Thursday, April 29, 2010

What Do You Think Is Wrong With The Current Tax System in America?

“Everything!” it seems.

No matter who you talk to, everyone seems to have a gripe with the current tax system in America. Part of it you can chalk up to the fact that no one really loves to have any of their hard-earned money extracted from their wallets to pay for government services. There is always a perception of ‘waste, fraud and abuse’ as well as funding certain government programs that you completely disagree with.

Maybe the tax code is the work of the Devil. "Obey Me! Or Else!"

The other part has to do with the notion that everyone thinks ‘everyone else’ should be shouldering more of the tax burden: the not-so-well-off think the rich should pay more; the rich think the middle-and-lower income wage-earners should pay something and everyone thinks foreigners like the Chinese should pay more to import their products to America…except when it is something you want or need like cheap underwear.

We fought a Revolution to get away from ‘taxation without representation' in 1776 in case you have forgotten.  Now we have ‘excessive taxation WITH representation” so how’s that working out for you?

Let’s tick down the problems with the current system and see if we can come up with a magic bullet that might solve these burrs under your saddle:

1. ‘I pay too much in taxes’.
2. “Rich people don’t pay their ‘fair share’”.
3. 50% of Americans don’t pay any income tax any more.
4. ‘I pay more in payroll taxes than I do in income taxes’.
5. Lobbyists in Washington get special tax breaks and loopholes for big corporations.
6. ‘Little guys like me can’t take advantage of the tax code like rich people and corporations do’.
7. ‘The tax code is way too confusing’.
8. ‘I pay through the nose on income and payroll taxes and we still don’t have balanced budgets!’

All of these perceptions are true in one way or another to some group or sector of the economy. With over 140 million households filing tax returns, a significant percentage of the population is going to feel aggrieved some way or another each year.

We are sure we never heard anyone come to us in Congress in over 12 years of service and say: ‘You know, I think I am being taxed just about the right amount to live in a free society protected from invasion and attack by the best military in the world, drive on highways to anywhere in the nation and have a safety net that I could fall into if adverse circumstances befell me or my family’.

So what can be done about it? Every single time we have seen a ‘tax reform’ effort pass Congress, the tax code has become 10 times more complicated and the law of unintended consequences has run amuck by producing outcomes far removed from original goals.

We are becoming increasingly interested in the concept of a consumption tax being passed to completely replace the existing federal tax code in America. But we most definitely do not advocate any sort of consumption tax to be placed on top of the sclerotic tax system that already resembles swiss cheese with all the loopholes now in it. There is a perception that there are relative winners and losers in the US tax code every year, that it is ‘unfair’ in many regards and that is not a good thing for any democracy.

Let’s tick off some of the reasons why a consumption tax would address the concerns listed above:

1. Everyone would pay the same form of tax.
2. No one would be able to escape it with a tax loophole, deduction or exemption.
3. Class warfare would end because people could not be singled out for targeted tax treatment as is the case now.
4. It is simple…1 consumption tax collected at the point of sale would very clearly show people what they are paying for the benefits of living in the American democratic republic.
5. Lobbyists, and PACs and all the other things that drive people crazy about the current tax system and campaign finance would be reduced to next-to-nothingness because there would be no loopholes to get or defend.
6. Rich people would pay more in taxes because they consume more each year. If they choose to buy 10 luxury homes and yachts after hitting it big in business, all those purchases would generate consumption tax payment after consumption tax payment.
7. People would be encouraged to save and invest because interest, dividends and capital gains would no longer be taxed.  The stock market might quintuple for all we know.

There are two things we would like to see explored further by economic experts, although since hardly any economics expert saw this tidal wave of recession coming along even as late as summer 2008, we are not sure we put a lot of credence in their opinions anymore. The first would be the level of taxation that would be necessary to generate 19% of GDP which seems to be the fixed level of federal taxes people are willing to part with since 1970. The other would be protecting low-income people from adverse effects of the consumption tax since they are really the ones who need government assistance, not higher-income folks.

It seems to us that the current price levels of everything we buy have all the income, corporate, payroll, excise and death taxes already baked in them because those are included in the costs of goods sold in the first place. If they are all eliminated, wouldn’t prices then fall flat as a pancake? And then wouldn’t the new consumption tax start pushing up prices from this much lower, compressed level, not a higher one?

We are not sure that price levels might not stay just the same under a well-constructed consumption tax as they are under the current system.  And maybe with tax revenue that gets picked up in the black market, perhaps we might even increase tax revenue collections without massive hit squads sent out by the IRS each year.

We have asked some very important people in Washington (ok, a senior Congressman) to come up with some numbers, projections and analysis as to what level of consumption tax would be necessary to completely replace the current miasma of federal taxes. And when they do, we will forward it on to you as quickly as possible so you can decide for yourself if shifting to a broad-based consumption tax would be better than sticking with the devil we know, the current US federal tax code.

Cause the current tax code sure looks to be the work of the Devil himself, even a funny one portrayed by SNL's Jon Lovitz, don't you agree?

Jon Lovitz courtesy of SNL, NBC

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