The Destructive Income Tax Code Hurts Almost Everyone
by Ken Hoagland

Both the Chairman of the House Congressional Committee that writes federal tax laws and the man who will be responsible for our tax system as the Secretary of the Treasury now say they failed to pay owed taxes because they misunderstood our tax laws. They are not alone in their confusion.

House Ways and Means Chairman Charles Rangel, Treasury Secretary Timothy Geithner and former House Speaker Tom Daschle have now joined the ranks of millions of Americans and the IRS itself who are befuddled at the almost indecipherable 67,500 pages of tax rules that accompany the US income tax system. The tax code is so complicated that Americans will pay an astounding $300 billion this year in tax preparation costs.

The amount we spend just to obey—or game—our tax laws is about $150 billion more than the entire cost of the taxpayer stimulus checks mailed out last year. Our tax system has become an expensive and confusing patchwork quilt of thousands of political favors, ambiguous rules that invite all manner of tax avoidance strategies and ham-handed Congressional attempts to manipulate citizen behavior.

Under the income tax code, debt is more favorable than wealth, married people pay more than singles and business decisions are made on the basis of tax consequences instead of sound practices and growth. The alternative minimum tax, once designed to squeeze taxes from a few hundred very wealthy people who figured out how to legally underpay millions of dollars, now threatens to add more than $2,000 a year to the tax bills of middle class Americans because of an error in the way the law was originally written and because the government now counts on that revenue.

Even the IRS cannot guarantee that the advice it gives confused taxpayers is sound.

Worse, the income tax system gives foreign producers a price advantage over domestic producers in US markets, the payroll tax that tripped-up Mr. Geithner is highly regressive and most of what we pay the government either in taxes “embedded” in the price of goods and services or withheld from paychecks, is hidden from plain sight. It’s a wonderful system for those tax lobbyists who get the majority of all lobby dollars spent in Washington in any given year and for Members of Congress who love the power but a terrible system for taxpayers and destructive to the nation’s economy.

Outside the beltway, people from across the political spectrum believe that there is a better way to collect taxes that solves many of the problems facing the nation. The FairTax proposal to shift to a national retail sales tax and eliminate withholding, the destructive payroll tax and all the gimmicks commonly used by the fortunate few continues to resonate in hometown America, if not in the halls of Congress.

Based on $22 million of peer-reviewed research, FairTax proponents believe that eliminating income tax withholding and payroll taxes will allow millions of distressed homeowners the ability to satisfy mortgage obligations. They like the idea of a universal monthly prebate to cover the tax on necessities and which eliminates federal taxes on the poor. And a simple, transparent tax that is paid at the cash register without exception by every consumer, including illegal immigrants on one end of the spectrum and billionaires on the other, seems far fairer than a system that invites manipulation by “insiders” who can afford a tax lawyer, tax lobbyists or a special relationship with a Member of Congress.

Over the years, the FairTax campaign has become as much about whether Americans, who almost universally despise the income tax system, can actually trump the self-interests of those who profit from the income tax code. As the nation’s economy teeters, perhaps now is the time for this public policy to change to actually favor the public.

Ken Hoagland is the National Communications Director of FairTax.org.

2 COMMENTS

  1. I’ve been following this issue for a while. National sales tax would be better than IRS graduated, loophole-filled code we have now. But it’s not perfect. I also supported Steve Forbes’ flat tax. I heard the 1:30 – 2 pm segment of the show today.

    (1) A caller complained that, under the fair tax, old people will have to pay taxes. It’s fair that the old don’t have to pay but the young do have to pay taxes. So he refers to equal, universal taxation as unfair. Those who benefit unfairly from the current system will never support any kind of flat tax or equal treatment under the law. These people must be out-voted or overpowered. Privilege breeds resentment by those with and those without the special “rights”. No wonder older people are treated so poorly in our society.
    (2) People say the 23% will be added to existing prices. They can only think of one sound bite at a time. The embedded taxes, which will disappear, are invsible to them. The main problem with the fair tax is that it seeks to be revenue neutral, instead of decreasing the tax burden and increasing liberty and prosperity.
    (3) Opponents of fairness say the fair tax will disproportionately affect the poor. That’s true. They will benefit the most. Poor people will have more money to spend and become more independent. The fair tax encourages saving because you don’t get taxed until you spend the money. And you’ll have more money to spend. Prices will be the same because the fair tax is revenue neutral. Drug dealers and those paid under the table will also be disproportionately affected. They will have to pay the same tax rate as everyone whereas now they pay nothing.
    (4) I don’t like the prebate. It’s a form of welfare. I fear many people will quit their jobs and live off the prebate. It’s more than most welfare, food stamps, aid to dependent children, etc., than is available now.

    Here’s my plan. Keep it simple based on first principles. 10% on everything with no exceptions for products or consumers. This is not revenue neutral because it would increase revenue, which lower tax rate have proven to do time and again. The only welfare would be from private charities. But once you make an exception, for food or nonprofits, it’s not fair anymore and it’s not simple for merchants to collect. But when’s the last time the privileged few stood on principle?

  2. Why should people who refuse to get an education, breed themselves into poverty and work only when the govewrnment requires them to, get a free pass on paying taxes? I agree with Blair, drop the prebate idea.

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