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The Income Tax is Not Rocket Science — Rocket Science is Easier

We don’t have a revenue problem; we have a spending problem. We hear this repeatedly, but we actually have both a spending problem AND a revenue problem.

As a retired accountant, I have a couple of thoughts on the federal income tax. I don’t like it — never have and likely never will.

Many years ago, when I was pursuing my degree in accounting, I put off taking the required course covering income tax until my final semester. As I expected, it was my least favorite subject of my entire college experience.

Since I obtained my degree at a relatively late age and already had a job with a private company that employed a public accounting firm to prepare its taxes, I was able to avoid dealing with income taxes throughout my entire professional career.

Many people assume that all accountants are tax experts. This is not the case. Tax is a specialty within the accounting field. Our tax code is so convoluted that it is also a specialty for some who practice law. One cannot fully appreciate the sheer volume of our tax code unless it has been viewed in printed form, but to give you an idea, it is now available in a 20-volume set for Kindle.

Why is the tax code so complicated? Not being an expert, I can only speculate that over the last century, legislators have fallen prey to the whims of constituents and special interest groups.

What I can say for certain is that it does not have to be this complicated. Given that the sole purpose of the Internal Revenue Service should be to raise the money required to fund government operations, the system for accomplishing that goal could be incredibly simple and vastly more efficient.

How America’s Tax Rates Compare With Other Countries

For the sake of simplicity and with an incorrect assumption that the IRS would be virtually eliminated, many people have jumped on the so-called “FairTax” bandwagon. In an attempt to sell the plan, proponents also claim a prebate eliminates the regressive nature of the sales tax.

Sales taxes are always regressive, and prebates only shield money spent up to a predetermined amount corresponding to the government’s definition of poverty and involves a bureaucracy for distributing them. Additionally, the proposed percentage (23%) is speculative and does not highlight the potential need for adjustment due to the variability of economic activity (e.g. the “Great Recession”) or unexpected increases in spending (e.g. the invasion of Iraq).

When all is said and done, the proposal appears to be nothing more than another attempt to further reduce the tax burden on the wealthiest Americans. There are better ways to reform the tax system.

A one percent national sales tax could be initiated. It could be designated only for paying down the national debt, but that would be of little significance if the government continues to run annual deficits. However, it could lead to a more focused debate on deficit spending.

It would also immediately silence those who complain that there are too many citizens paying no income tax, when even poor people pay more than their fair share of the many “hidden” taxes we all pay.

Regardless of the ads on television this time of year, there is no reason anyone should receive a tax refund. There should be no such thing. People should pay the amount of tax owed throughout the year and not a cent more. There should be no payments to families in the form of child credits or earned income credits.

In addition to the added expense to process refunds and the duplication of efforts better handled by other agencies, these practices open the door for the criminal fraud that is costing us billions annually.

Eliminating all personal exemptions, deductions (except retirement savings), and child-related credits would allow employers to remit the exact amount of tax due for each employee. Those earning W-2 wages would not need to file a return (if not for the new health care check box — another issue better handled by a different agency). That, in itself, would reduce the size of the IRS.

How would this work?

For those being paid W-2 wages, the number of rate tiers could be increased dramatically while reducing the incremental increases between tiers. The tax penalty for entering a higher tax bracket would be reduced accordingly. Year-to-date earnings for new hires throughout the year could be downloaded from a secure government website.

With modern computer data systems, access would be limited to employers and their access could be monitored to ensure only valid inquiries are made. However, this would require employers to transmit wage and tax data every pay period.

In addition to relieving millions of Americans from having to file a tax return, such a system would also demand that citizens make decisions about the number of children to have and the size of their house without consideration of what the tax effect would be.

We hear a lot about our high corporate tax rate. It is so high that Democrats and Republicans sometimes talk about reducing it, but never do anything about it. In the context of competitiveness in a global economy, why not abolish it and tax earnings as ordinary income when distributed to owners?

Greater competitiveness would result in jobs remaining in and/or returning to the United States. Boosting the economy and expanding the tax base is the best means of reducing the proportional tax burden on the wealthy.

Of course, if the corporate income tax were eliminated without conditions, it would merely create windfall for private business owners and public shareholders. That is why investment income must be taxed as ordinary income.

As with any tax system, there will be those who will employ any means to avoid the tax. Consequently, rules related to the corporate retention and distribution of earnings would likely need to be devised. Also, some of the administrative savings in other areas would need to be committed to auditing functions to ensure that all business expenses are legitimate.

Obviously, this is an oversimplified characterization of what a final plan might look like. But it should at least be a starting point for any politician who claims to support real tax reform.

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