1/31/2013 4:30 PM ET|
5 ways to fix our aging tax system
The nation's income tax, which turns 100 this year, needs a bit more than a facelift.
The idea of allowing the government to tax incomes has been controversial since the 16th Amendment was ratified on Feb. 3, 1913. Back then, the questions were much simpler: How much do people pay, and at what income levels? Do companies pay? What income sources get taxed? Where does the money go?
Those questions are still around, but the system is infinitely more complicated now. The tax code is massive, with endless deductions, loopholes, conditions, extensions, penalties and exemptions. We have to buy tax software to sort it all out, or pay tax professionals hundreds of dollars to do it for us.
The tax system is out of control. Everyone agrees with this, and that consensus transcends party affiliation or socioeconomic class. The tax system must be changed. This country has backed itself into a fiscal corner that it can't get out of without a major tax overhaul.
But how to change it is a messy thing indeed. The current Congress isn't likely to act on reforming the tax system anytime soon, because there is no political gain in doing so. Any real tax reform would be immediately controversial and challenged at all levels of government, not to mention in the courts. It would be pounced on by lobbyists and activists, and would likely be watered down or annihilated.
Few want to grab this bull by the horns. But for any willing to try, we have some ideas. Here is our birthday present to the federal income tax: five ways the system needs to change.
1. Stop taxing foreign corporate profits. The U.S. is the only major economy that taxes its companies on profits they make overseas. Executives are understandably loath to pay that 35% corporate tax rate, so companies instead park that foreign money in overseas bank accounts. EMC has stashed $5.1 billion overseas, while Google has parked $29.1 billion, The Wall Street Journal reported.
Let companies bring that cash back to the U.S. at a much lower tax rate. It would help the economy and help companies grow, and the money would actually go to good use instead of slumming in the Cayman Islands.
2. Cut tax rates across the board. A commission created by President Barack Obama has suggested (.pdf file) three tax rates -- 12%, 22% and 28% -- based on income levels. That would simplify the code dramatically. Sorry, flat-tax fans, a flat rate simply would not bring in enough revenue without crushing the lower and middle classes. But reducing the number of tax rates to three would be a big step toward transparency and fairness.
3. Abolish the alternative minimum tax. This was supposed to be a tax on wealthy people who were exploiting loopholes, but over the years it begun to punish people it was never intended to. It's a complicated layer on top of the standard tax, and about 4 million taxpayers owed this tax in 2011, Time reported.
This tax is so bad it has been modified 19 times since 1969. It's so confusing that people often didn't know if they were paying it until they were preparing their returns. That's the opposite of transparent. The tax got its latest fix in the recent fiscal cliff deal, but it should have been abolished.
4. Add a consumption tax. When you cut income tax rates and remove the alternative minimum tax, you're going to have to make up the money somehow. And that's where a consumption tax, like a European-style value-added tax, could come in handy. The U.S. is "the only leading economy without a national broad-based consumption tax such as the value-added tax," Alan Auerbach, the director of Berkeley's Burch Center for Tax Policy and Public Finance, writes in The New York Times.
Instead of a single sales tax at the point of purchase, a value-added tax implements a tax at several points in a product's supply chain. It's similar to a national sales tax but is considered easier to enforce. Liberals hate the VAT because it taxes everyone at the same rate, Harvard economist Gregory Mankiw writes in The Times. Conservatives hate it because it would provide a massive source of funding for our government, potentially allowing it to get much bigger.
5. Close loopholes. Again, if you're going to lower the tax rate, you also have to eliminate the vast number of loopholes that individuals and companies use to dodge Uncle Sam. End the deduction for interest on loans for vacation homes. Don't give fund managers ridiculous breaks on carried interest -- instead tax carried interest as regular income. Keep the mortgage interest deduction, but limit the maximum deductible mortgage to $500,000.
And don't forget about corporate loopholes. Many major corporations in this country pay little to no tax. Back in the 1950s, companies contributed 30% of the nation's tax receipts. That had fallen to 6.6% by 2009, according to The New York Times. Companies have successfully lobbied for goodies that include export subsidies, tax deferrals and favorable equipment depreciation timelines.
So happy birthday, federal income tax. Perhaps it's time to drop some of those extra pounds you've accumulated over the years. We need you in fighting shape to help pull us out of our unsustainable fiscal path.
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Taxes on wages are the greatest evil of our American Republic. When government is free to steal from you, there are no limits to waste and abuse in government. If a person chooses to work extra hours or two jobs in order to better provide for themselves or their family, they should not be penalized, but that is what happens. The more you make by working harder and longer, the more money is stolen from you, and given to those who spend their lives living off the hard work of others.
The revenue the government needs to provide legitimate constitutional services should be obtained primarily from a national sales tax instead of a tax on wages. All would pay based on consumption, the more you spend the more you pay. The more luxury you surround yourself with, the more you pay. Your choice. A national sales tax system would capture money spent by criminals and by illegal aliens who currently pay near zero in taxes. There would of course need to be exemptions: Cars (already have a federal excise tax) Primary Residence/Rental Properties (vacation homes would be subject to tax/rental profit would be taxed) Fresh Food (Preprocessed foods and prepared meals would be taxed – only fresh/fresh frozen/canned goods would be exempt) Insurance Premiums, Health Care & Certified Education.
