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Time to retire the tax code?

By Kay Bell · Bankrate.com
Tuesday, February 26, 2013
Posted: 3 pm ET

The federal tax code as we know it turns 100 this year. Some tax experts say that makes it well past retirement age.

At a recent Washington, D.C., panel discussion hosted by the tax information publisher Tax Analysts on the aging tax code and what to do about it, the consensus was that it might be time to find other ways to supplement federal revenue.

We're all familiar with the complaints about taxes. It's not just about the amount of money the Internal Revenue Service collects each year. Folks are also very unhappy with the complexity of today's tax code. It's frustrating enough on the individual side, but is even worse at the corporate tax level, especially with the changing, international face of business.

The complexity factor often leads to charges that the Internal Revenue Code is unfair. And that then devolves into fights over exactly what fairness means.

One hundred years ago, the income tax rate was 7 percent and earnings of up to what would be around $100,000 in today's money were exempt. "It was a light tax applied to just a handful of people. It was designed to make the tax system fairer but not raise a lot of money," said Christopher Bergin, president and publisher of Tax Analysts.

But it didn't take long for lawmakers to start fiddling. Just five years later, noted Bergin, the tax had changed dramatically. By 1918 the top rate was 77 percent, in large part because of the need to pay for U.S. involvement in World War I. The second World War transformed the income tax even more, making it more applicable to more Americans.

As the country has grown and changed, so has the tax code. So what now, 100 years later?

The first thing to remember is that we'll always need money to run the government. The only way to end that is to, as some no-tax advocates have admitted, "starve the beast" of federal government to the point where it is so small it can be drowned in a bathtub.

However, most people want at least some federal programs. So we'll always have a need for money to pay for them and an agency, such as the IRS, to collect it.

Who should pay?

The core issue is who pays. Not necessarily how much they pay, buy who pays.

Right now much of the focus, thanks to political rhetoric on both sides, is on wealthier taxpayers. Under a progressive tax system such as ours, they have always paid higher rates. But, said Joseph Thorndike, director of the Tax History Project and contributing editor at Tax Analysts, the focus has been on too narrow of a sliver of the population.

"I think you squander your opportunity when you spend a lot of time raising taxes a little bit on very rich people," Thorndike said.

Instead, every taxpayer needs, to borrow another political phrase, some skin in the game. This doesn't necessarily mean major changes, but rather better focus on what taxes support.

"If people are disconnected between what they're willing to pay for and what they get, our tax system can't survive in terms of legitimacy, fairness, providing the kinds of revenues and services and protections that an advanced economy needs in this century," said Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities. "It's critical to reconnect paying for what you want with a tax system that collects that revenue."

But tying taxes more directly to the programs they fund would be difficult for Congress. Capitol Hill lawmakers love to roll things into bills that hide who's paying how much for what in the hopes that by the time the voters figure it out, it will be too late for political repercussions.

Cynical much? Cynical just a bit.

Flat vs. progressive

Personally, I like the progressive tax system. I disagree with flat-tax advocates who say that is fairer. It isn't. A 20 percent tax on $40,000 is "just" $8,000. But that leaves the taxpayer just $32,000 to work with. But a 20 percent tax on $250,000 leaves that taxpayer with $200,000 to spend. Those making less should pay lower tax rates to give them more disposable income.

Reforming our tax system is going to be difficult, but I agree with Bernstein that the first step must be acknowledging what we get for our taxes.

And the next step is acknowledging what everyone else gets for our taxes, too.

Mortimer Caplin, IRS commissioner during the John F. Kennedy administration, said that that every taxpayer should fill out a tax return as "part of the price of citizenship." Caplin cited JKF's declaration in a 1961 speech to Congress that a "strong tax system is essential to a strong democracy."

Or, as former Supreme Court justice Oliver Wendell Holmes Jr. famously said back in 1904, "I like to pay taxes. With them, I buy civilization."

