Don’t Reform the Tax Code – Repeal It!

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It’s tax season again – oh joy!

There is little disagreement that the Federal Tax Code – at least as it applies to individual and corporate income taxes – is complicated, confusing, inequitable and prone to abuse. The disagreement and debate is over what to do about it.

Soon after the 1913 passage of the Sixteenth Amendment to the U. S. Constitution that authorized a federal income tax, Congress passed the United States Revenue Act of 1913. Federal income tax has been with us, in one iteration or another, since then. At the time of its passage, the federal tax code was 27 pages in length. Today the lineage of that code has grown to 73,954 pages, contained in 25 bound volumes; and it’s still growing.

Despite the obvious complexity of the current tax code there is a relatively simple structure. One percent of the 73,954 pages deals with the rate at which individual income and corporate profits are taxed; the remaining 99 percent of the code deals with ways an individual or business can circumvent the code in order to reduce or even eliminate the amount of taxes due. Taken as a whole, the tax code spells out the tax to be paid and then offers copious ways (loopholes) to avoid paying the tax.

As a result, the tax code has become fertile and profitable ground for a boundless array of accountants, lawyers and lobbyists to find, use or expand these loopholes in order to reduce the amount of tax due by their clients. Hundreds of thousands of people have come to depend on the complexities of the tax code to earn a very cushy living. For them, the more byzantine the tax code is, the more they like it, because their livelihood depends on it. (It should go without saying that this convoluted tax system works best for those who can afford to pay those who will find loopholes, while the rest are left to fend for ourselves.)

Nevertheless, with every election cycle there arises a great hue and cry for “real” tax reform. The abuses of the system are decried and promises are made to fix them, but nothing happens. There is an interesting dynamic that comes into play when the idea of “tax reform” comes up. Those who are supposedly the most “burdened” by the highest rates of taxation – wealthy individuals and corporations – are the ones who surreptitiously resist any reform. They may publicly wail about high taxes and call for reform, but anytime there is an effort to change the system, they send in their lobbyists to kill it.

Why do you think that is? It’s because the current tax code is so voluminous, convoluted and riddled with loopholes the wealthy and large corporations are able to “game” the system and end up paying at the lowest rates of taxation; or often nothing at all. In the meantime, the rest of us and small businesses are left holding the bag.

Don’t Reform It … Repeal It

Even if the powers that be wanted to actually reform the federal tax code (and they don’t) the effort would fail under the weight of the challenge. That’s because there is a tendency to respond to complicated problems with cautious timorousness or complicated fixes. What is needed is bold reinvention of the tax code, not faint-hearted re-engineering. All too often when people fixate on the problems, as happens in the tax code debate, they are prevented from focusing on the solution.

What is needed is boldness not timidity. The federal income tax code is beyond reform and so the best way to fix it is to repeal it. I accept that in the current environment the idea of repeal is considered Pollyannaish thinking, but if it could ever be brought up for serious debate, people might be surprised to find how simple and effective a tax system could be.

The highly respected, non-partisan American Institute for Effective and Fair Taxation (AIEFT) has recently released a report – five years in the making – that makes the case for a complete repeal of the individual, business and corporate tax code. In its study AIEFT simply ignored the existing tax code and started with a clean slate to design a revenue-raising system intended to be fair and equitable, while maintaining the current levels of government revenue.

AIEFT identified what they see as the most serious flaw in the current tax system: Taxes are based on “net income” rather than “total income.” This opens the door for all the loopholes and abuses as wealthy individuals and corporation attempt to make their “net income” seem as low as possible. That explains why some can take in millions in income and and pay little, if any, taxes.

Certainly AIEFT’s ideas are revolutionary and can stir heated debate, but that is the point. Any debate would be over finding a solution, rather than tweaking to a bad system.

Here are some of the suggestions made in the AIEFT report:

  • Eliminate all taxes on individual earned income; including capital gains and investment income. Replace it with a “wealth assessment” of 1.25 percent of an individual’s total net worth over $100,000.
  • Eliminate all taxes on business and corporate profits. Replace it with a “revenue tax” equal to 2.3 percent of gross business revenues over $250,000.
  • Institute a national “sales tax” of 2.7 percent on all goods and services. Those with total earnings of less than $50,000 would receive a refund of any sales tax paid.

The AIEFT calculated that if these proposals were adopted now, total revenues would be slightly higher than those being collected by the federal government in the current fiscal year.

There are a number of key elements in these proposals:

  • Taxes are shifted from the poor and middle class to the wealthy, but in a way that is equitable. The more you have and the more you spend, the more you pay.
  • Taxes are based on “gross” rather than “net” value or earnings. This eliminates the chief area of abuse caused by the current tax code that bases taxes on “net” rather than “gross” earnings; which opens the door to the thousands of loopholes that allows individuals and corporations to seek the lowest possible “net” earnings.
  • These proposals favor and encourage small businesses that have been overly burdened under the current system.

The real value to be gained by these proposals is simplicity and the elimination of the ability to “game” the system that is so prevalent now. Of course, taking into account the power of the wealthy and large corporations, there is little likelihood there will even be a debate over these proposals, let alone seeing them pass. But it would be nice to have a real, open and honest debate over tax reform.    

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One response to “Don’t Reform the Tax Code – Repeal It!

  1. Larry Koppenhaver

    Mirror, mirror on the wall, what’s the fairest tax of them all? Answer: A universal transaction tax. No exceptions. No escapees. No loopholes. No brackets. No returns to file. No politics. Is there anything about no that you don’t understand? There is no free lunch. A tax break for some is a tax burden for others, notwithstanding the debt. Replace the income tax that has failed to collect enough revenue to pay for what the nation needs and wants. Proof: Growing national debt. It has doubled four times in thirty two years, and five times in the foreseeable future. That will be $32 trillion within forty years. There is a limit to the burden of debt that the nation can bear. No one knows when and how much.

    The US income tax is the most corrupt and complex (none) system on earth. The evidence is the 16,000 loopholes that shrink the tax base upon which corrupt and ignorant (lack of knowledge) politicians advocate cutting tax rates. The political propaganda is that cutting tax rates and adding incentives (loopholes) will grow the economy with more jobs and more revenue. That propaganda is voodoo economics with a 40 year history of failure. Stupid is as stupid does.

    Corruption, ignorance, and stupidity have failed to provide adequate revenue for the needs and wants of all the people of the nation. Let’s try university level knowledge; that can be found on the internet under Edgar Feige’s name, or the “apt” tax. The are descriptions, examples, and FAQ‘s. Beware that the shills for wealth and high income are salting comments with false and misleading assertions. Pay attention to reliable sources. Beware of moral equivalence from the media. The transaction tax base is 100 times larger than the income tax base. Thereby the tax rate can be 1% of what most income taxpayers now pay. Too good to be true? That depends upon your reading comprehension; propaganda versus analytical thinking.

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