A Closer Look At Tax Reform

Tax reform seems to be a hot topic just about every election. So, why hasn’t anything been done about it? While everyone agrees tax reform is needed, few agree on how to do it.

The United States tax code is an abomination. Literally. Much like Frankenstein, it has been put together with different pieces of code kicked out by different Congresses and White House residents. Some sections create loopholes you could drive a GE tax return through while others come up with bizarre taxes that only a politician could truly appreciate.

The end result is a tax code that is so strange that even Stephen King wouldn’t dream of writing it into one of his novels. The code is so strange the Treasury Department and IRS have been forced to write over 50,000 pages of regulations interpreting what each section means and how it interplays with other sections. It just doesn’t get much messier than that. 

Everyone agrees the tax code is a mess and needs to be reformed. This includes Democrats, Republicans, Tea Partiers, Fascist, Communist and any other political group you can think of. The question, of course, is how will the code be reformed? You undoubtedly have a view, but let’s see if it holds up under closer scrutiny. 

You’ve probably heard by now that 46 percent of Americans pay no income tax. It is true. Getting them to pay would obviously add a lot of money to the pot. Where is the IRS?! Well, the truth of the matter is they don’t pay because they earn so little in income that they need not. Yes, you read that right. The biggest indicator this country is in trouble is that not only do we have massive unemployment, but real income has DROPPED by more than 6 percent from 2008. In short, there are fewer people working and those that are do not make what they used to. So, how is that global trade working for you? 

Let’s tax the rich! This would be President Obama’s answer to raising revenue. It sounds okay at first when talks about taxing people making more than a million dollars a year, but the numbers don’t really support his position. About 235,000 tax returns reported revenues of a million or more in 2009, the last year we have all the tax returns in on. That might sound like a lot, but it is less than .01 of the total population. Let’s just say we slapped a $100,000 tax on each of them for being, well, rich. This would raise a paltry $235 billion a year. Remember, we run an annual deficit in the $1.5 to $1.7 trillion range. If you took 50 percent of their earnings as taxes, you might do some damage but even then you are just getting back to zero on the annual deficit and the tax code is no clearer. 

Business tax is, if anything, even more confusing. There are tax lawyers for large companies that will readily admit that they have no idea if the company is in full compliance because there are so many forms to be filed. One company even reported that they were filing one tax form or another at federal and state levels every three minutes of the working day!

The business tax code has become so riddled with contradictions that the United States now has some of the highest corporate tax rates in the world while also somehow having some of the lowest tax revenues collected from businesses. How can this be? The lobby groups have convinced politicians to create huge loopholes in the code that companies can use to slash or even eliminate their tax bills. Ah, it is a great country indeed!

So, what needs to really happen with the tax code? It needs to be ditched, burned, shredded and, well, fill in your favorite word. There is no redeeming this beast. My personal preference is we move to a flat tax for business and a consumption tax for individuals. Both would be simple and straightforward. Both would raise the tax revenues we now take in. Having said that, fixing the financial problems of the country is a two step process. Tax reform is great and all, but it really won’t matter much if we don’t face reality and start doing some major spending cuts.