Journalist T.R. Reid has made a career out of traveling the world, looking for best practices in other lands. His latest journey — some might call it a junket — was to find the world’s best income tax systems and report them back to the home of tax revolution — the No-Taxation-Without-Representation United States of America.
With Tax Day around the corner, there’s no better time to visit Reid’s new book, “A Fine Mess: A Global Quest for a Simpler, Fairer, and More Efficient Tax System.”
PBS NewsHour’s Paul Solman talked to Reid about American income taxes and what we might learn from the rest of the world. For more, tune in to tonight’s Making Sen$e report, which airs every Thursday on the PBS NewsHour.
PAUL SOLMAN: Why an income tax to begin with in the United States?
T.R. REID: It used to be that we taxed property — zapped farmers basically. And there were very rich people who didn’t pay that much tax. So in 1913, they put in the income tax. It was incredibly popular. The tax we love to hate today.
SOLMAN: Why was it popular?
REID: Because it only taxed the Rockefellers, the Morgans and the Vanderbilts. It was aimed at the top 4 percent, and the top rate then was 7 percent. Woodrow Wilson had a big ceremony and said, “I’m delighted to be president at the creation of this popular new tax.”
SOLMAN: We also got a lot of our federal income from tariffs, right, from customs duties?
REID: That’s how all countries start. You tax at the border. Because if you sail a ship in from India full of tea, it’s kind of hard to hide it. So it was an easy thing to tax for a young country. And then gradually we moved to property taxes, manufacturing taxes, and the income tax was the answer to a populist demand: Let’s go after the rich guys.
SOLMAN: The obvious question: What happened? It’s not that anymore.
REID: Well, we got into World War I, and they raised the rates and started taxing [the rich]. Then we got into World War II, and that’s when they taxed everybody, because they just needed more revenue.
SOLMAN: At a high marginal rate, right? For all income above a certain fairly high level.
REID: The taxes used to be very high in the 1950s. The top tax rate in America was 90 percent. And gradually, that came down. Today, the top rate is 39.6 percent.
SOLMAN: On the richest people.
REID: You’ve got to be in the top 1 percent to pay that. Very few people ever pay the 39.6.
SOLMAN: But it used to be 90.
REID: It was 90 in the ’50s. One of the people who paid it was a movie star called Ronald Reagan, and it made him hate taxes for the rest of his life.
SOLMAN: But if we go back to the high marginal rates of the past — that is, if you make enough income, the next amount of income is taxed at its highest rate, 39.6 now, used to be 90 percent — if we do that, wouldn’t people just leave like the French actor Gérard Depardieu, who left France for Russia?
REID: He absolutely did. France, they’re the world champion at soaking the rich on taxes. And at one point, they had what they called a hyper tax, 75 percent, and Gérard Depardieu and many others left the country. So I think there are diminishing returns here. The higher the rate, the more interest there is in avoiding the tax. Either you move or you shift your profits overseas, as American corporations have proven very good at doing.
SOLMAN: How much does the income tax cost us as Americans?
REID: We have the most expensive compliance system in the world. The IRS brags that they spend 35 cents for every $100 they collect. They’re very efficient collectors. And the reason is they stick the real cost on you and me. Americans spend about 6 billion hours a year collecting the data and filling out the forms. We spend $10 billion to H&R Block and other preparers. And on top of that, $2 billion in tax preparation software, which still takes hours of work. It’s outrageous the burden we put on people, and guess what, you go to Europe, you go to Japan, it’s 15 minutes and costs nothing.
SOLMAN: So what are the most egregious absurdities of the tax system in your view?
REID: How do you rate “most”? There’s a $7,500 credit if you buy a very expensive hybrid car.
And the argument for that is, well, it saves gas. Except we also offer a tax credit for buying a recreational vehicle, a notorious gas guzzler. So there’s no rhyme or reason to these; it’s whatever any lobbyist was able to nestle past Congress.
SOLMAN: What about provisions that most Americans are in favor of? The mortgage deduction, for example?