Adding another layer of tax to a business would not be fair. Businesses would need to be compensated by keeping a portion of the tax to cover the expense of collection and reporting. A percentage of .20 to .05 would be fair.
1. corporations already pay little to no taxes as it is. I think that we could lower the % from 35%, but we should also close the majority of deductions/loopholes they are allowed to take. For example, when a company like GE and Ford gets billions of dollars back from the government, there's something wrong with the tax system
2. because this would favor the rich significantly and we all know that the extra money they get from the gov't trickles down into poor people's pockets and create jobs. We should go to a flat progressive tax system (i.e. 10%, 15%, 20%, etc). The top bracket should start at $1million per year. Also, why aren't capital gains taxed the same % as income? Or rather, why don't they also create a flat, progressive tax for capital gains dependent on amount of income?
3. don't know enough about this to have an informed opinion
4. sales tax is regressive and always favors the rich because they have more money. That being said, I do believe that there should be a national sales tax on everything, with the revenue generated only going to pay off the debt. Implementation of the tax would only be for a set period of time until the debt was paid off, then removed.
5. got to agree with this one. We should remove some deductions too. I hate paying taxes, but we need to fix the system (we should also look to make cuts/reforms to all gov't programs)
NOTHING WILL EVER CHANGE--WRONG PEOPLE HAVE THE KEYS. A NATIONWIDE SURVEY ON TAX IDEAS WOULD BE A START. REAL PEOPLE GIVING IDEAS. CATAGORIZE IT AND VOTE ON IT. CONGRESS WOULD BE BOUND TO VOTE THE WILL OF EACH DISTRICT.
The author of this article, Kim Peterson, does not know what she is talking about.
Starting from the first article; our Federal Income Tax program was overwhelming
approved by a major majority of Americans prior to 1913, when our tax system
was first implemented.
Adding a consumption tax would be another form of corruption; because it would
just add an additional tax, like the national sales tax. Do not be fooled by the fake economic experts that promote this nonsense. (I have 2 full years of college economic credits) The only part that is right is closing loopholes.
There are many loopholes that only the rich can use to lower or avoided taxes.
Corrupt corporate loopholes have allowed them to pay little or no tax on most of their income. They say the income is earned overseas, but that is not true. The merchandize is manufactured overseas then sold in the USA. Therefore their income is actually earned in the USA. This must stop because the US is losing billions in tax revenue each year.
All Americans for One
$24,000 personal exemption
10% next $100,000
20% next $200,000
All realized income is treated the same, capital gains, salary, dividends, tips, etc.
Each individual must file
Corporate rate 25%
Any money that is moved overseas, out of the country 35%
Overhaul the IRS. They are FUBAR (F'd up beyond all recognition). They were not prepared for this tax season. You can't get through to a live person on the phone. I was told by my local IRS office, they are so overwhelmed they have stopped trying to answer all of the calls. The fact that there are still forms people who have to itemize are not available and won't be available for some time, means they get to keep the refund money due these people.
Elected representatives are so afraid of the IRS, because they fear being audited, they won't take any action to straighten out the mess that is the IRS.
Hey, I was always taught K.I.S.S. = Keep It Simple Stupid. It's called flat tax. Everyone pays the same percentage rate regardless of income. Income is income no matter where it comes from, capital gains, wages, investments, inheritance, trusts. NO DEDUCTIONS, NONE , NADA. That will close EVERY loop hole. The only answer to make it fair is flat tax.
Think of it this way, you don't get a sales tax break because you have kids, own a home, have a tax shelter or a 401K, you just pay the sales tax that EVERYONE pays. Same for flat tax, if super rich Joe Schmoe pay 15% so would the dirt poor guy down the street. 15% of 10 million is $150 thousand in tax that year. 15% of the dirt poor guys income of , let's just say $10 thousand for the year, his tax would be $150 for the year.
Again, no deductions, no loop holes, no tax shelters just flat tax! Remember K.I.S.S.
4. Yeah, tax those savings that people put away for 30 years towards retirement while everyone else enjoyed themselves as they were paid, the future be damn. When the thrifty spend that money after the new consumer tax, they are truly being rewarded for being so responsible to plan for the future.
3. All those tax credits end up shifting the burden of taxes to single people that can't claim all those credits. Without the AMT, it be even worse. Besides, I heard that even with the AMT, there are rich people making in excess of 250K/year that still pay no taxes. Fix the AMT, don't get rid of it.
2. Oh yeah. Cut those rates for the rich back to 28% while increasing the lowest rates from 10% to 12% and 20% to 22%. Make the bottom feeders pay a greater percentage of their income in taxes while giving the rich an even bigger break.
1. Corporations don't pay taxes, instead, consumers do. The taxpayer does. Corporations just past the tax on to the consumer in the form of higher costs.
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