TCS Daily

Towards a Simpler, Fairer Tax

By Jon N. Hall - October 7, 2009 12:00 AM

Simplify, simplify, simplify...Henry David Thoreau ("Walden")

Some tax reform proposals, like the Flat Tax and the Fair Tax, are fairly revolutionary. Regardless of their merits, these proposals would turn our tax system upside down and inside out, and hit the delete button on most of the U.S. Tax Code. Getting Congress to accept these proposals and replace the complex monstrosity they've been so busily creating all these years seems, at best, unlikely.

If you're old enough, you may remember TV repairmen and "shade tree mechanics" -- America used to fix things. But nowadays we just buy a complete new unit and throw out the old one, even if it can be fixed.

We must resist this tendency when it comes to our tax system. We should fix what we have, rather than replace it. To throw out our current tax system -- a system that has seen us through the Great Depression, World Wars, as well as our most prosperous boom times -- when Congress has never really tried to fix it, is the height of imprudence. And scrapping the current system for some untested substitute would expose America to a host of unknowns and unintended consequences.

But I'm here to tell you: Our current tax system could be much simpler and fairer. Indeed, simplification might be fairness.

A few years ago I conceived of a tax reform that I thought might just be able to get through Congress. The reason why: My idea leaves the U.S. Tax Code virtually intact. All it does is add a few lines; it would be very easy to install. And by leaving the Code intact, my reform could easily be backed out if folks didn't like it. Under my reform, everything that is currently taxed will continue to be taxed. This is rather different from the revolutionary tax reforms, which exempt certain types of income.

In the Age of Trillion Dollar Deficits, tax reform must be revenue-neutral. My reform accomplishes this by its method of setting new tax rates. My idea is a type of Flat Tax, and its goal is complete simplification.

This is a sterner type of Flat Tax than the others, though, as it does away with ALL exemptions. So there might well be resistance to it. But exemptions mean lost revenue, and since others must make up for that lost revenue: One man's exemption is another man's tax hike. So exemptions aren't fair. However, the method I use to establish new tax rates incorporates old exemptions, spreading them out to everyone in each bracket. Current exemptions are "baked" into the new rates.

But this reform is not for everyone, as it would affect, at most, only the top 5 percent of taxpayers. However, for tax year 2007, the top 5 percent paid 60+ percent of the personal income tax, and the top 1 percent paid 40+ percent. So we'd be getting simplification into the returns of those paying the lion's share. Unlike other Flat Taxes, my modest proposal does not sock it to the middle-income taxpayers.

As for what to do about the bottom 95 percent, I'm afraid that's above my pay grade. But if we wait for a "comprehensive" plan that includes all taxpayers, we'll continue to wait. Besides, it's more difficult for lower income taxpayers to accommodate simplification, simply because these folks, unlike high-earners, need exemptions. So until we figure out how to simplify their taxes, middle and lower income taxpayers will continue to use the current U.S. Tax Code, with its stunning array of exemptions.

My reform is only for those who can afford simplification, some of whom earn more in a year than others do in their entire lifetimes. What I'm trying to do is get simplification into the But my reform could serve as a model of tax simplification for the bottom 95 percent. Only after we phased in everyone would we hit the delete button on the Code's current exemptions.

This link is to a 2-page article I wrote 2 years ago that outlines the mechanics of my tax reform idea: How to Reform the Individual Income Tax. The next month it appeared at PPTO, the Public Program Testing Organization, and is still available there, too. I even gave my little idea a name.

Charities might object to my plan, thinking donations would dry up. But just think of all of those in the federal government, including the head of the Treasury (who oversees the IRS), who have not been paying their taxes. Do we really want these paragons of virtue deciding which charities are legitimate and worthy of a tax write-off?

Simplification would make it easier to predict how future tax rate adjustments would affect revenue, as taxpayers would no longer be able to shelter their income. But the best thing about tax simplification is this: Simplification neutralizes Congress.

Congress continually changes the Tax Code to reward campaign contributors with favors. It's not too much to say that these professional politicians owe their incumbency to the Tax Code -- it allows them to create their re-election treasure chests. Congress not only adds exceptionsand loopholes to the Tax Code to lower taxes for its contributors, it hikes taxes for those it disagrees with. We see this in the onerous tax rates for tobacco users as well as the proposed new tax on sugary soft drinks.

Congress continues to consider new taxes, such as taxing employer-provided health insurance, cap-and-trade, and perhaps a VAT (value added tax). Congress wants more types of taxes to tax more things. And they're always in the mood to jack up tax rates. There's no end to it. But if you jump through their hoops and do what they want you to do, Congress will provide a way to get out of paying their taxes. All of which makes taxes in America more and more complex and, incidentally, more and more unfair.

If Congress wishes to favor certain individuals and enterprises, or fund one of its pet projects, or make feasible some utopian entitlement, it should find some other way of doing it than fiddling with the U.S. Tax Code, pitting one taxpayer against the other.

Congress, and Congress alone, is responsible for the U.S. Tax Code. And it is Congress that must be held accountable for this unfair and complex mess.

What most tax reform plans strive for is simplification. But Congress thrives on complexity. So regardless of which reform you favor, nothing is going to happen with the current Congress.

You'll have to replace it.

Jon N. Hall is a programmer/analyst from Kansas City.

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