All is Fair in Love and War – But not in Taxes

When it comes to the U.S. Tax Code, “tax fairness” is an oxymoron

Business and government leaders gain respect and support when those they lead believe the system is fundamentally fair. There is no requirement for the system to be equal, but it must be seen as equitable. To put it another way, for an organization or society to function effectively over time, there must be a feeling of parallel interests under which all contribute and are rewarded in an essentially fair and impartial way. When people come to believe the system is inequitable and favors one group over another there is a loss of respect and support for the system as a whole.

By way of example, employees in an organization recognize and accept that higher pay and benefits are due those in leadership positions, so long as that compensation is equitable with what is paid to all. When leaders use their power to gain advantage and personal benefits only for themselves or a privileged few, the unfairness of this concept causes respect for these leaders to erode and morale of the organization to decline.

The same concept is true when it comes to government, but with even more dire consequences. When a government loses the respect of its citizens, governing becomes difficult and gridlock follows. And the U.S. is brushing dangerously close to this perilous disaster.

The Gallup Poll’s most recent survey indicated, for example, that only 17 percent of the population has respect for government in general. Is it any wonder that, with such pitifully low levels of respect, government leaders find it virtually impossible to marshal support for the dramatic actions needed to solve such gut-wrenching issues as deficit spending and expanding national debt?

Our Number One Problem

Nothing contributes more to the loss of respect for the government and its leaders than the inequity and fundamental unfairness of the U.S. tax code, especially as it applies to income taxes. The concept of income taxes is for everyone to pay their fair share of the revenues needed to pay for government services received. That does not mean that everyone pays the same, but equity calls for everyone to pay their fair share.

Income taxes were first implemented in 1861 to pay the costs of the Civil War and then repealed shortly after the end of the war. Income taxes became a permanent way of funding government expenses with the ratification of the 16th amendment to the constitution in 1913. No sooner had the 16th amendment been ratified than the basic concept of raising revenues to pay for the activities of government began to be diluted and manipulated. Since that time, the tax system has been expanded (it began as 400 pages and now contains 13,500 pages in 20 encyclopedic volumes), bastardized and mutated in so many ways that the basic concept that “everyone pays their fair share” has been lost. The tax code evolved into a system surfeit with tricks, treats and loopholes that reward the few at the expense of the many. Equitable, efficient and fair are not terms one would use to describe the current system. And, most importantly, this defective system fails to accomplish it original objective, which is to collect the revenue needed to pay for government services.

Republicans love to point out that at 35 percent the corporate tax rate in this country is among the highest in the world. They suggest that if corporate tax rates were to be reduced – indeed eliminated – then corporations would be encouraged to invest more capital in their businesses, thereby increasing employment. What Republicans conveniently fail to point out is that, due to the convoluted nature of the tax code, (mainly loopholes created for corporations) very few companies pay taxes anywhere close to 35 percent. You cannot have a fair system when in 2010, despite profits of $14.2 billion – including $5.1 billion from U.S. operations – GE paid no U.S. income tax whatsoever. And GE is not alone. In fact, since the 1950s of the total tax revenues collected by the government, the percentage from corporate taxes has fallen from 30 percent to 6.6 percent.

Corporate Tax Loopholes are Just the Beginning

Of course, corporate tax inequity is just one of the thousands of unfair exemptions and deductions that have crept into the tax code. There are too many examples of inequities added to the tax code to mention here, but one could ask if it is fair for homeowners to deduct interest on mortgages while renters do not have the same benefit? The objective of a tax should be to raise revenues, not provide incentive for a certain action. Is it fair that those who make less than $106,000 per year pay 7 percent of their total income into Social Security, while those who make above that level are not taxed?

As discussed in last week’s blog, as a result of the government constantly spending more than revenues justify, deficit spending has become the norm, triggering a runaway national debt that has created a financial crisis capable of transformational dimensions for the country. How we respond to this crisis will determine the very nature of our future society. And both the Democrats and Republicans are taking a flawed approach to seeking a solution.

The Republicans focus on deficit spending and the national debt by seeking reductions in spending and services; they loathe the idea of increasing revenues. The Democrats focus on increasing taxes; they loathe the idea of reducing spending or services. They are both right in what they seek to do but wrong in how they seek to do it. They are both preaching from a three-legged stool with one of the legs missing. The real issue is not about taxes, it is about revenues. The taxes are already sufficient to provide the revenue needed to pay for government services; the problems arise because of the inherent inequity as to how taxes are applied, causing a revenue shortfall.

The simple reality is that, if the entire tax code were “reinvented” in an equitable manner so as to assure that all paid their fair share, there is more than enough wealth in this country to solve the issues of deficit spending and national debt. It has been estimated that there are $1.1 trillion in annual tax breaks in the current tax code. The Republicans view correcting this inequity as “increasing” taxes, but that is not the case. Let’s say that one year you find a loophole that allows you to pay less in taxes, but the next year the loophole is eliminated and you are forced to pay-up. Does that mean that taxes have increased? No, you are just forced to pay your fair share. Correcting the inequities in the tax code would simply be an equitable approach that would require all to pay their fair share. In fact, the end result would actually be a reduction in tax rates. If the tax code is returned to its intended purpose of raising revenue to pay for needed government services and is combined with pegging government services and benefits at the level of revenue available, i.e. adopting a balanced budget requirement, the financial crisis could be solved and the country’s future strengthened.

There are those who suggest the country is in trouble because we are living beyond our means to pay for what we want, but that is not true. The country is in financial crisis because we are not using the means we have to pay for what we want. A fair and equitable tax code would solve that problem.

Of course, all of this is pie-in-the-sky wishful thinking. There are too many elections to be won, power to be brokered and contributions to be made to ever see an equitable tax code. GE may make more money with its shady practices manipulating the tax code (basically being subsidized by those who do pay taxes) than they do “bringing light to life.” It may not be equitable, but it is reality and, as a result, the country will continue to bounce from one financial crisis to another, until it may be too late.

And the Moral of the Story …

No leader can long be successful, no organization can maintain coherence of effort and no government can operate effectively when the basis of how they function is inequitable. One cannot expect to receive the support of the whole when only a part benefits. A leadership style or government system based on interests and responsibilities that are not parallel and equitable for all is destined to ultimately disintegrate. And, that is not fair for all.

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