REID: That’s one of the most popular deductions. It costs the Treasury about $103 billion a year. Now that’s money we could use to treat wounded veterans or reduce the deficit or fill the border. Instead, we give it a subsidy to homeowners, and it goes mainly to the richest homeowners in America, because only one third of Americans itemize their deductions.
And, you know, it’s designed to enhance homeownership. Guess what? It doesn’t work. Many countries have gotten rid of the mortgage interest deduction. Almost all of them have higher homeownership rates than we do. If you ask any economist, they’ll tell you all the mortgage interest deduction does is raise the price of the house.
So a couple is out looking at the house, they say, “Oh, we love this house, but we couldn’t make the monthly payment.” And the realtor says, “Yeah, but you’re going to get a tax break.” So people pay more than they would otherwise.
SOLMAN: It’s always struck me as amazing, as long as I’ve been doing my own taxes, which is decades, that you get to depreciate the value of your home — you actually get to take that off your taxes, how much it lost in value — while it’s gaining value.
REID: Absolutely right. So you take a loss even though you’re making a gain.
SOLMAN: But I think Americans would rebel if you tried to get rid of the home mortgage deduction.
REID: I disagree, and here’s why. If you get rid of all these giveaways and loopholes and deductions and credits, then you can sharply lower the rates. So there’s a tradeoff. Yeah, I lose the deduction that I really like, but my tax rate is going to go down, and I don’t have to fill out that form anymore. It’s much simpler, rates are lower, and that tradeoff has worked in many countries. Many countries have just cleaned house of all those exemptions in order to provide lower rates, and people buy it.
SOLMAN: Another deduction is for health insurance. That’s a big one too, right?
REID: Yes, if your employer pays your health insurance, that’s not counted as income to you. And any economist would say that’s your income, because they’d pay a higher wage if they didn’t take it. That’s a huge loss to the Treasury.
You also get a deduction in America for taking a night school course, growing sugarcane, moving to a new city for a job, replanting a forest, insulating the attic, destroying old farm equipment, employing Native Americans, commuting to work by bicycle — but only if the bike is regularly used for a substantial portion of travel — or buying a plug-in hybrid sports car, or buying a recreational vehicle. I mean there are hundreds of them, and most of them are nuts.
SOLMAN: So how did other countries get rid of these provisions, or did they never have them?
REID: Most countries had the whole range of exemptions that we do. Starting in the ’80s or so, after the United States sharply cut its rates, other countries decided they better do it too, and here’s how you do it: you just wipe out the exemptions, the deductions, the credits, the depreciation allowances. And people complain, “Oh my God, it’s terrible,” but you give them much lower rates and you give them an easier form to file, and people accept that tradeoff.
SOLMAN: Do you like the idea of a graduated consumption tax? So savings are not taxed, but consumption is. They know how much you earn, they know how much you saved, the rest has got to have been consumption.
REID: I really like the idea of consumption tax, and most countries have a pretty serious consumption tax. It’s called a value-added tax or a goods and services tax … It’s a sales tax. It doesn’t tax labor, it doesn’t tax savings or investment — it taxes consumption. And it turns out a VAT — a value-added tax — is a very easy tax to collect and a very hard tax to evade. It’s a really good idea. It was invented about 60 years ago in France, of course.
SOLMAN: “Of course” because?
REID: Because they’re so good at taxing. They had a business tax that was easy to evade, and the head of the French IRS invented this value-added tax, which is very hard to evade. One hundred seventy-six countries have it now. It’s really a good tax. Professor Eric Zolt of UCLA, said to me, “The VAT is such a good idea, mark my words, within five years, the U.S. will have a VAT.” Then he said, “Of course, I’ve been saying that for 20 years.”
SOLMAN: So you’re saying this is all obvious. Every country in the world besides us has reformed its tax system, or most all of them. So why can’t we get rid of these provisions in the United States?
REID: Because in the United States, unlike any other advanced democracy, money really talks. Our Supreme Court has said that spending money on politicians is a form of free speech. No other court has said that.
SOLMAN: No other court anywhere in the world?
REID: They all have limits.
Watch Reid’s full interview on the April 13 broadcast of PBS NewsHour.