We need to shred the current Tax Code and start from scratch.
In creating a new Tax Code, Congress must recognize and acknowledge the fact that the purpose of the federal income tax is to raise the money necessary to pay for the administration of the government and government sponsored programs. It is not to be used to “redistribute income” (the Tax Code is not Robin Hood) and not to be used as a way to deliver social welfare and other government benefits.
Many of the current “tax expenditures,” like the Earned Income Credit and the refundable Child Tax Credit, the education tax credits and deduction, and the energy credits, do not belong in the Tax Code.
I am not saying that the government shouldn’t provide financial assistance to the working poor and college students, or provide encouragements for making energy-saving purchases and improvements. What I am saying is that such assistance and encouragements should not be distributed via Form 1040.
The benefits provided by the Earned Income Tax Credit and the refundable Child Tax Credit should be distributed via existing federal welfare programs for Aid to Families with Dependent Children. The benefits provided by the education tax credits and deduction for tuition and fees should be distributed via existing federal programs for providing direct student financial aid. The benefits provided by the energy credit and other such personal and business credits should be distributed via Cash-For-Clunkers-like direct discount or rebate programs funded by the budget of the appropriate Cabinet department.
Distributing the benefits in this manner is much better than the current method for many reasons:
1. It would be easier for the government to verify that the recipient of the subsidy, discount or rebate actually qualified for the money, greatly reducing fraud. And tax preparers, and the IRS, would no longer need to take on the added responsibility of having to verify that a person qualifies for government benefits.
2. The qualifying individuals would get the money at the “point of purchase,” when it is really needed, and not have to go “out of pocket” up front and wait to be reimbursed when they file their tax return.
3. We would be able to calculate the true income tax burden of individuals. Many of the current “47 percent” would still be receiving government benefits, but it would not be done through the income tax system, so they would actually be paying federal income tax.
4. We could measure the true cost of education, housing, health, energy and welfare programs in the federal budget because benefit payments would be properly allocated to the appropriate departments.
And when writing a new Tax Code, Congress must “keep it simple, stupid!”
One filing status and one tax table. One or two tax rates. No adjust-gross-income-based reductions, phase-outs, exclusions and adjustments. And definitely no Alternative Minimum Tax. Every deduction and credit should be indexed for inflation. And there should never be any “temporary” tax provisions.
The simpler the better.
Some people may wonder why a tax professional is calling for a simpler tax system. Does not each new tax law, and each complexity added to the code, put money in my pocket? Is not a more confusing Tax Code better for my business?
I believe that a much simpler tax system would not hurt my business, or that of most tax preparers, at all. I sincerely believe that if I did nothing but 1040As all day during the tax season, I would make more money, experience less agita, and substantially reduce the number of extensions.
I also believe that my clients would not decide to do their own returns if the tax system was simplified; they would continue to come to me. Most taxpayers who use a tax professional simply don’t want to be bothered with the task of preparing their tax return.
And there will always be the need to calculate business, investment sale, rental, and farming gains and losses on Schedules C, D, E and F and Form 4797.
Unfortunately the chances of such true substantive tax reform taking place in the next few years are slim to none. It appears that President Obama believes tax reform = raising taxes on “the wealthy.”
Oh well, I can dream, can’t I?
Wayne County, Pa., tax professional Robert D. Flach has been preparing 1040s since 1972. He writes The Wandering Tax Pro blog for the average middle-class taxpayer, and The Tax Professional blog for professional tax preparers. He also writes on taxes for The Street.com and MainStreet.com.
7 Comments
I agree with Robert D. Flach in most instances. And the logical comments. The tax code should be simplified. However, it's simpler to say then to do. Pun intended.
As far as some of the other comments:
7 and 7; Sounds like an alcoholic drink to me. Is this the new "999?"
Fair Tax; I give up. So what is fair? And what specifically, with intelligent explanation is unfair?
I love generalized comments. Gets the commenter of the hook to have any sort of intelligent explanation.
Posted by: tego@verizon.net | February 21, 2013 1:52 PM
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A "consumption" tax is the most regressive of all tax methods. Do you include stock transactions too? Lease transactions? Rent payments? Donations? Yachts? Payments to accountants/lawyers?
Taking away child care credits? What about depletion, may it depart too?
Creating a national consumption tax will no doubt trigger a huge underground economy.
Bad idea. Come up with something else, please.
