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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 26, 2013 at 7:20 pm

I like the Fair tax or consumption tax. That way everybody pays their fair share....Even those that receive benefits and are not legal citizens, help to pay their way for services they and the rest of us are getting or using.

Plus spending cuts need to be made with the government. The lessor more non-essential areas. Not the "lets scare the hell" out of our citizens and cut what they want most. Congress waste so much money it would be easy to cut spending...

mark
February 26, 2013 at 6:56 pm

The only reason the tax code is as complicated as it is, is because the wealthy, when they pay $20,000 for a lunch or dinner with a scumbag politician, want something for it. Usually those are either set-asides or targeted tax breaks. The wealthy have much more to lose if our system of government is ever compromised. What does a poor person have to lose, compared to a Romney or Buffett? So they should pay more in defense of their privileged state.

Marvin
February 26, 2013 at 6:52 pm

A flat tax is the only way to go 10% for the Federal government and 5% for the States. No filing and no refunds and a constitutional ammendment that the State and Federal governments cannot spend more revenue that it recieves

RC
February 26, 2013 at 6:30 pm

My opinion is there shd only be one tax. That being a consumer tax or also known as sales tax. No payroll tax. No business taxes (not including SS or MC here as they are not really a tax). Everyone pays based on what they consume. Businesses would boom, and the Fed Gov would shrink considerably.

Second best is the progressive flat tax based from 0% to max of 15%.

jim
February 26, 2013 at 6:27 pm

Flat tax everyone pays that billionairs to people who get "entitlements" of any type. Russia has a flat tax rate of 13% they seem to be doing better than we are

Ojokeo
February 26, 2013 at 6:19 pm

We don't have a tax problem we have a spending problem. Those crazies in Washington need to learn to say know. If the can't balance the buget cut their pay in half every year they fail.

wade
February 26, 2013 at 6:15 pm

It seems only logical, that if you have a flat rate and you earn more money, you already pay more taxes. how can you argue with the fact that "the more money you make the more you pay". this is what a flat rate does and it has the potential to turn the economy into thriving machine, and means you can grow a business. as a business owner making only $30,000 in revunue a year, the government still hates me. obamacare affects me directly through pork regulations. i have to spend money like crazy to keep up with new regulations. what do i do? i put my business up for sale. its not worth it. i can only imagine the nightmare in growing and having thousands of more regulations affecting me. it sucks. the government hates me.

Kurt
February 26, 2013 at 6:14 pm

What this country needs are two things, a national sales tax, and a constitutional amendment prohibiting ANY other kind of tax imposed by any government, local,state or federal. Go to fairtax.org and see for yourself, there is no downside, everyone pays a proportionate amount, i.e. you pay taxes to the extent to which you choose to indulge yourself. And government has a built in incentive to keep the economy strong. What could be more fair than that?

Chris
February 26, 2013 at 6:12 pm

Tax what we spend not what we make. Now we pay tax on what we make and what we buy etc... not right at all. The current system doesn't work The government is terrible with managing its money and we have to pay for it.

Steve
February 26, 2013 at 5:54 pm

Why should someone who makes only $40,000 be granted more disposable income than someone making $250,000? That makes no sense to me whatsoever. 20% is excessive, how about 10%? If someone makes that much money, they should have that much more to spend. It's pretty simple.