Tax Reform Is Needed – Here’s Why

Michael Lodge –

I have been talking about tax reform for so long, doubting that it will ever happen because of Congress inability to get things done.  But I feel that tax reform has to be done because of the complexity of the tax code.  It is so complex that we have the following issues:

  1.  Increases Avoidance and evasion.  The earned income tax credit’s complexity has created a whole new industry of fraudulent tax returns, filing with the IRS.  This costs billions of dollars a year.  There is a similar problem with large corporations.  We have the highest-rate and most complex corporate tax code in the world, this has created a breeding ground for widespread tax avoidance.  Corporations leaving the United States to find a country that has a better tax rate.  This is unacceptable – moving jobs overseas.
  2. Undermines financial planning.  For families, the tax code complicates decisions   about retirement savings, paying for education and other life events.  For businesses, the tax effects of hiring workers, investing in capital equipment, and other decisions are constantly changing as new laws and regulations are imposed.  The IRS Taxpayer Advocate counted 4,428 federal tax rule changes over a 10-year period.   When you have that many changes and additions, it confuses Americans because they can never understand the tax laws that affect them.  How in the world can you do really good tax planning with so many changes and adds?
  3. Creates “horizontal inequity.”  People with similar incomes pay different amounts of tax because of all the special breaks.  Homeowners, for example, can have a tax advantage of thousands of dollars a year over renters.  So we have a problem.  Perhaps it is time to face it and take a look at a flat tax that might be a little fairer to all Americans.

I think the solution is to rip the tax code to pieces, make is simpler, fairer, and no deductions.  I kind of like the way the Philippines does it, they have their businesses file the income tax for the individual employees, the business just reports a W-2 to the BIR (their IRS) – taxes are done.  However, getting that simple in the US – not going to happen.  But we need change to our tax codes and this is the responsibility of Congress and the President to get done.  As we have seen, the Congress has a hard time doing the right thing and getting things done.  Let’s cross our fingers that something can get done.

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