Posted by: Chas47 | February 19, 2013 8:54 PM
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is there some reason that they don't understand the only fair system on the population is a 7% consumption tax and A 7% flat tax with no loopholes. wake up america lets get a level playing field fairest way ever.the dinosaur we have now is antiquated
Posted by: roadragein | February 19, 2013 3:14 PM
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If it were not so serious this whole discussion and the tax law itself would seem like a Saturday Nite Live Spoof. A tax code of 78,000 pages and a bunch of politicians whose only interest is re election, amending the monster every year, talking about reform by adding another 5,000 pages. I am glad I regard this as a comedy. That make me know I am still sane and have not started the "Long Good-Bye". If I could use my Magic Wand, I'd make all the code and all the writers disappear and three friends and I would call in the FairTax people and we'd be up and running in a few months. No social engineering. If someone wants benefits they'd have to go somewhere other than the tax dept. The tax dept would be an accounting function-Money in--Money out and a report to president and a report to congress. See how simple it is. Not gobble-d-gook.
Posted by: wjeretidwell | February 19, 2013 2:52 PM
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A hearty AMEN to Mr. Flach! The Income Tax and the Tax code that contains the rules on how it is implemented have become such monsters that its primary purpose is no longer to generate revenue to finance the govenment but a tool to be used by legislators to raise vast sums of money to insure their re-election, and the basis on which otherwise unsound business decision are made which in the long run are decidedly detrimental to our economic growth and which serve to make the US non-competetive in the world market.
Most countries have followed in our footsteps and instituted their own income taxes, but some 15 countries do not have any income tax at all, but instead raise 100% of their tax revenues through other kinds of taxation, like consumption taxes, etc.
One of the most damaging aspects of our tax code is its extraterritorial reach behind the borders of other sovereign nations to consficate funds out of their economies and funnel them into the US Treasury. The US, for example, is the ONLY "civilized" country that taxes its citizens who live in work in another country, where they are fully subject to the tax laws of that country, as if they never left home. Americans living abroad, just like everyone living in the US, are required to file US tax returns and pay taxes to the IRS on top of the taxes they have already paid to their country of residence.
Oh yes, they can claim a foreign tax credit for taxes paid abroad to their country of residence and if the foreign tax rates are higher than the US rates, they may end up owing nothing to the IRS. But they must file and accompany their filing with several additional forms that are only are required from citizens living abroad in order to prove to the IRS that they owe nothing more. What an absolute waste of money and resources that generates mountains of paperwork but does not genereate even one cent of revenue for our Federal Treasury.
US citizens who live in the 30 some countries with foreign exchange controls are unable to obtain dollars to pay their tax obligation to the IRSs, except on the black market where in most of them these transactions are considered felony offenses which can result in the confiscation of everything you own and years in prison. But if you spend any of your foreign blocked currency on food, rent or any other expense the US tax in dollars is immediately due and payable. Don't expect any sympathy from the IRS because what the tax code says is law. "That's your problem," is the IRS response when you have to violate foreign law to obtain dollars illegally to pay your US tax obligation. So you must decide which prison system you are most likely to survive.
So how about some really serious consideration of junking the tax code and replacing it with the FairTax or the Flat Tax? At any rate our current citizenship based taxation, on which FATCA has recently been heaped, make it impossible for many Americans to survive living in aother country. It is either return home, leaving your job or business and foreign citizen family behind, or renounce your US citizenship before a US consular offical outside of the US. Once renounced this decision is irrevocable. No other nation obligates its citizens to renounce their homeland citizenship to be able to survive living and working outside of their own country. Oh America, sweet land of freedom and liberty!
Posted by: RogerC | February 19, 2013 8:28 AM
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The focus of this article related to redistribution of wealth as it pertains to forms 1040 and individuals. It did not mention the massive redistribution of wealth that exists in the tax code in the form of corporate welfare. The inequities in the tax code as it relates to the chosen industries (energy of all types, aerospace, agriculture, biotech etc) has a redistribuion of wealth effect that should not be ignored.
Marty Albert, CPA
Posted by: martinalbert | February 19, 2013 8:24 AM
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Between 1995 and 2010 the tax code caused the poorer half of the population to lose 70% of their wealth while the top 10% had a 10% gain. The middle class lost 8% of their wealth. This leads to the need to reform the tax code to stop hurting the 90% who have suffered. The extra $400 or $500 billion a year needed to address projected deficits identified by the U.S. Treasury must necessarily come from those who have the wealth to pay it. A 2% net wealth (excluding $15,000 cash and retirement funds up to $500,000) would generate sufficient revenue to eliminate the job killing payroll taxes and enable the income tax to be reduced to a flat 8% for all (because no tax expenditures are needed when the rates are very low). The same 2% net wealth and 8% income tax rate would apply to rich and poor, and still remain progressive because the half the country has only 1% of the wealth while the wealthiest 10% have 75% of the net wealth.
Posted by: Eugene Patrick Devany | February 16, 2013 1:08 PM
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