Never Mind the Tax Cheats -- Go After the Tax Code: The Ticker

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By Caroline Baum

It was one of the big applause lines in President Barack Obama's State of the Union address: "We can either settle for a country where a shrinking number of people do really well while a growing number of Americans barely get by, or we can restore an economy where everyone gets a fair shot, and everyone does their fair share, and everyone plays by the same set of rules."

Strict grammar violation notwithstanding -- the singular "everyone," takes "his" or "her," not "their" -- the set of rules the president wants us all to play by were made in Washington.

Millionaires paying an effective 15 percent tax rate because their income is from investments? Blame the tax code. Carried interest, a form of income that accrues to hedge fund and private equity managers, taxed at the more favorable capital gains rate? The tax code's the culprit.

Yes, there are a lot of tax cheats out there who aren't playing by the rules. What Obama objects to -- Warren Buffett playing a lower effective tax rate than his secretary -- is ordained by the grotesque, 72,536-page tax code.

In researching a recent column, I went back to "The Flat Tax," published by economists and Hoover Institution fellows Robert Hall and Alvin Rabushka in 1985. They proposed a revenue-neutral flat tax of 19 percent. All income would be taxed once, and only once, at the same rate and as close to the source as possible. "Whenever different forms of income are taxed at different rates or different taxpayers face different rates," they write, "the public figures out how to take advantage of the differential."

Bingo. I'm no tax expert -- I have trouble gathering all the necessary information to take to the accountant once a year -- but I know enough to recognize that the tax code is the problem, not the folks who capitalize on its myriad of loopholes.

Whether it's a flat tax or a national retail sales tax, simpler is better: for each of us and for the economy overall. So the next time the president says he wants everyone to play by the rules, please tell him it's the rules that are broken -- not to mention the rule-makers.

(Caroline Baum is a Bloomberg View columnist.)

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-0- Feb/06/2012 14:18 GMT