NEW YORK CITY — The modern income tax was passed 100 years ago on a simple premise — it would only apply to the top one-half of one percent of the population and it would be easy to fill out — just one page.
The income tax would raise revenue necessary to provide for the common defense and operate the government. Most Americans would vote for that proposal now. No one would vote for the tax system we currently have.
So tax reform talk is in the air and it’s time to hold onto your wallet. Whenever the discussion turns to taxes, it’s always tax someone else — they have more. The American tax code is a mess — something both parties actually agree on. The question is, "What can we do about it?"
Every change in tax rates brings about new ways to avoid those taxes through the use of political connections by those individuals and groups that can afford to donate sizeable sums to their elected representatives.
Less connected individuals and groups — that's most of us — end up subsidizing the better connected. Renters subsidize breaks for homeowners; young earners subsidized breaks for retirees; and taxpayers in low-tax states subsidize those in high-tax states. Fair? Who says taxes are supposed to be fair?
But the code today is a paper monster of 73,608 pages and it grows every year. And the IRS now is in charge of collecting your medical insurance taxes. The recently released bill by House Ways and Means Committee chairman Dave Camp (R-MI) was "only" 1,000 pages long — I’m sure that will simplify the tax code.
To reform the tax system, Congress should look to the original tax code that was simple with few deductions and a flat, but progressive tax rate — as high as six percent! All income was equal — there was no distinction on how money was earned whether it came from wages, rent, dividend and capital gains.
That change by itself would create a more uniform and less politically volatile discussion of taxation. Warren Buffet would pay the same tax rate on wages, dividends or capital gains based upon his tax bracket — obviously the highest.
Corporate tax reform also needs also to be addressed. Ideally, corporate taxes should be eliminated since they are just passed on to consumers in higher prices. With the highest corporate tax rate in the world at 35 percent, the United States is at risk of becoming uncompetitive on the international market. And with the small business tax rate for Sub S and Limited Liability Corporations, near fifty percent in states like California, it is small wonder that the country continues to struggle to create jobs and prosperity.
Cleaning up all special deductions would eliminate the political influence in the annual tax discussion and remove the major corrupting force of lobbying in the country. It was also eliminate a large portion of the IRS whose job it is to continue to add new forms, new rulings and new landmines for the average taxpayer.
What we need from Washington is a bold approach to tax reform — one that will offend every special interest.
At least Representative Camp’s proposal got some sacred cows squealing. The louder the outcry over the proposal, the better it will be for the American people.
The ideal solution is to simply make all income equal by reducing the number of special interest deductions; broadening the overall tax brackets and lowering the effective tax rates for everyone. For business, that would mean reducing the corporate tax rate and eliminating the double taxation of dividends so that small businesses can benefit from more rational tax policy.
Tax policy should be about the running the government while encouraging prosperity. Simple is better in all things — especially taxes. Then everyone could sincerely say, "Happy Birthday 16th Amendment."
Peter Rush is the CEO of The Kellen Company, an association management company and professional services firm, and the author of "Class Tax, Mass Tax." Readers may write him at Kellen, 355 Lexington Ave, New York, NY 10017.
