the issue. Agree the tax code is an easy vehicle for corrupt people to practice corruption but if one is inclined toward corruption another vehicle will surface whenever one is eliminated.

      Many of the supposedly "corrupt" provisions in tax law were not established to enable corruption. Though an arguable issue, in itself, many provisions were put there to incentivize presumably preferable behavior or to mitigate perceived unfairness or, most importantly, to close loopholes. It is the province on Congress to write equitable tax laws and the province of business and wealthier individuals to find ways around those tax laws.

      The concept of progressive taxation is justified in the works of Adam Smith, considered by most the founder of "free market" economics. One has to ass-u-me Fareed is familiar with those works but his premise belies that assumption.

      I chose your response to reply, lucky you, because you mention you are a business owner and you complained that self-employment taxes are "double taxation". If your business reports as a Sub-S Corp and you are a shareholder-employee you do not pay self-employment taxes on the net profits of your company. Yes, you do pay FICA on your wages along with your company but it has long been the practice of Sub-S companies to hold down wages to shareholder-employees to minimize total payments into the SS system. Of course many other, personal type, bennies are available to you. Does your company provide you a car? Do you belong to social organizations the dues for which are paid by your company? Are those "heinous" fees you pay your tax agent packaged such that the business deducts the entire fee? Your non-shareholder-employees enjoy no such benefits.

      Leading to: the bulk of the work your tax agent does is involved in calculating your business net income and that responsibility will not go away, even under a flat tax. The actual tax calculation is a piece of cake once your net profits have been ascertained, even under existing tax laws.

      All in all, is it possible: Thou "doth protest too much"?

      March 27, 2012 at 9:16 am | Reply
  29. coastlinecascot

    Although I agree 90 percent with this author. My opinion is the government will reform the income tax, start VAT. We will rejoice. Several years later the tax code will again start to morph into the monster it is now. So then we will be in the same situation we are in now, however have a VAT on top of it. Congress and the A...holes in government cant stop spending. The VAT will just drive us poorer while they keep spending.

    March 25, 2012 at 2:45 pm | Reply
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