Simplifying the Tax Laws

Image by Gamma Man

There are very few things in life as inequitable, burdensome, complex and convoluted as the tax code.  The government has been talking for decades about simplifying the tax laws.  But, nothing ever seems to change.

There are 71,684 pages of regulations in the 2010 IRS tax code.  This grows more unwieldy every year as new regulations are piled on and few are ever scrapped.  This affects small businesses disproportionately, because they don’t have the accounting resources to comply with many of the laws.  Often, companies must keep two separate sets of books, one for taxes and the other for profit and loss.

The tax code needs to be scrapped and replaced.  Most of the 71K pages of code apply to a small minority of businesses and individuals.  Hidden in all of those regulations are the special credits and loopholes companies have lobbied for.  So, there will be intense pressure from special interest groups to preserve their tax perks.  Politicians will never eliminate tax breaks for the companies who finance their campaigns.  Nothing will change with taxes, until the tax system is changed.

Solutions:

• Sunset the existing tax code and replace it with a simple framework
• Prohibit modifications to the tax framework from any new legislation
• Force any changes to the new tax framework to be voted on separately

Make Everyone Pay their Share

There was a lot of buzz last month when the New York Times reported General Electric (GE) paid no corporate income tax last year, despite reporting $5.1 billion in U.S. profits and 14.2 billion in profits worldwide.  Yet, the average American worker paid more for taxes than for food, clothing and housing combined.  This has to stop.  How can we ask the American working class to carry the tax burden avoided by multi-billion dollar corporations?

The U.S. has some of the highest corporate income tax rates in the world, but they are almost irrelevant.  The effective tax rate (the amount corporations actually pay) has dropped dramatically in the past decade.  There are so many credits and deductions, most corporations have no tax liability.  Some tax credits are so specialized they are only available to a few companies.

Solutions:

• Minimum Tax Rate for all Corporations, Foreign and Domestic
• Tax penalties for multinationals using illegal transfer pricing

Replace the IRS with a New Agency

The IRS has consistently proven itself to be an unresponsive and inefficient collection agency.  Some agents have abused their authority to the point of terrorizing widows and grandmothers.  For years, it was nearly impossible to even reach someone in the agency by phone.  And, responses via mail didn’t fare much better.  The IRS taxpayer help line is notorious for giving out the wrong information and they still don’t have an interactive website for filing tax returns online.

To give the IRS some credit, they have a very complex and difficult job.  It’s a massive undertaking and it’s critical to the operation of our government.  But, a series of high-profile gaffs have cost the agency some credibility.  There was a multi-billion dollar computer system upgrade that was aborted and a series of related glitches and security breaches.  This year, there seems to be a glitch that sent thousands of refunds to the wrong bank accounts.  Nobody is perfect.  But, the IRS is an obvious relic.

If the tax laws were overhauled, it would make a lot of sense to start fresh with a new collection agency.  There would be little need for the ancient proprietary mainframes, massive secure buildings and armies of agents and auditors.  The new agency could be structured in a way that would encourage self-service and accurate filing by taxpayers, while discouraging brow-beating and bean counting by the government.

Solutions:

• Sunset funding for the IRS and create a new tax collection agency
• Eliminate the taxpayer is guilty until proven innocent mentality
• Modernize all aspects of the new agency for interactive service.

The Bottom Line

The bottom line is that a fair amount of taxes are necessary and proper.  But, the unfair ways in which taxes are calculated and collected benefits wealthy special interests at the expense of the working class.

“The nation should have a tax system that looks like someone designed it on purpose.”

William Simon – Former Secretary of the Treasury

Recommended Reading

Investor Junkie - All About Taxes
Lazy Man and Money - Most Common Tax Filing Mistakes
Don’t Quit your Day Job - Tax the rich, Feed the Poor … Til’ there are No Rich No More

This post was featured on the Carnival of Personal Finance over at Financially Digital.  This is the Greatest Carnival on the Net.  Check it out.

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I was just kidding about the rant.  People have enough problems at tax time and I’m not one to rub salt in the wounds.  Besides, the tax filing deadline is a day to give thanks for living in the greatest nation in the world.  It’s a time to remember how this country started as a plucky little colony and became a world superpower.  It’s a time to be proud of the nation we have built and the opportunity it has created for millions of people.  And, it’s a time to reflect on how much money we made last year and to wonder where it all went.

Why we Need a Flat Tax Rate

Photo by Jeff Sandquist

Here on Hope to Prosper, I attempt to present solutions to our most difficult financial problems.   This year, I propose we replace our existing tax system, with a flat-rate income tax.  Let’s get rid of the credits, the deductions, the line numbered forms and the flow charts.  I say, eliminate the AMT, nuke the schedules and pare it down to a couple of forms.

We should have three tax brackets and make people pay those rates.  If everyone had to pay, we could lower the rates and still collect more in taxes.  If you are a corporation, you pay your taxes.  If you are an individual, you pay your taxes.  If you moved last year, have a mortgage and donated to a charity, you pay your taxes.  Even if you have a blind dog or convert your car to run on bio-diesel, you still have to pay your taxes.

