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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
Bryan
February 28, 2013 at 6:55 am

Consumption tax has issues. If I spend my entire paycheck just to get by every week, I'm taxed on 100% of my income. If I make so much money that I can bank 98% of my income, I'm taxed on 2% of my income. Hardly "fair".

Jamie
February 28, 2013 at 6:42 am

"Those making less should pay lower tax rates to give them more disposable income."

But why the emphasis on what someone *makes* as the basis for taxation? If we want people to have more disposable income, the surest way to do that is allow people the freedom to make as much (or as little) as they are willing to work for.

We should be concerned, not only with the public debt, but also the amount of credit card and other personal debt (which mostly stems from over-spending, and less to do with "disposable" income).

If we are also look at our supposed concern for the environment (we aren't *really* all that concerned, or we wouldn't be making the personal choices to drink bottled water while driving our SUVs with the air conditioning cranked to 60 degrees on our way to the store to buy individually plastic-wrapped anything, but just go with me on this...), the most sensible answer is a tax on consumption - particularly on new items. Don't punish people for what they earn - punish them for how much they spend (i.e., waste) without reusing.

If some rich person wants to buy a private jet, fine! Let them - they'll get taxed on the price of that new jet. If you choose to buy a new car (instead of a used car), or some bottled water (instead of from the tap), or something shiny and new and plastic-wrapped, you get taxed on that. If you choose to go to a restaurant, instead of preparing food from your own backyard garden, you get taxed on that.

In order to keep it fair for those who do not have much or only spend money on "necessities", the government only taxes this consumption after a certain "poverty-level" of spending has taken place. In fact, they can do it at the beginning of each month, via a pre-spending tax rebate, or "prebate".

This is what makes the FairTax fair - if you are not wasteful in your spending and take good care of the things you own, you will pay a lower overall tax than someone who feels compelled to spend, spend, spend.

Additionally, since there would no longer be a tax on money earned, a large portion of that income that was funneled to offshore accounts (approx $9 trillion) would come back into this country's economy, because we would become the largest tax haven on the planet! Imagine *that* stimulus...

Nick
February 28, 2013 at 12:59 am

A flat percentage tax rate would work the best, with no loop holes. example if the flat tax percentage was 5% everyone who earned any kind of income would pay $0.05 for every $1.00 they earned. Income tax reporting will be so easy it could be reported on a post card like it was in the early 1960's. I believe that taxes is the price of freedom and we should all pay our equal share of it.

George
February 28, 2013 at 12:07 am

FairTax! yesssssss

Donna
February 27, 2013 at 1:23 pm

I believe the Flat or Sales Tax is the only fair way to go. But I seriously doubt it will ever happen since it's big business for consumers to file taxes every year along with the fact most of the super wealthy would probably stroke out they had to pay their fair share.

Kevin
February 26, 2013 at 10:01 pm

Cynical much? ABSOLUTELY!!! It has been proven that a consumer tax plan would generate more money for this country. The problem is that, enabling such a format would mean that the government would have to cut all the frivalous spending because all the revenue would be accounted for and therefore harder to hide in politicians pockets. This is like asking government across the board to take a major pay cut. Don't forget that the only time every member of our government votes together is when its for thier own pay raises. It's time for the average guy and women to get a pay raise, It has been far too long!!!!

Jay Roberts
February 26, 2013 at 9:10 pm

I agree with the National Consumption Tax. We all have more money to spend, the economy is vibrant and the government get's money from "EVERYBODY", not just the working man!! You have money-You buy something-You pay taxes on the spot! The government get's the taxes right then and there. EVERYBODY HAPPY.

Skippy
February 26, 2013 at 8:50 pm

I have doubts on a consumer tax. The biggest problem will be that the rich probably will find a way to get around the system, let alone overseas and internet purchases. An underground economy will prevail. However, the best way to bring the current tax code to its knees will be to start an underground economy, especially on the employment side. With so many unemployed, they should be running said economy, with the lower income people, and the hell with the government and their stalling.

John Oliver
February 26, 2013 at 7:23 pm

The national sales tax is a idea I've loved since it first came out. Heres the problem and why the government will never go that way. The government loses the IRS which is another way they keep tabs on us, all of those folks that works there would be out of a job and they would have to come up with something for them to do or come off alot of money for severce.And it would make things alot simpler(and you know that aint happening)and the government would have to live within it's means. Another thing is what alot of folks don't even know is Uncle Sam already has excise taxes on alot of things including GAS!!!!!!!!! lol

Jan
February 26, 2013 at 7:21 pm

Our Country does something better than any country in the world. WE Buy Things. A National Consumption Tax is the answer. Get Rid of income taxes and adopt THE FAIR TAX or sales tax on what we buy.