Financial Planning

More Freedom; More Money

Less regulation actually increases government tax receipts.

Less regulation actually increases government tax receipts. That's the conclusion of a recent—and prominent—global economic study. A basic analysis of the recent Eastern European flat-tax regimes makes this conclusion obvious. We did a double-take, however, when we learned the authors of said study.

We naturally assumed such a statement favoring greater market efficiency and economic freedom would come from those infamous supply-siders at the Hoover Institute, or maybe the nefarious libertarian-leaning CATO people on the fringe of intellectual society (that was a joke). But no! The report "Paying Taxes—The Global Picture" was authored by none other than the World Bank and PriceWaterhouseCoopers.

The study concludes that the more complex a government's tax regulation structure, the greater is the propensity for tax evasion. This is true for both corporate and personal taxes. We quote:

"The design of the tax system can have significant economic impacts and can influence multinationals in deciding where to invest. Tax regimes with relatively high marginal rates and which include a number of exemptions and allowances tend to be less economically efficient in relation to encouraging employment, saving and investment. Such regimes generally also impose higher tax compliance and administration costs. Evidence suggests that simpler tax systems promote economic growth and can help achieve a win:win for governments and industry.

"Burdensome tax systems can be a deterrent and can lead to tax evasion. Companies in 90% of surveyed countries rank tax administration among the top five obstacles to doing business. The main factors contributing to this are:

• the large number of business taxes to pay;
• lengthy and complex tax administration;
• complex tax legislation; and
• high tax rates."

As it stands today, the IRS tax code is tens of thousands of pages long. Think of it this way: the same dollar is taxed over and over again at every layer of the economy. An employer pays payroll taxes revenue taken in, then the employee pays income taxes on that same dollar earned, and then that same individual pays taxes again on whatever goods he buys with it! And then that very same dollar goes through the process all over again. This is a system badly in need of reform.

Below is a summary of the report from today's Wall Street Journal, and also a link to the full report.

Tax Epiphany
Editorial Staff, The Wall Street Journal

Paying Taxes – The Global Picture


If you would like to contact the editors responsible for this article, please click here.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.