07 Mar Hooray – It’s Tax Return Season … Again!
How often have you heard that cheer? Never, right? For good reason.
How many mothers have you heard wishing that their children grow up to become tax return preparers? None, right? For good reason.
Candidate Donald Trump in 2016 called America’s tax system “complex” and “unfair” – to virtually unanimous national agreement –, adding that “[m]y understanding of the tax code gave me a tremendous advantage over those who didn’t have a clue about it…. [Hillary Clinton] complains that Donald Trump took advantage of the tax code…. All [her] friends take the advantage that I do.” He was right. The Infernal Internal Revenue Code (IRC) exacerbates the perception of generalized government unfairness while simultaneously increasing the reality of income inequality. Insofar as the tax laws are concerned, the rich indeed are motivated to use their wealth to hire highly-trained tax lawyers and accountants – the “tax defense industry” – to avoid taxes reduce their tax obligations. Middle-class Americans, on the other hand, “pay their fair share.”
Neither the perception nor the reality of that unfairness has improved in decades. In fact, both have become worse as further falsely-described mislabeled “tax reforms” have been added to the IRC …, and not surprisingly since America has a far more complicated and less fair tax system today than it had 35 years ago. The changes that have been made over those decades have been cumulative “tweaks” enacted not to promote simplicity or fairness but to favor special interest groups …, not coincidentally adding an awful lot of length and complexity. Today, the IRC totals ~2,600 exceedingly small, dense pages (plus >65,000 pages of regulations and interpretations). It was last overhauled by Ronald Reagan in 1986!
America’s original 1913 income tax system – rebuilt during the Reagan Administration –, was designed to complement American capitalism, incentivizing job creation and business innovation and encouraging class mobility. Instead of doing so today, the IRC is toxically intensifying disgust in American government and distrust of American democracy. Instead of making America proud, acting as a beacon for the American democratic success story and enhancing America’s global competitiveness and that of its industries, the IRC has become an exemplar of America’s decline, a glaring illustration of its inability even to address its structural problems …, of which its tax system is a prominent part. The IRC not only is unfathomable to most Americans, it’s so full of loopholes that it disadvantages many home-grown American industries, motivating them to locate their offices and facilities offshore. In doing so, it blatantly discriminates in favor of selected lobbyists, sectors and constituencies, often sapping labor and redirecting resources into inefficient, anti-capitalist pursuits and industries. Among the consequences are structural inconsistencies, inefficiencies, inequalities and divisions. It’s therefore more than merely a drag on economic efficiency. It’s erosive, wearing away the foundations of America’s social, political and democratic principles and institutions.
The IRC provides the rules that taxpayers are required to follow in self-assessing their income tax liabilities, relying on Americans to freely and honestly pay their taxes. To be successful, the IRC must inspire the belief, first, that taxpayers are being treated equitably in the assessment and payment of their tax liabilities – the “carrot” that a democratic government promises – and, second, that their failure to pay the amount they owe has a downside – the “stick.” Neither is the case for America’s 21st Century tax system.
The purpose of any country’s system of taxation is to raise the revenue needed to fund defense, education, health and welfare. Under America’s democratic-capitalist system, the “invisible hand” of capitalism is intended to work its magic while government avoids the temptation of tilting the economic scales in favor of some and to the detriment of others. In America, the Constitution requires that the State be subsumed to individuals’ innate rights. Unhappily, as President Trump’s statements about complexity and unfairness confirm, America’s tax laws have dropped any such pretense. They’ve morphed into a vote-buying and campaign fund-raising mechanism – political corruption by another name – in an economy where the State has allocated individuals’ rights to itself – a non-too-subtle slide into Statism (a subject previously discussed by TLR here). Special-interest lobbyists now get what they pay for. The result is an IRC that explicitly distorts selected economic activity, misallocating resources and reducing productivity. The goal of politicians in both Political Parties is to serve their constituent campaign contributors interest groups, not America-as-a-whole and not a broad base of Americans … and they have been
abusing using the IRC for that purpose.
So much for a discredited tax carrot. Insofar as the tax stick is concerned, statistics show that Americans realized some time ago that tax evasion
pays carries little real-world risk.
During 2019, individual Americans filed over 253 million income tax returns. The Internal Revenue Service (IRS) will be able to audit fewer than 1% of them … and then only with a time-lag of years. With less than a 1-in-100-chance of anyone even looking at their tax returns being second-guessed for underreporting, undervaluing or committing outright tax fraud some time in the future, is it any wonder that disrespect for the Internal Revenue Code, for American government, and for America tax evasion is rampant … or that it has steadily increased over recent decades as Congress has reduced the IRS’s budget? The Brookings Institution estimates that Americans are now underreporting their income – a polite way of saying that they are committing felony tax evasion – by approximately 16% each year …, a total of over $550 BILLION in 2019 alone.
Next, add the economic costs – in lost productivity and out-of-pocket expenditures – for every American required to prepare his/her individual tax return. The IRS estimates that an average taxpayer spends 13 hours preparing his/her annual tax return, a number that excludes the costs of tax professionals who assist in that preparation. More than 50% of Americans require such assistance. The out-of-pocket annual cost of preparing and filing tax returns consequently exceeds $150 billion …, excluding the lost output for American businesses, estimated at between $240 billion and $600 billion per year. America would be far better off if that output and its value were invested in production and research, in making life better for America and Americans, especially given that successive administrations have gutted the capitalist and Constitutional rationales for America’s tax system and taxpayers well-understand that they have little downside risk in underreporting their income.
This is government waste on an immense scale!
What America needs is a simplified tax system that Americans perceive as being fair. That requires change. It requires disruption. It requires a tax system that relieves American taxpayers – as well as the entire tax return preparation industry – of the burden of preparing tax returns and engaging in time-consuming tax accounting, record-keeping and filing exercises. What is needed is tax reform that is revenue-neutral, allowing Federal and State governments to collect sufficient taxes to cover their budget obligations without interfering with the invisible hand of capitalism.
Such a necessary constructive disruptive tax reform proposal was described in the August 30, 2020 TLR (here) in a fruitless effort by TLR to incite Presidential campaign discussion. Its failure to inspire political dialogue apparently means that, in addition to Social Security and Medicare, actual tax reform – as opposed to tax earmarks for favored constituencies – is the third “third rail” of American politics!
The so-called Competitive Tax Plan (CTP) that was proposed, researched and drafted by Columbia Law School Professor Michael Graetz (which can be found in its 2013 version here) would shift America’s current income tax-based system to one based primarily on consumption. It would convert the U.S. from a high income-tax country to a low income-tax one by subjecting only 20% of Americans (those with higher incomes) to income taxation while, at the same time, adopting a carefully-targeted consumption tax …, a form of national sales tax. It would lower taxes on savings and investments and provide that >80% of Americans pay no income tax at all, eliminating tax returns for those Americans having incomes of less than ~$100,000 (of which, in any event, fewer than 0.25% are audited each year). The CTP would be a major simplification that would benefit both America and Americans (as well as American businesses), eliminating the unnecessary costs of universal tax return preparation and many of the enormous number of special interest tax provisions that riddle the IRC. The CTP would ensure that Change Would Come to America in more significant and durable ways than President Obama attempted in his eight years as President …, and would Make America Great Again in far more tangible and long-lasting ways that President Trump achieved in his four years as President. The CTP most surely would disrupt the order. That’s both Change and Greatness …, precisely the stern Churchillian stuff that leadership of a successful country requires.
President Biden. Senator McConnell. What do you want the history books to say about you … and about your roles in America’s decline?
Finally (from a good friend)