Kill The Current US Tax Code And Start Over

More than one person has said that our tax code is longer than the Bible — without the good news. They aren’t kidding. It’s not even close. “The Code,” as it’s affectionately referred to, has just a bit less than fifty times the pages of The Gutenberg Bible. In 2011,  taxpayers spent an astounding $200 billion dollars in compliance and 6 billion hours filing taxes.

That’s almost a quarter of a trillion dollars. That’s 250 million days. That’s some serious time and money.

It’s time to kill The Code.

The problem with The Code is that it’s jam-packed with all kinds of subsidies to various industries which boil down to credits or deductions offered to the taxpayer. Why does the government allow you to depreciate (deduct from gross income) purchases of NASCAR equipment over a seven year period? So why is the government saying that you can’t get a $500 credit if you buy eye glasses? Why are they proposing tax credits for hearing aids?

The list of inconsistencies and oddities goes on and on. The United States tax code has become one large boondoggle that legislators now use to curry favor with individuals and big business. It’s become a never ending of game of robbing Peter to pay Paul. When you give a credit to one person or company, another has to subsidize that cost.

First and foremost, America’s foundation is embedded in the principles of liberty and equality.

As such, government should not be in the business of picking winners or losers particularly as it relates to the tax code. Intervention in free markets is never a good idea. One only needs to look at the country’s housing mess to see that.

A corollary to the idea that the government should not be picking winners and losers is that a tax code that treats all income the same would be more equitable.

Right now, wages are technically the most heavily taxed form of income, due in large part to withholding. However, not everybody lives on wages. Many people live off the money they’ve gained from investment income. If the tax code were revenue-neutral, every type of income would be treated equally — whether it’s earned from dividends, capital gains, or wages. Wouldn’t that be a wonderful simplification in itself?

Contrast that to right now, where all “income” is taxable under The Code — but not all income is taxed at the same rate. Income from wages is taxed at a certain level, but income from “capital gains” (sale of stock, for example) or “dividends” (income payable by a stock to the shareholders) are taxed at different rates.

There is no need for different rates and double taxation.

Capital gains and dividends are already taxed as corporate profits when they come in as corporate revenue — and that revenue gets taxed again when the shareholders are paid.

So how does such a flawed system get fixed? Many have floated the idea of the Fair Tax which is in effect, a national sales tax. Sorry, Fair Tax advocates  – but it is not a good idea just now. Until the repeal of the 16th Amendment is made possible, a Fair Tax is a non-starter. We would no doubt wind up with a national sales tax and income taxes.

Ideally, a flat tax would be a better approach to becoming a society which is taxed more fairly.

A flat tax treats people equally by taxing everyone’s income at the same percentage. If your taxable income is $50,000 and the tax rate is 10%, you pay $5,000. If your taxable income is $5,000,000, you pay $500,000. Equal treatment under the law. Eliminating most (if not all) of tax deductions while lowering tax rates would make The Code treat people more equitably – and more fairly — without picking “winners and losers.”

But how does the government account for the marginal utility of the dollar?

The government can institute a standard deduction/exemption for a set amount representing the so-called “cost of living” for people to support themselves and their dependents. We actually have this in our current tax laws. Everybody is entitled to a “standard deduction” and a “personal exemption,” which are both supposed to represent costs of basic living.

Since every person would be receiving the same deduction or exemption solely based on his or herself and the number of dependents, people would be treated equally under the law of the tax code. In addition, there would be no itemization of deductions. Combined with a lower tax rate, in theory individuals should not have a higher tax liability and the government should not lose out on revenue. In fact, a flatter tax would stimulate growth, as some have argued.

Right now, the standard deduction and personal exemption for an individual is approximately $10,000. Under a flat tax with a deduction/personal exemption, the first $10,000 (give or take) of income would help protect a lower-income individual.

Not only would a true flat tax be a lot fairer by treating all income equally, but compliance costs would plummet because the tax code would be simpler, would not require itemization or documentation of expenses, or hiring of tax professionals to find “loopholes.” This would be key, especially for small businesses, which are disproportionately affected by compliance costs compared to larger businesses.

The GOP’s 2012 presidential candidate who, in my opinion, had the best tax plan — the closest to a true flat tax — was Jon Huntsman. Huntsman proposed eliminating all tax deductions and credits while setting up three tax rates that were based on earned income: 8%, 14%, and 23%. Huntsman also suggested lowering the corporate income tax rate to 25%, which is a large decrease from the current rate of 35%. Finally, Huntsman proposed eliminating taxes on dividends and capital gains to encourage capital flow and investments. Capital flow and investments are stimulative in themselves, which will cause GDP growth and thus, create sorely needed jobs. This, in turn, generates more revenue for the government. Hence, revenue neutrality (or even a government windfall) is achieved.

This is a great idea and will encourage investment and savings — the latter of which, is sorely needed in America.

The tax code should be simplified and shaped to treat all taxpayers — more fairly. Equal protection for the taxpayers under the law. The Fourteenth Amendment guarantees it.

Now we just need to enforce it.