The Prospects for Tax Reform or Simplification

Without exception, numerous attempts over the past 35 years to simplify the tax law have resulted in greater complexity. There is a fundamental conflict between simplicity and fairness. Without qualification, I can say that it is impossible to have both if we insist on keeping the income tax. The only way to have both greater simplicity and fairness is to replace the income tax with some kind of consumption tax.  But whether a consumption tax does produce greater fairness may also prove to be a contentious issue. Those who are advocates of a progressive tax system that attempts to tax the rich more than the poor (in terms of the percentage of income that is taxed) are vocal opponents of any kind of consumption tax.

A consumption tax imposes a proportionally greater burden on the lower income members of society who are unable to save a significant amount of their income. The income tax was in fact enacted because the excise taxes at the time (1913) were perceived as being unfair to the lower and middle income segments of the populace. Changing from an income tax to a consumption tax would impose a greater tax burden on those who are retired or near retirement. Those who are retired generally consume more than they make in income, resulting in more taxes with a consumption tax system than with an income tax system.

One of the major obstacles to significant tax reform is the insistence of the government that any alternative tax system must be “revenue neutral”. That means it must generate the same amount of tax revenue and the burden must be the same from all of the significant special interest groups as it is with the current system. However, those restrictions effectively eliminate any serious possibility of reform. 

Few of us in the U.S. are able to claim that no one in our immediate family is not dependent in some manner on the current tax system and the government spending that it supports. Only a few of those who are retired could live in comfort without the benefit of Social Security and Medicare. All but a few families have a senior member who is receiving some long term care benefits from Medicaid. Teachers depend on government revenue for their entire income. Employees of companies that produce goods or services to any branch of the federal or state governments are dependent on the status quo. The list goes on and on and on. Who is willing to give up their income or their subsidies in order to reform the U.S. tax system?

Meanwhile, the Congress and the President (of whatever party) continue to use the tax laws to implement social policy by rewarding various kinds of behavior with tax incentives and by punishing other kinds of behavior with tax penalties. As the law grows in complexity and intrusiveness more and more taxpayers will come to scoff at trying to comply with the mindless minutia of the tax rules and will just take their chances on getting caught at being tax evaders.  The social stigma of evading taxes will evaporate.

The government will try to respond with more severe penalties and more restrictive rules. But that will lead to even more non-compliance and even less concern about being caught. Only the very well to do and those with land locked businesses in the U.S. will continue to be tax compliant.  The so called tax gap will widen year after year in spite of spending billions more to close the gap.

More and more taxpayers will develop sources of income that are not subject to wage withholding. Other taxpayers will move abroad and will just begin to forget about filing tax returns after a few years. And eventually, enough taxpayers will openly flaunt the tax system so that it will be impossible for the government to enforce the law.

Today, I suspect that the great majority of taxpayers still fear the IRS and attempt to comply with the tax laws. But as the laws continue to grow in size and complexity and as the government adds more and more punitive penalties, a growing number of taxpayers will begin to scoff at our tax laws. That will mark the beginning of the end of our present Frankenstein’s monster of a tax system. What will replace it remains to be seen. But any attempt to simplify any kind of income tax system is doomed to failure because income is much too complex and subjective to be used as a fair foundation for a tax system.

At least, that’s the way it seems to me.

Until then, I will do what I can to keep up with the changes in the International segment of the changing tax law and to help those taxpayers who are not yet ready to scoff at the insane complexity and ambiguity of the tax system.