We must eliminate the ability of the connected and the wealthy to game the system to avoid paying taxes.  And, we should require everyone over the poverty line to pay taxes, regardless of the number of dependents.  Everyone uses our Government resources and everyone should pay their share.  The free lunch mentality is bad for America.  So are the corporations who think they are too big to pay.  We need to put a stop to it.

Why Our Current System is Broken

I wrote this post is because of an article I read in CNN Money.

In 2009, roughly 47% of households, or 71 million, will not owe any federal income tax, according to estimates by the nonpartisan Tax Policy Center.

It is mind-boggling to expect the other 53% of households to fund the entire Government.  I’m all for a progressive tax system, but way too many people are getting a free ride.  And, it’s well known that many corporations don’t pay any income tax.  So, the tax burden falls increasingly on the middle-class employees and their families.  Our income tax system is complex, confusing and unfair.  It is unsustainable and it has to change.

Another problem is that our tax code has become a mechanism to encourage or discourage certain behaviors.  It’s wrong for the Government to reward or penalize people, based on their personal decisions.  And, it’s wrong for special interest groups to receive tax breaks after they contribute to a politician’s campaign.  In my opinion, this is legalized corruption.

New Taxes Coming Soon

Since the Federal Government is spending our country into ruin and raising income taxes during a recession isn’t very popular, the next surprise may be new taxes and fees.  There are already rumblings around Washington about a European style VAT (Value Added Tax).  This would allow the Government to tax the things we buy, much like a sales tax.  The Value Added part of this tax is questionable.  Most states already have a sales tax and this hasn’t solved any of their financial problems.  It only encourages more wasteful spending.

The Bottom Line

The bottom line is that it’s time to sunset the tax code, lay off the auditors and close down the IRS.  There are much more efficient ways to assess and collect income taxes.  We should be spending our precious tax revenue for bridges and roads, instead of wasting it on auditors and field offices.

“If Congress were to pass a ‘flat’ tax, you’d simply pay a fixed percentage of your income, and you wouldn’t have to fill out any complicated forms, and there would be no loopholes for politically connected groups, and normal people would actually understand the tax laws, and giant talking broccoli stalks would come around and mow your lawn for free, because Congress is NOT going to pass a flat tax, you pathetic fool.”

Dave Barry – American Author & Columnist

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Taxed Enough Already  (TEA)

The Taxed Enough Already (TEA) Party, which takes its inspiration from the Boston Tea Party, is growing in strength and numbers.  They are holding rallies across the nation and members are writing their elected representatives.  Vocal crowds turned out in many cities on tax day and there are hundreds of rallies scheduled for the 4th of July.

It will be interesting to see how much of an impact the TEA Party will make.  There is no doubt many voters are fed up with the runaway spending and the climate is ripe for a change.  The real question is can the TEA Party generate enough momentum to affect the decisions made by our Government.  I certainly hope so.

Our Future as a Country

Many believe our very future as a country is at stake, at least in the lifestyle we have grown accustomed to.  Unless we want to have an economy like Japan’s, we need to stop spending our country into ruin.  Our current level of debt is so high that investors are dumping our bonds and currency.  Investors already know what most Americans haven’t yet figured out.  There is no possible way for our Government to repay the 11 Trillion dollars of debt without sustained inflation or a massive devaluation of the dollar.

If that happens, Government bonds and U.S. dollars will be worth a lot less.  And, so will everyone’s IRA and 401K accounts.  Think about that for a second.  Say you work hard your whole life to save up a couple million dollars and then it gets devalued or ravaged by inflation right before you retire.  I don’t want to engage in scare-mongering.  But, this is a very realistic scenario.  It has happened in Germany, Mexico, Argentina and many African and Asian countries.  Our economy cannot support 1.5 Trillion dollar annual deficits.

Graft and Corruption

The most frustrating part of this whole deficit problem is that it stinks of graft and corruption.  Between the Wall Street bailouts, the targeted earmarks and the no-bid contracts, it is obvious that our tax dollars are being funneled to companies who are connected to our politicians.  These entities are stealing our precious tax dollars, which should be used for providing Government services.

Lack of Representation

The Wall Street bailouts showed very clearly that the Government no longer represents voters, but special interests.  Voters were strongly against the bailouts, but were largely ignored by the Government.  Only a handful of politicians stood up for taxpayers and they only held up the giveaway for a short time.

The next election will determine a lot about our representation within the Government.  If we vote out a significant number of incumbents, then we may regain some influence as voters.  If the majority of incumbents are re-elected, then we may continue to lose our rights and our representation.

The Bottom Line

The bottom line is that taxes are necessary to operate our country.  And, I don’t mind paying my fair share.  However, I am furious that our hard-earned tax dollars are being squandered recklessly and swindled away from our treasury.

I’m both a patriot and an optimist.  But, I don’t foresee a very pleasant future if we can’t stop this runaway spending.  Unless we can regain some control over our Government, we are all going to be sitting together in a sinking ship.

“The government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”

Ronald Reagan – 40th President of the United States

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