We Need True Tax Reform

We Need True Tax Reform

There is no doubt that the current U.S. Tax Code needs to be seriously reformed. It has grown to become such a convoluted mess that, as House and Ways and Means Committee Chairman Dave Camp describes; it “is 10 times the size of the Bible with none of the good news.”

We need to shred the current Tax Code and start from scratch.

In creating a new Tax Code, Congress must recognize and acknowledge the fact that the purpose of the federal income tax is to raise the money necessary to pay for the administration of the government and government sponsored programs. It is not to be used to “redistribute income” (the Tax Code is not Robin Hood) and not to be used as a way to deliver social welfare and other government benefits.

Many of the current “tax expenditures,” like the Earned Income Credit and the refundable Child Tax Credit, the education tax credits and deduction, and the energy credits, do not belong in the Tax Code.

I am not saying that the government shouldn’t provide financial assistance to the working poor and college students, or provide encouragements for making energy-saving purchases and improvements. What I am saying is that such assistance and encouragements should not be distributed via Form 1040.

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 and deduction for tuition and fees should be distributed via existing federal programs for providing direct student financial aid. The benefits provided by the energy credit and other such personal and business credits should be distributed via Cash-For-Clunkers-like direct discount or 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.

And when writing a new Tax Code, Congress must “keep it simple, stupid!”

One filing status and one tax table. One or two tax rates. No adjust-gross-income-based reductions, phase-outs, exclusions and adjustments. And definitely no Alternative Minimum Tax. Every deduction and credit should be indexed for inflation. And there should never be any “temporary” tax provisions.

The simpler the better.

Some people may wonder why a tax professional is calling for a simpler tax system. Does not each new tax law, and each complexity added to the code, put money in my pocket? Is not a more confusing Tax Code better for my business?

I believe that a much simpler tax system would not hurt my business, or that of most tax preparers, at all. I sincerely believe that if I did nothing but 1040As all day during the tax season, I would make more money, experience less agita, and substantially reduce the number of extensions.

I also believe that my clients would not decide to do their own returns if the tax system was simplified; they would continue to come to me. Most taxpayers who use a tax professional simply don’t want to be bothered with the task of preparing their tax return.

And there will always be the need to calculate business, investment sale, rental, and farming gains and losses on Schedules C, D, E and F and Form 4797.

Unfortunately the chances of such true substantive tax reform taking place in the next few years are slim to none. It appears that President Obama believes tax reform = raising taxes on “the wealthy.”

Oh well, I can dream, can’t I?

What do you think? We’d love to hear from you.

Source: AccountingToday – Wayne County, Pa., tax professional Robert D. Flach has been preparing 1040s since 1972.