THE TAX CODE MUST BE DESTROYED!

I am a tax professional who has been preparing 1040s for individuals in all walks of life since 1972.  As a tax preparer I know full well that the United States Tax Code has grown into a complicated and convoluted “mucking fess”.

The major reason for tax return errors, by both paid tax preparers and taxpayers who self-prepare, is the excessive complexity of the Code. It needs to be shredded and totally rewritten from scratch.

Bring me the head of the US Tax Code!

Like Frankenstein, the Tax Code must be destroyed.  It must be shredded and totally rewritten from scratch, acknowledging that the one and only purpose of the Tax Code is to raise the money necessary to fund the government.

The new Tax Code must –

(1) Be simple – easy for everyone to understand.  Simplicity for simplicity’s sake.

(2) Be fair and equitable - treat all taxpayers equally.

(3) Be consistent – treat specific conditions, situations, and activities, and maintain specific definitions and descriptions, the same in all instances.

(4) Encourage savings, investment, and growth.

(5) Index for inflation all allowable deductions and credits.

The new Tax Code must not –

(1) Be used for social engineering, to redistribute income or wealth, or to deliver social welfare and other government benefits.

(2) Encourage or discourage certain economic decisions (other than savings, investment, and growth), or provide exclusive benefits for specific industries, business activities, or classes of taxpayers.

(3) Contain any refundable credits, or any phase-outs, exclusions or adjustments based on Adjusted Gross Income or Modified Adjusted Gross Income. 

(4) Contain any “alternative” tax calculation systems (such as the current “Alternative Minimum Tax”).

(5) Contain any temporary deductions, credits, benefits, or provisions.

A new Code would state “Everything is taxable, except . . .” and “Nothing is deductible, except . . .”.  Only those “excepts” – exclusions and deductions - that are absolutely necessary and appropriate, in the context of the “musts” and “must nots” listed above, should be added back.

The Tax Foundation, a nonpartisan, educational organization, has earned a reputation for independence and credibility. All Tax Foundation research is guided by the principles of sound tax policy, which should serve as touchstones for policymakers and taxpayers everywhere.  It has identified key principles of sound tax policy:

Simplicity: Administrative costs are a loss to society, and complicated taxation undermines voluntary compliance by creating incentives to shelter and disguise income.

Transparency: Tax legislation should be based on sound legislative procedures and careful analysis. A good tax system requires that taxpayers be informed and understand how tax assessment, collection, and compliance works. There should be open hearings, and revenue estimates should be fully explained and replicable.

Neutrality: Taxes should not encourage or discourage certain economic decisions. The purpose of taxes is to raise needed revenue, not to favor or punish specific industries, activities, and products.

Stability: When tax laws are in constant flux, long-range financial planning is difficult. Lawmakers should avoid enacting temporary tax laws, including tax holidays and amnesties.

No Retroactivity: As a corollary to the principle of stability, taxpayers should be able to rely with confidence on the law as it exists when contracts are signed and transactions are completed.

Broad Bases and Low Rates: As a corollary to the principle of neutrality, lawmakers should avoid enacting targeted deductions, credits, and exclusions. If tax preferences are kept to a minimum, substantial revenue can be raised with low tax rates. Broad-based taxes also produce relatively stable tax revenues from year to year.

Put simply, good tax policy promotes economic growth by focusing on raising revenue in the least distortive manner possible.

This new Code would state “Everything is taxable, except . . .” and “Nothing is deductible, except . . .”.  Only those “excepts” – exclusions and deductions - that are absolutely necessary and appropriate, in the context of the “musts” and “must nots” listed above, should be added back.

One of the biggest problems with the current system is the inappropriate use of the Tax Code to deliver social welfare and other government benefits – hence its appearance as #1 on our list of “must nots”.  This practice is not only inappropriate, but it also invites and encourages tax fraud.

The Internal Revenue Service, and the tax professional community, should not be required to act as Social Workers and administer and verify government program benefit payments.

I am not saying that the government shouldn’t provide financial assistance to the working poor and college students, provide encouragements for purchasing health insurance, making energy-saving purchases and improvements and other “worthy” benefits.  What I am saying is that such assistance and encouragements should not be distributed via the tax return.

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 should be distributed via existing federal programs for providing direct student financial aid. The benefits provided by the Premium Tax Credit, energy credits, and other such personal and business credits should be distributed via direct discount payments to the appropriate vendors or direct 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.

Unfortunately, my dream of true substantive tax reform will probably remain just that - a dream.  Tax law is written by Congress the members of Congress have absolutely no knowledge of or experience with the practicality of tax return preparation.  And, of course, there are the personal agendas of Congresspersons, who rely on the political contributions of lobbyists working to maintain specific tax breaks, and who more often than not, especially today, avoid independent thought and merely do what they are told by their Party.