4 Tax Reform Proposals to Simplify the Tax Code

Not to sound cliché, but it’s that time of year again. The Tax Man is coming to take a portion of your hard-earned money and put it toward improving the nation. Taxes are inextricably linked to the size of government and what the federal power brokers hope to accomplish in the following fiscal year.

These are just a few of the major proposals to simplify the tax code. It may not ever be as simple as allowing Americans to “fill out taxes on postcard,” as U.S. Senator Ted Cruz (R-TX) has proposed, but these reform ideas do carry weight with some influential politicians backing them.

 

 

The flat tax is a common tax reform proposal put forth by GOP presidential candidates.

While campaigning to win the nomination in 2012, Texas Gov. Rick Perry, former House Speaker Newt Gingrich, and Herman Cain hoped to gain the favor of the GOP establishment by promoting their way to a smaller government through lower taxes. With lower taxes comes less spending, smaller government, and happy Republicans.

None of these candidates gained the traction they were hoping for, however. Eventual nominee Mitt Romney had his own problems with his tax proposal.

After the 2012 elections, the most well-known flat tax proposal is likely Herman Cain’s 9-9-9 plan to cover individual federal tax, business tax, and sales tax all at 9 percent.

 

Most people will agree that the current tax system is unfair so the name Fair Tax alone creates a certain likability.

The Fair Tax is similar to Cain’s 9-9-9 plan, but eliminates the individual and corporate rates and would create a national sales tax at a much higher percentage. Makes sense, doesn’t it? A sales tax in the 25 percent range will likely dampen people’s shopping habits slightly, but it does serve to strengthen Social Security and equals the playing field. You spend more, you get taxed more.

Re-writing the tax code sounds appealing, but this method would have changed not just the usual IRS taxes, but funding for Medicare and Social Security. The national sales tax would still be on top of state and local sales taxes and would impose a greater financial burden on lower-income earners.

 

For people who dislike taxes, the only thing better than an ultra-low flat tax is the notion of no tax at all. That is the goal behind former U.S. Rep. Ron Paul’s (R-TX) position. The leader of the libertarian wing in the Republican Party feels that the income tax, in particular, is a problem:

“I want to abolish the income tax, but I don’t want to replace it with anything. About 45 percent of all federal revenue comes from the personal income tax. That means that about 55 percent — over half of all revenue — comes from other sources, like excise taxes, fees, and corporate taxes. We could eliminate the income tax, replace it with nothing, and still fund the same level of big government we had in the late 1990s.”

History may be on Paul’s side. Framing the argument that taxes restrict liberty, one would search for a part of the Constitution to reinforce their position. In this case, they would strike down the Sixteenth Amendment, which solidified the income tax after much debate.

Proponents of this stance point to the unconstitutionality behind the Wilson-Gorman Tariff Act of 1894. This income revenue act was the first to levy a peacetime tax on income — the original breakdown was 2 percent over $4,000. This was to make up the revenue lost by reducing tariffs, one of the same tools Paul would use to fund the government in lieu of income taxes.

The following year, the Supreme Court ruled that the act was unconstitutional in Pollock v. Farmers Loan Trust Co. The Sixteenth Amendment was adopted 18 years later in 1913, making taxes a constitutional right of the federal government.

 

Former Libertarian presidential nominee, Gary Johnson, used the stage at the Tennessee Libertarian Party convention last month to sound off on several key issues, such as propping up a consumption tax and the Fair Tax.

Johnson is not the only one talking about the consumption tax. Bill Gates also raises an important point on taxing income:

“I think tax structures will have to move away from taxing payroll. … Technology in general will make capital more attractive than labor over time. Software substitution — whether it’s for drivers or waiters, nurses … it’s progressing. And that’s going to force us to rethink how these tax structures work in order to maximize employment given that capitalism in general over time will create more inequality, and technology over time will reduce demand for jobs.”

Support of a progressive consumption tax may seem like a tax on spending, or sales tax, but it is slightly tweaked. It would include income and set an exempted amount so tax-filers earning at or below that amount would not be taxed. The more you earn and spend over that exempted amount, the more taxes you pay. This intriguing, yet out-of-the-box tax reform proposal is worth looking into.

States’ rights activists who want less federal government still need their state to get funding so the issue is not only with the IRS. States like Texas and Florida rely on sales and property taxes without imposing on payrolls.

Such tax reform proposals as eliminating the IRS or cutting the income tax in half or two-thirds, especially in a single flick of legislation, will never take place. Too much too soon is not the way the government works.

Ironically, those who fight for lower taxes still have their sacred cows that need money to operate. The belief that lowering taxes or creating credits/deductions will benefit corporations can be endlessly debated. But, consider the time and energy in those debates put toward real problem-solving. The real effort should be on bipartisan compromise and gradual comprehensive change.

What do you think of these proposals? What others are out there?