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Commentary

Celebrate the Income Tax’s 100th Birthday by Fixing It


     
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Republican presidential candidate Mitt Romney has taken some heat for paying just 13.9% of his income in federal taxes last year. The real scandal is not Romney’s tax rate, however. The real scandal is the tax code.

We need to fix it. And with the federal income tax observing its 100th anniversary next year, 2013 would be an appropriate year to make a big change.

We can safely presume that Gov. Romney paid all the taxes he was required to pay under federal law. How many Americans intentionally pay more than they’re required?

Let those who do cast the first stone.

The current U.S. tax code provides more than $1 trillion per year in various subsidies, such as employer-provided health care benefits.

We also receive deductions for mortgage interest payments, charitable contributions, interest on municipal bonds, state and local income and property taxes, and certain educational expenses, among other items.

These lower our effective tax rate and make it necessary to set the marginal tax rate—that is, the rate we pay on every additional dollar we earn—higher than it needs to be.

Moral Question

Gov. Romney aside, the current tax code also places many of us in a moral dilemma.

Like Warren Buffett, we might feel guilty about the personal deductions and special tax rates that apply to us—on investment income, for example—but how many of us actually reject doing so? To do so in fact would seem irrational.

Consider my own oncoming moral dilemma. I was married for more than 10 years and never remarried. Under the law, when I reach Social Security retirement age, I am eligible to apply for Social Security benefits under my ex-wife’s account, and I’m entitled to 50% of her retirement benefits, though I continue to work and continue to accumulate more credits toward my own Social Security account.

At some time in the future, I can decide to drop my ex-wife’s Social Security and begin taking my own.

Meanwhile, I feel great unease about pursuing this course of action, though it’s perfectly legal under the law. Several of my friends already have taken advantage of this feature in the Social Security law.

In their view I’d be crazy not to go for it as well.

No good tax code or government program should do this, and Mitt Romney, like millions of other Americans, should not be scandalized for taking advantage of the existing rules. After all, he didn’t make the rules. Many of the same people who now criticize him are responsible for the rules.

Think Simple

The real tax scandal isn’t the behavior of individual taxpayers, but the onerous complexity of the U.S. income tax code.

What began 99 years ago as a three-page income tax form with one page of instructions has evolved into a monstrosity with more than 500 separate tax forms. Tax-preparation instructions now exceed a staggering 7,000 pages.

In 2009 alone, according to Internal Revenue Service estimates, taxpayers hired as many as 1.2 million paid tax-preparers to help break through the morass of tax rules—and to help them minimize their tax liabilities, I might add.

The need for this army of specialized tax preparers is the real scandal, not Mitt Romney’s tax rate.

America’s tax system is something we should be able to take pride in, rather than the unwieldy, intimidating and ultimately shameful arrangement we have today. We need a fairer, more transparent and simpler system. Getting there may take years, but we can’t get there too soon.

If U.S. politicians want to avoid scandal and make life easier for everyone, their goal should be an income tax code that mirrors its first year. Three pages of forms and one page of instructions seems just about right.


Burton A. Abrams is a Research Fellow at the Independent Institute and Professor of Economics at the University of Delaware. He is the author of the new book, The Terrible 10: A Century of Economic Folly from the Independent Institute.






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