Vail Daily letter: Our country needs a less-complex federal tax code
August 9, 2017
Our tax code is incomprehensible
The Internal Revenue Code contains tax laws enacted by Congress. The regulations are issued by the IRS to make more detailed provisions.
Have you ever browsed through those documents? Much of the text is not comprehensible to ordinary people, or even many lawyers and accountants. They are the sum total of efforts to avoid payment of the percentages that are levied on income, as well as defining what is taxable income and what are legitimate deductions.
A while back the then-head of the IRS was on a TV show, and a passage from the code was read to him. He was asked: what does it mean? He confessed he couldn't tell.
The wealthy spend a lot on accountants, lawyers, lobbyists and politicians to create angles and loopholes that reduce their income tax burden. It has helped cause the mess that governs this subject. What they are doing is legal. I believe some of the costs of these activities are deductible expenses against income. Do you blame them? What would you do if you were rich?
So politicians can proudly promote high tax rates on higher incomes; but they don't discuss all the exemptions and deductions that make those high rates less than it would appear.
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Another bad effect from high marginal income tax rates is that people arrange their activities to lessen the tax burden. The path chosen may not be the most economically efficient way to go, except for the income tax factor.
The middle class is as guilty as the rich. Here are some examples:
• Mortgage interest deduction. Why should people with mortgages on their homes get a deduction for their interest payments? Is that fair to people who rent, or to people who don't have mortgages on their residences, or those who take the standard deduction?
How much of the pressure to keep this feature comes from those who profit from residential housing — developers, planners, contractors, construction unions, mortgage lenders, realtors and so on.
How did any houses get built in this country before this special interest feature was added to the income tax laws?
• Employer health care programs. Ordinarily, it isn't just money payments that are made subject to income taxes. It can be in-kind compensation like a car or plane that is not used entirely for business purposes, or payments to third parties, such as country club dues. But employer payments for employee health insurance are not counted as taxable income to the employee, even though they can be deducted by the employer as a business expense. Is this fair to employees who do not get such benefits, or to those who are not in the labor market?
• Dependent deduction. Why should your taxes be lower if you have kids? Don't those kids cost the government more money? Tax breaks are usually granted to promote some social aim. Do we need more people? Isn't overpopulation a problem — in the world, in the U.S. and in Eagle County? Why is Planned Parenthood so popular? I can see another essay coming about that topic.
People can rationalize unequal treatment by the law if they are the beneficiaries. In the end, it's human weakness; ethical relativism; soft core corruption. It isn't made less offensive when it's enjoyed by those who are not rich. Politicians support them because they mean votes from the special interest groups involved.
Then there are those who are not asked to pay income taxes. Lower income people. Don't they benefit from what the government does? You wonder what the effect is when they are asked to support a new spending program, where they don't have to worry about paying for it. Some get the earned income tax credit, which amounts to a subsidy for working.
When I buy something that is subject to a sales tax, they don't ask me how many kids I have, or what my income level is. I pay the same flat rate as everyone else. Why can't this principal be applied to income taxes?
Don't forget what it costs to comply with the present system — do you prepare your own income tax returns, or do you pay someone else to wrestle with all the details?
My position is that whatever compensation you get, it should be subject to income taxes. And the rate should be the same for everyone. So, if the rate is 15 percent, and I make $20,000 a year, I pay $3,000. And if I make $200,000 a year, I pay $30,000.
It doesn't matter how many kids I have, whether my income is from oil production or hedge funds or salary or hourly wages; whether my house has a mortgage on it; and so on.
There are a lot of people who would find this attractive. And many who think they can do better with the complicated system now in place. Maybe the remedy is to have parallel income tax systems. You can sign up for a flat rate, and fill out your return on a single page. Or you can continue as before.
For more about this issue, look up Steve Forbes and Milton Friedman. Or Google "flat income tax" There's a lot of information out there.
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