OK, maybe I'm not that cynical after all.

***

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You also can follow me on Twitter @taxtweet.

Veteran contributing editor Kay Bell is the author of the book "The Truth About Paying Fewer Taxes" and a co-author of the e-book "Future Millionaires' Guidebook."

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50 Comments
George
February 28, 2013 at 11:33 pm

Go to the Fairtax site and read it, the poor have a built in prebate that helps them out under the FairTax system. Unlike food stamps this system helps more, helps them save and build up savings!

The IRS as we know it would cease to exist thus reducing spending! The services our government should be providing will remain intact and the garbage spending sent packing. Lower the consumption tax.

I would like those that cheat on taxes, don't pay taxes but reap the benefits to start paying like me and you!

George
February 28, 2013 at 11:23 pm

To Address BRYAN,

Your pay check will be much more as you pay more than 2%. There are plenty of taxes that come out of your pay before you even get your check.

FairTax only taxes for new items and not used items. I would prefer to have more disposable income, pay my taxes when I want something new. Not have it taken from me and then have much less to spend anyway. I can deside when I make the purchase and pay my taxes.

It will also make the system transparent and collect money from those that are not paying any taxes or that cheat on their taxes!

jmcwilliam35@comcast.net
February 28, 2013 at 7:34 pm

As long as there are illegal immigrants not paying taxes, collecting social services and receiving over 4 billion dollars in illegal tax refunds AND as long as we have a terrorist organization like the IRS, that refuses to go after that lost taxpayer money....it's all bullsh*t. How dare people say that the wealthy should pay more, when people that shouldn't even be a presence in our country, have taken the taxpayer for a $4 billion+ ride!

James D. Brandon
February 28, 2013 at 6:08 pm

I think everybody that works should pay some tax, even the poor.
Tax them 1 - 3% but Something. Cut the loopholes and the number of tax brackets, simplify the code and evasion will be harder to achieve. Justice Holmes had the right idea; everybody needs to support the country, even though it may be little from those who have little.

fred
February 28, 2013 at 6:01 pm

A flat tax and reduced need for IRS oversight with one exception. People do tax themselves by supporting the charities they believe in so a dollar for dollar adjustment to their income. Everybody participates, has a stake, and we eliminate wasteful programs. Give the pres a blue pencil to edit bills of pork but keep the essential purpose.

John
February 28, 2013 at 5:50 pm

I don't believe a sales tax is the right way to go. If I make $25,000 and spend all my money on necessities, I will pay as much in taxes as someone making $250,000 and only spending money on necessities.

As a percentage, the "fair tax sales tax" would be higher for the lower income people. Would it not?

Michael
February 28, 2013 at 2:40 pm

I KNOW this is a fantasy..."what if" EVERYBODY INCL CORPS/BIZ paid 10% period no deducts, etc???

sylvia jones
February 28, 2013 at 2:27 pm

I think it is time to be honest and remove some of the emotional terms out of the discussion. "Fair" is the first that should be removed when discussing taxes. Is life "fair"? Is death "fair"? And so, the same with taxes. Taxes are needed for revenue in order to provide essential services. Some people will need more services than others. Does a civil society cut them off? To take this matter seriously, flat taxes should only be considered if all wage earners are making a living wage. Secondly, we need to review our essential services.

Edward Negola
February 28, 2013 at 2:14 pm

Eliminate Income taxes and use A "fair tax sales tax. It raises income on those who can afford to pay. It eliminates the IRS , Tax Accounts and Tax Attorneys.(See fair tax.org)

A tiny "social security and Medicare" sales tax that would help pay our seniors. Everyone who buys anything would be contributing but also would benefit in their senior years.

Remember, imports that are sold in this country do not contribute to our seniors.

BOB
February 28, 2013 at 1:18 pm

I guess it's the age old question, is the Tax Code legal, was the 16th Admendment really ratified by the 38 States as required by the Constitution.