Whiting column: Personal responsibility important in tax code
Our income tax code is a mess. It’s too long, too complex, full of special, self-interest loopholes and deductions. Consequently, it’s inefficient, inequitable and doesn’t motivate compliance.
Annually, Congress makes “code adjustments” that are neither rational nor effective, but rather self-serve the party in power and special interest groups with the most influence. These changes only serve to make filing taxes more complicated and encourage spending an inordinate amount of time on finding loopholes rather than creating additional income.
In 2016, the tax code and correspondent regulations comprised 74,608 pages, 187 times larger than the original 1913, 400 page code. This assures that no one is proficient in compliance. If one calls the IRS for help with a provision, you are told they aren’t responsible if their interpretation is incorrect.
The original purpose of the code was simple in both intent and operation: raise money to fund the operation of the federal government. This doesn’t require complexity. The complexity is a function of thousands of pages of loopholes, deductions and credits benefiting thousands of large and small special interest groups. It has become a tool of politicians to facilitate re-election by enacting provisions benefiting their constituency and/or repaying special interest group financial and voting support.
Currently, Congress is debating new provisions. The goal is to reduce taxes facilitating increased spending which boosts business, the economy and generates employment. But it also contains pages of provisions adding, eliminating, or limiting specific deductions and credits.
We each benefit from one or more of these provisions and don’t want them eliminated, but we have to be smart enough to realize that for each one we receive benefit there are literally thousands we subsidize.
For example, if we benefit from the mortgage interest deduction, those who are renting or don’t have a mortgage are subsidizing us. The original purpose was to facilitate home purchase. A worthy goal and one that works, but there are economic ramifications. More houses being purchased means more demand which translates into higher prices. Not an intended consequence, but one that can be significant in areas such as ours.
In addition, those who can only afford a $300,000 home and have a smaller mortgage are in effect subsidizing the interest of those who can afford a $700,000 mortgage and have a higher interest cost.
If we don’t buy an electric car, we are subsidizing the tax credit received by those who do.
The current bill eliminates the deduction for state and local taxes, but that deduction isn’t equitable. California has a 13.3% State income tax, almost twice Colorado’s. Consequently, those of us in Colorado and other states with lower state taxes are subsidizing California residents and state programs they chose to fund, whether we agree with them or not.
If residents don’t receive a deduction for their state and local taxes, they might become more involved in the legislative process which determines where their tax money is spent.
The current bill provides increased tax benefits for the producers of beer, wine and liquor.
A great thing for them, but every other individual and business is in effect subsidizing that industry.
There are literally thousands of deductions and credits that can be used as examples, but they all create the same dichotomy: we benefit from some, subsidize the rest. In reality, the net result of all these deductions and credits to each individual and business is nearly zero. Only the politicians and the special interest groups benefit.
An attempt to eliminate a deduction elicits a cry of “foul” from those it benefits. They feel it’s not fair to eliminate theirs and someone else has another. If we want to make the tax code more simple and equitable there is only one solution: eliminate all the deductions and credits. This is true equity. What could be more fair. Every individual pays taxes on their income, business on their profit. No deductions. No credits. One simple calculation on income. Simple, equitable.
Special interest lobbying and influence in Washington would lessen. Congress might be able to agree on a bill based on what is best for the country and its people rather than each respective political party.
There would be a large economic benefit for the country to such a simplification. According to Forbes magazine, in 2015 individuals spent 6.1 Billion hours on tax preparation. A tax form listing income, a tax rate and a tax liability would take minutes to prepare. If the 6.1 Billion hours were spent producing income, the benefit to the individual and the economy are self-evident. If one adds the hours spent by business on tax preparation, the economic benefit multiplies geometrically.
A side benefit would be increased compliance. Forbes also estimated that at least 50% of those not reporting honestly or not filing at all, do so because they feel the system isn’t equitable.
Any discussion of a simple, efficient and equitable tax code must include tax rates and the national deficit which will be the focus of next month’s column.
It is our personal responsibility to pay our fair share of our government’s costs, but it is also our responsibility to make sure the tax code is efficient and equitable.
Bryan Whiting feels most of our issues are best solved by personal responsibility and an understanding of non-partisan economics rather than by government intervention. He recently retired after 40 years of teaching marketing, entrepreneurship and economics. Comments and column suggestions to: email@example.com