Why a Broader Tax Base Gives America an Economic Free Lunch
Income taxes create a tough situation for America. We need to raise money for important government services, but high taxes kill job growth and leave everyone with less money overall. What if we didn’t have to choose? What if we could fund the government while charging everyone a lower tax rate? While this might sound too good to be true, it’s possible if the tax base is broadened.
What Does That Mean?
The tax base is the total amount of assets and revenue, such as income, taxed by the government. The total amount of taxes the government raises each year is calculated by multiplying the base by the government’s tax rates. For example, if the base is $10 trillion and the government charges 20 percent for taxes on average, the government would raise $2 trillion a year in funding.
This equation creates two methods for the government to raise more money: increase tax rates or increase the tax base’s size. When the base grows, the government can raise the same amount of money while charging lower rates, in essence creating a “free lunch.” In the example above, if the country grew its base to $20 trillion, the government could cut its average tax rate in half to 10 percent and still raise the same amount.
There are three ways to grow a tax base:
1. Remove Deductions to Simplify the Tax Code
Tax deductions put a huge dent in the American tax base. A deduction reduces a person’s or company’s taxable income, and the tax code is full of complicated and unnecessary tax deductions. Not only do they shrink the base, but they also make filing taxes so difficult that many people need to hire a professional to help them.
By getting rid of tax deductions, the U.S. could greatly expand its base. Rates could be lowered to offset the loss of deductions, and people would pay the same amount in taxes but through a simpler process.
2. Go After Tax Evasion
Another problem with the tax code is that revenues go unreported when people try to avoid taxes. Lowering rates and simplifying the tax code would reduce tax evasion. How? First, lower rates would lessen the benefits of tax evasion, causing more taxpayers to report rather than risk facing criminal charges. Second, a simpler tax code would free up IRS resources. The IRS spends much of its time communicating with taxpayers about complicated deductions. If taxpayers were able to file simpler returns, the IRS could put its resources toward going after tax evaders instead.
3. Grow the Economy Through Tax Cuts
If the economy grows, the base also grows because there is more income. Cutting taxes would help in this regard. Business owners would have more money to invest in their companies and hire workers. The U.S. would see a surge in business activity, and the larger base would help the government raise additional revenue—even at lower rates.
The government doesn’t have to sacrifice growth to raise taxes. With this simple, three-step approach, the U.S. government could be well on its way to a broader tax base and the economic benefits that come with it.