Economists Slemrod (Univ. of Michigan) and Bakija (Williams Coll.) provide a sometimes dense but mostly easy-to-read road map of the US tax system.
The authors discuss the progressivity of the graduated income tax in great detail, explaining how it yields more revenue than corporate taxes, penalizes savings (by taxing interest), and can be considered superior to the flat tax (which is simpler but not progressive) but inferior to the value-added tax (or VAT, widely used in Europe) because of its complexity and many loopholes. Readers, especially conservative ones, will be surprised to hear that there is no direct link between tax rates and prosperity. Rates in the US haven’t changed much over the past 50 years, even during periods of stellar growth, whereas in Europe (where taxes are higher) growth has often proceeded ahead of the US. Slemrod and Bakija also outline factors most laymen don’t consider when discussing (or complaining about) the topic. Any discussion of tax reform, for example, has to take into consideration what it costs to comply with the rules as well as how much we spend enforcing them. Taxpayers blow around $100 billion a year figuring their taxes; the IRS has a budget of $8 billion. Given these figures, policymakers and legislators (and, by extension, the voters) must be held to blame for the nation’s tax woes, not the IRS. The authors’ prescriptions for reform are myriad and leave no clear avenues. The efficiency of the flat tax might (but probably won’t) compensate for its regressive nature. The VAT in theory is cheaper to enforce than the income tax, but in Europe it costs the same or more. A national sales tax appears very easy, but it would break the economy. It’s possible to catch oneself reading but not comprehending the extended proofs that accompany these proposals. Given the usual opacity of the subject, however, Slemrod and Bakija are as clear as glass.
A fair-minded exposition of a politically loaded subject.