Tuesday, June 04, 2013

Opportunity knocks: the IRS and the tax code badly in need of repair

Good things sometimes result after bad things happen. The growing revelations of wrongdoing at the Internal Revenue Service dramatically illustrate the agency's devolution into near anarchy, and this ought to lead to an operational revolution. It ought to also lead to something else that needs to be done, and has needed to be done for a long, long time: overhauling the current tax system.

An organization known as CCH has tracked the growth of the tax code from 1913 when it was only 400 pages to 2012 when it was 73,608 pages.

An Associated Press story noted, "At nearly 4 million words, the US tax law is so thick and complicated that businesses and individuals spend more than 6 billion hours a year complying with filing requirements, according to a report Wednesday by an independent government watchdog. That’s the equivalent of 3 million people working full-time, year-round."

“This report confirms that the code is 10 times the size of the Bible with none of the good news,” said Rep. Dave Camp (R-Mich.), chairman of the House and Ways and Means Committee. “Our broken tax code has become a nightmare of loopholes and special interest provisions that create added complexities and costs for hardworking taxpayers and small businesses.”

“If tax compliance were an industry, it would be one of the largest in the United States,” according to Nina E. Olson, the National Taxpayer Advocate. She said that since 2001, Congress has made an average of more than one change a day to tax law, nearly 5,000 in all.

The tax code is a chaotic mess that no one can comprehend. So, replace it with something much simpler that can be easily understood, and doesn't require 100,000 federal bureaucrats, some of whom cannot control the urge to persecute the people they work for.

Without going into great detail, there are two sensible approaches that would vastly improve the tax system. Both have advantages and disadvantages, but both the Flat Tax and the Fair Tax are far superior to the 73,000 page monstrosity we now suffer under. Even substantially lowering tax rates and reducing deductions and loopholes in the current system would improve things.

It has never made any sense to tax people's productivity, particularly when so many are excluded from paying any tax at all. Those who have no skin in the game thus don't mind raising taxes on the people that pay the freight for them.

Taxing what people spend, on the other hand, puts everyone in the game to the extent that they buy stuff subject to taxation, excluding food, medicine, medical care, and perhaps a very few other things from the tax, while protecting charitable contributions, and move ahead with replacing our asinine tax code with something that makes sense, and is immune from malfeasant bureaucrats and politicians. Then, when Congress wants to raise the consumption tax from, say, 10 percent to 12 percent instead of being frugal, nearly everyone will have a reason to care.

The current system enables politicians trying to make political hay to demonize corporations or the wealthy by criticizing the way they pay or don't pay taxes. The most recent example of this manufactured "moral outrage" concerns Apple, Inc., which earns money in the US as well as in foreign countries. Senator Carl Levin (D-Mich.), has leapt to the front of the bandwagon to condemn Apple, which paid nearly $6 billion to the federal treasury in 2012 on money earned in the US, but keeps money earned overseas out of the US due to the high corporate tax rate. But Apple does only what the tax code allows or encourages it to do.

America's corporate tax rate, which at 35 percent is one of the highest in the world, literally drives corporations to keep money overseas that otherwise could be brought here to produce jobs, and be taxed here, if Congress wasn't so greedy. Rather than make an honest effort to fix that problem, Sen. Levin foolishly prefers to label Apple a "tax dodger."

Many Americans agree with him. Those who think corporations are misbehaving by using provisions of the tax code to pay less tax should do a little personal reflection. Anyone who has ever taken a deduction for mortgage interest or other adjustment to earned income is just as guilty of being a tax dodger as Apple.

Managers and employees who lack character and integrity have fatally soiled the IRS. It has violated the most sacred tenet of American government: to honorably serve its citizens. At the very least it must be overhauled and slashed in size and power, but better yet, let's rid ourselves of the need for an agency like the IRS.

A final thought: The Affordable Care Act is a 2,700-page bill hatched in the dark of night by one political party, passed on a partisan vote by elected representatives who had not read the bill, controls 14 percent of the private economy, opens private medical data of every American to government scrutiny, and will be controlled by 16,000 new IRS employees. What could possible go wrong?

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