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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
BOB
February 28, 2013 at 1:15 pm

I guess it's the age old question, is the tax code legal. Was the 16th amendment really ratified by the 38 States as required by the Constitution.

BillyGoat
February 28, 2013 at 12:21 pm

Flat tax (around 14%), no deductions, dependent credit. Polititians talk about being fair. That is FAIR. Everybody pays. Simple, easy. My state taxes are this way. The IRS could be reduced saving even more money.

Duane Weaver
February 28, 2013 at 11:02 am

Let's have a national sales tax on all goods and services and drop the fed tax rate to 5% for everyone with no deductions. The revenue from a sales tax would automatically increase when the price of goods and services increased. Give people who earn minimum wage credit or refund equal to a percentage of the national average percentage of income that people spend on food and medicine That should create more than enough revenue for the government

Laura
February 28, 2013 at 10:55 am

Jim refers to the Fair Tax. Unless I misunderstand him, I believe he is referring to a national sales tax rate that would replace not only the federal tax withholding but also the social security tax and medicare tax.

My take on a national sales tax is that EVERYBODY pays a fair share by taxing their spending. Keep in mind that people go to great lengths to hide their earnings. But how can you hide your spending? For those people who earn money "under the table" they have no choice but to participate in the tax system with a national sales tax.

Another aspect of this is that it would be self-regulating. If the rate is set too high, then people will curtail spending. Just refer to the state revenue departments. They already show that type of model. This would force our government to regulate and set a rate that would be acceptable to the public. If the rate is too high, the government's coffers would deplete; however, when the rate is set at an acceptable percentage, then the coffers will fill so that our nation can take care of social programs.

There is much more to this. Naturally, there will be certain items exempt. Will it make people lose their jobs? Not according to Fair Tax. Check them out. It is a financially mind-opening study.

Jim
February 28, 2013 at 9:44 am

If we would just go to the Fair Tax system the problem would be solved. We would be able to keep Medicare and Social Security. There would be no more tax loop holes for Corporations and everyone would be paying their fair share in taxes.

Did you know that 45% of people in this country don't pay taxes because of loop holes and tax breaks for certain people. By going to the Fair Tax System it would put an end to this.

There was a big battle in Congress over healthcare, and we were reminded every day by the newscasters that the bill was over 2000 pages long. If it was such a big deal about the healthcare bill being over 2000 pages long, then why aren’t they screaming about our tax code, over 60,000 pages long and so confusing that the people who are in charge of it at the "IRS" admit that they don’t even understand it, and to make matters worse, if you call the IRS tax help line and ask for professional advice, and they give you the wrong information, which happens a lot, it’s you NOT the IRS, who will have to pay any penalties. By going to the Fair Tax system we would get rid of the IRS all together.

Because of our current tax code we’ve had thousands of businesses have relocated to other countries. Under the Fair Tax System not only these business but many foreign businesses would relocate here because of the friendly tax system we would have for them. We would see an economical boom here that we haven’t seen in over a hundred years.

There is 60 to 90 billion dollars that moves in the under world every year that isn’t taxed. There are billions more that are paid under the table to illegals every year that isn’t taxed. Under the Fair Tax system that money would be taxed.

Under the Fair Tax system, if you win a million dollar lottery jackpot you get to keep the whole million dollars. You do not have to give half or more to the IRS. If you have a rich aunt die and leave you a million dollar estate you get to keep all of it. You do not have to give half or more to the IRS. Look at how much they take out of your pay check each month for Federal tax, under the Fair Tax system you get to keep that money.

Get Government out of our private lives. Shrink Government. No more dreaded April 15th tax day. A tax system so simple an 8th grader can understand it and on top of that, a tax system that is fair for everyone. If you haven't read the book then please do so. You can pick up a copy on Amazon or on eBay.

Leeza
February 28, 2013 at 9:44 am

Is it fair to tax people at a higher rate if they earn more income than someone who earns less income? The best way to answer this question is to stipulate that a person who earns more income does not receive a greater benefit than someone who earns less income for the same benefit. For example, take the benefit of National Defense and Security. Everyone receives the benefit of National Defense and Security on an equal basis. Our National Defense and Security benefit is paid for by our taxes. A person who earns 1 million dollars in income each year does not receive any more National Defense and Security than someone who only earns 25 thousand dollars in income each year. Both receive the same equal benefit of National Defense and Security each year. My point here is that all income earners receive the same benefit on an equal basis. National Defense and Security is but only one of many federally-funded benefits through taxation.

So, how is it fair to tax someone at a higher rate if everyone receives the same benefit equally?

D Werner
February 28, 2013 at 9:36 am

I think the entire federal beaurocracy should take a pay cut, finance their own retirement through 401k plans & social security ( and soial security, & pay part of their health care like the rest of us in the real working world. In addition, why not a 20% pay cut for all federal & state government workers especially the legislature. On another point I also favor a progressive tax on income and a "consumption" tax for everyone on what you use - except for the basic food and clothing.

Mary Richard
February 28, 2013 at 9:12 am

The tax code we have now is a nightmare for those people making under $35,000 a year. Retires are the hardest hit. If you make under $40,000 a year you should be exempt. Plan and simple. a lot of people have "under the table" business to get by. I really makes it hard on those of us that don't. I don't even qualify for Social Security, yet I am over 62.

William Rotenberry
February 28, 2013 at 8:07 am

The Income Tax/IRS was born on March 8,1862. It was legalized 1913. The irony of the Income Tax is April 15, was the Day Titanic Sunk and America's wealth sinks too. Abraham Lincoln should get the credit he so richly deserves. WLR

Donald
February 28, 2013 at 7:51 am

Sales tax would work.10% minu food.When you buy other than unprepared food you pay.When you buy stock you pay but you your dividends free until you buy any other shares.Irs workers would be moved over to the SEC to audit companies.So the workers would still work.