Tuesday, April 15, 2014

Our Tax System is Broke

Well fellow citizens, it is April 15, affectionately known as “tax day.” This is the day when most of us end our annual battle with the Infernal, er. . . I mean Internal Revenue Service. I assume most of you are like me—you don’t mind paying taxes, you just hate this annual battle. I think each of us are torn between two fears; 1- that we’re paying more taxes than our neighbors, and 2- that if we claim a questionable deduction IRS agents will be knocking down our doors to drag us off to federal prison. I also think that a lot of us feel kind of resentful on tax day because we keep hearing that rich individuals and corporations never pay their fair share of the costs of government.  

A few years back, this maven wrote a piece on the Fair Tax proposal, which was sort of popular for a while. I think the Fair Fax proposal has moved to the back burner. But some of the stuff I said then still applies and I will quote it here. Don’t worry; I gave myself permission to plagiarize so there are no copyright problems. 

“A tax system should have only one purpose—raising revenue for the government to carry out the functions that the representatives of the citizens have assigned to it. In addition, under the theory that those who accumulate the most wealth derive the most benefit from the country or state, the tax system should be progressive. Those who earn the most should pay a higher percentage of their income in taxes than do those who earn the least. Finally, a tax system must not only be fair, it must also be perceived as fair by the citizens.

“Under these standards, our current tax system ranks low. First, rather than being only a mechanism for raising revenue, our current system is used continuously by the government as a mechanism for controlling the behavior of individuals and corporations in our society. When the government wishes to encourage certain activities it offers tax incentives to those who abide by those wishes. Likewise, when the government wishes to discourage certain behaviors it places tax costs on those behaviors. This management of our society by use of the tax code is probably as old as the code itself and has been used by both Republican and Democratic governments. It explains why the Internal Revenue Code is thousands of pages rather than only a few pages long.

“Second, our tax system is unfair and is perceived by most citizens as unfair. It is set up as a yearly game between the citizens and the IRS. The objective of the IRS in this game is to maximize the amount of taxes each citizen pays. The objective of each citizen is to minimize the amount of taxes he, she or it pays. The rules of the game are tens of thousands of pages long, and those who can afford expensive CPAs or tax lawyers who have mastered those rules are going to play the game much better than those who can’t. A tax system in which the amount you pay depends on how clever you and your tax preparer are is not a fair system. And it cannot be perceived as fair. Many taxpayers get the feeling that somehow they are paying more than their fair share of taxes. They fear that their neighbor has discovered a hidden deduction that they don’t know about. Or they fear the dreaded audit in which the IRS will discover that they have claimed more in deductions than the law allows.

“The unfairness of the system extends into its progressiveness. Although our tax system is, on its face, progressive, the presence of so many loopholes and deductions and credits and shelters reduces the tax burden on those with higher incomes. The result is that in many cases individuals with high incomes may be paying a lesser percentage of that income in taxes than do individuals with lower incomes.”

I would love to see our present system replaced with a tax system that is fair. I would love to see the IRS disappear. I would love to eliminate the anxiety I suffer every year in playing the 1040 game. 

We’ve been using the income tax as our primary source of government revenue for just over a hundred years. It’s about time we think this through again.


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