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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.

***

Want the latest news on taxes, tax reform prospects, filing deadlines, Internal Revenue Service alerts and tax-saving tips? Subscribe to Bankrate's free Daily Tax Tip newsletter, our Weekly Tax Tip newsletter or, if you're a true tax geek, both!

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
Bob
February 26, 2013 at 5:41 pm

Show me were in the constitution that sad we have to pad IRS anything. The IRS is unconstitution ask Ron Paul

just thinkin
February 26, 2013 at 5:40 pm

GGIN has a very good idea, I just finished doing my taxes and it was crazy goin. I agree consumption tax would be a lot easier.

Larry
February 26, 2013 at 5:38 pm

everyone should pay-do away with irs and go to fair tax

Eric Farmer
February 26, 2013 at 5:30 pm

We should do away with taxing what you make, and tax what you spend. Go to a national sales tax, and do away with the income tax system.

sailbuddy
February 26, 2013 at 5:26 pm

I agree with Hadenough. Why is it fair, as Ms. Bell suggests above, to have those who make more, pay a larger share.
It is hard to argue sensibly that everyone paying the same part of their income in taxes is not fair!
The National sales tax sounds like the European VAT. How's that working out for them? You see any of them paying less in income tax? Not to mention their fiscal health...

GGIN
February 26, 2013 at 4:57 pm

If we go with a comsumption tax to simplify our tax law,It would be a good thing. The present law is so complicated, hardly anyone knows how to fill a tax form out anymore.With a simplified taxation, we could down size IRS and people would not have to use a tax expert. It does not matter whether you are working in this country legally or not. Everyone pay their fair share. The more money you have, the more you buy, the more you buy the more tax you pay.

Fajita
February 26, 2013 at 4:52 pm

We should institute a National Sales Tax. Those who buy more, pay more.

Russell J.Hall
February 26, 2013 at 4:40 pm

Oh Boy,here we go again,Washington is going to straighten it out.I can imagine what a fiasco this is going to be.Until they learn some fiscal responsibility,no system will work right!!!!!!!!!

Izzie
February 26, 2013 at 4:39 pm

How come when the Goverment withholds our taxes, it gets to keep them for as long as they like and they don't have to pay us any penalties, but if we don't pay up and on their schedule we have to pay penalties???

Hadenough
February 26, 2013 at 4:26 pm

Why should people who have the ability to make more money than someone else be forced to pay more in taxes. They are obviously going to spend more, which puts people to work. Fair should be fair. Everyone should pay taxes, even the people on government subsidies!!