OP-ED: We can do better with our tax system | Op-Ed
Benjamin Franklin once said, “Nothing is certain except death and taxes.” Nobody likes taxes, but they are necessary for the proper functioning of a society. I had a college education in taxes, and as a small business owner, I also experienced the business side of our tax code. Our current tax system is inefficient, creates unnecessary pain and anxiety, and has become the tool of the powerful. We can do better.
For the sake of brevity, I will focus on the income tax, which became institutionalized with the ratification of the 16th Amendment in 1913. Initially, it affected only the very wealthy (only 357,000 out of 97 million people the paid, and the maximum rate was 6%). This changed when the costs of World War II overwhelmed the tax revenue system and income tax became a mass tax, with 40 million people contributing.
In 1986, President Reagan introduced a bipartisan tax reform bill that greatly simplified taxes and removed the distinction between types of income (interest, capital gains, wages, etc.). This eliminated an entire industry of tax shelters designed to allow taxpayers to turn wages into capital gains to reduce taxes. Complexity has since crept back into the tax code, with a reduced rate for capital gains (which is why Warren Buffet pays a lower tax rate than his secretary) as well as a growing number of tax credits and deductions. There is no good reason for income earned as wages to be taxed at a higher rate than income generated from wealth, other than that the wealthy have more influence in Congress. The same tax rate should apply to all income.
Since Republicans opposed government spending (non-defense) but can tolerate tax cuts, Democrats used the tax code to achieve policy goals instead of new spending programs. Policies such as the Earned Income Tax Credit (EITC) complicate the tax code and, ironically, have led the IRS to audit low-income taxpayers (earning less than $25,000) at five times the rate from everyone. Focusing on low-income taxpayers ignores where most tax revenue is lost, the tax returns of the wealthy. The IRS estimates that $600 billion in taxes are owed but not collected, 28% of which is owed by the top 1%. The IRS had fewer than 10,000 auditors in 2017, numbers not seen since 1953, when there were dramatically fewer returns requiring audit.
Anti-tax rhetoric has been weaponized by Republicans and used to cut IRS funding, as if preventing the IRS from enforcing tax laws is tantamount to cutting taxes (Republicans cut IRS budget 18% over the past decade, while making the tax code more difficult to enforce). It’s incredibly myopic, because tax laws still apply, so law-abiding citizens (which I hope we all aspire to be) still pay their taxes, but people who are willing to break the law but who are no longer afraid of being caught, do not do it. IRS funding shifts the tax burden from tax evaders to people who aren’t cheating on their taxes. If enough people avoid taxes, people who are still paying start to feel like suckers and are also more likely to cheat. An example of what this looks like was the Greek debt crisis, where the government and the economy were in crisis partly due to the government’s inability to collect taxes.
The IRS budget should be increased because when the IRS hires employees, they bring in far more revenue than they cost. The IRS estimates that spending an additional $80 billion would bring in $400 billion, while increasing compliance. This would improve the experience for most taxpayers, making it easier for the IRS to answer questions, for example.
Additional funds would also allow the IRS to create tax software that would make it easy (and free) for taxpayers to file their taxes. Since the government has most of the information needed to determine taxes owed, filing should be as simple as confirming the government’s figures, as is done in many other countries, where most citizens spend little time or anxiety over taxes. The government does not already offer this service due to the political influence of large corporations that profitably sell tax preparation software (Intuit, H&R Block). They lobbied Congress to stop the government from creating such software because it would harm their business. In return, the companies promised to make their own software free for low- and middle-income taxpayers. But companies made it so difficult to access that very few people used it for free. It was basically a bait and switch scam, with lots of upsells. This agreement is now dead and the government should do what it should have done a long time ago.
One way to simplify the payment of taxes would be for all governments to define taxable income in the same way. If they did, the federal government could collect income tax on behalf of states and localities. Each government could determine the tax rate it charges, but ideally governments could simplify their taxes enough that a taxpayer could fill out one form. The federal government should collect income taxes for states and cities, and just transfer the money. Other taxes (sales, real estate) would not be affected.
One of the most complicated aspects of taxation concerns retirement savings, which are often sheltered from tax. Their complexity allows people with smart lawyers and accountants to outsmart the system, which not only robs the government of revenue (by raising taxes for everyone else), but also means that productive talent is wasted in the tax avoidance instead of more socially productive uses. A glaring example of this is that billionaire Peter Theil created a Roth IRA in 1999 that will allow him to avoid paying taxes on $5 billion in income.
Paying taxes should be considered a patriotic duty, and those who pay a lot of taxes should be honored to bear such a large share of our common expenses. Paying taxes should be made as simple and inexpensive as possible. We can do better.
Kent James holds a doctorate in history and politics from Carnegie Mellon University and is an assistant in the Department of History at Washington & Jefferson College.