Fixing Taxes. Something We Expect Congress to Get Right?

Taxes are perhaps the seminal American issue. Certainly, taxes fed the fires of our Revolution. So, it should not be surprising that taxes are a political issue in a society that has fought over them since before there was a nation. Our current issues around taxes are many, divisive and in some cases irrational; nonetheless, the wheel has turned again to the time for “Reform”. I say ‘again’ because we seem to have to undertake an overhaul of our tax system every 30 years (think for each generation) or so.

Now you may wonder what causes our tax system to require that it be ‘Reformed’, ‘Revised’ or ‘Fixed’ after only 30 years? One could say that, “That’s complicated.”; but even if it’s complicated that doesn’t mean that there aren’t some factors that are easy to understand. For instance, one thing that causes America’s tax system to get screwed up and requiring a ‘fix’ is Congress. After all, they write the tax code (or in many cases they sign-off on what others wrote for them); and Congress modifies, enhances, adjusts, tweaks, and eventually ‘reform’ it because of all the prior attentions that they provided. All these activities are inherently causal in nature in why our tax system doesn’t fulfill or satisfy the nation’s needs or serve the nation’s interests. The problems with our taxes are that politicians are in-charge of defining them.

Why wouldn’t you expect a system and its processes be doomed to failure and self-destruction when the system is defined and implemented by a collective group that is as ill-prepared, uninformed, and unqualified as members of Congress? Add to this that they are hardly immune to personal self-interests, influence from major contributors and supporters, and ideological and party views that distort, corrupt and bias the system for some to the disadvantage of the nation and the public. After enough ‘changes’ the resulting system has no option but to implode and require a reset.

Maybe Congress could do a better job if they were able to pass in intelligence test demonstrating that they understand the dimensions, factors, principles and objectives of a tax system. Maybe it would even be good if the public could pass such a test. Could you?

Question A:  Which of the following are major problem areas in the current tax system / policy that need to be fixed?

(1). There are no problems with the current system

(2). Tax rates are too high

(3). Tax rates are too low

(4). Congress doesn’t understand Taxes or Tax Code

(5). Too many tax brackets

(6). Tax brackets favor low income citizens/families

(7). Tax brackets favor high income citizens/families

(8). Tax system is unfair

(9). Excessive information / paper-work required

(10). To many deductions for special-interest groups

(11). Deductions that benefit only the wealthy

(12). Deductions for corporations and influential groups

(13). Tax code is too complex to be understood

(14). Tax rates do not account for regional cost of living realities

Question B:  Is the US’s tax system ‘unfair’?

(1). Yes

(2). No

Question C:  If you see the present tax system as unfair; to whom is it unfair?

(1). Low income earners

(2). Middle income earners

(3). High income earners

(4). Individuals and families

(5). Small businesses

(6). Large Corporations

(7). Investors

(8). Everyone

(9). It’s not unfair

Question D:  If you see the present tax system as unfair; who benefits from it?

(1). Low income earners

(2). Middle income earners

(3). High income earners

(4). Individuals and families

(5). Small businesses

(6). Large Corporations

(7). Investors

(8). Everyone

(9). It’s not unfair

Question E:  If you see the present tax system as unfair; why is treating those in C’s answers (‘unfair to’) differently from those in D’s answers (‘benefiting’) an ‘unfair’ treatment?

(1). It’s not unfair

(2). Because it treats one person(s) different from another, not equally

(3). Because they don’t pay as much as someone else who had the same income

(4). Passing arbitrary rules that one group can use and others can’t, creates a bias favoring the first group over others

(5). It complicates the tax system so that politicians can grant favors for political supporters at the expense of the taxpayers

(6). There is no advantage to the economy or nation in selecting some people and situations that are more valuable than other people or situations that justifies granting them tax privileges.

(7). The current system is unfair because it enables or encourages individuals/entities to engage in activities that reward them for doing things that benefit them financially without providing a greater net value to the nation and economy as an explicit and verified justification.

Question F:   Does the current tax system tax the rich more than the poor?

(1). Yes

(2). No

Question G:  If you see the present tax system as unfair; what changes will make it ‘fair’ (or ‘fairer’)?   Select all that would apply.

(1). A lower tax rate

(2). A ‘flat’ tax rate (one rate for everyone)

(3). No deductions for anyone or anything

(4). Fewer brackets

(5). A ‘wealth’-based tax system

Question H:  Are different types of incomes / earnings treated differently?

(1). Yes

(2). No

Question I:    Who benefits the most by lowering tax rates?

(1). Bottom income earners: 25%

(2). Middle income earners: 26% = 75%

(3). High income earners: 78% - 95%

(4). Wealthy income earners: 96% - 99%

(5). Top income earners: > 99%

(6). Ultra-income earners: > 99.9%

Question J:   Which of the following would be required to make a ‘fair’ / ‘fairer’ tax system?

(1). A significantly reduced federal budget

(2). Eliminate/reduce some federal agencies

(3). Adequate tax revenues to reduce national debt

(4). Reduction in military spending

(5). Reduction in Social Security spending

(6). Sufficient tax revenues to fund expenditures

(7). Reduction in Medicare spending

(8). Improving state of the economy across all income levels

(9). Self-adjusting tax rate on imports based on import-to-export ratio

Question K:  Are Tax-Exempt entities a requirement for a ‘fair’ tax system or contributors to ‘unfairness’?

(1). Required

(2). Contributors

Question L:   Can Congress make the tax system ‘fair’ and can they keep the system from becoming ‘unfair’ again?

(1). Yes

(2). No

ANSWERS:

Answer - A:  4 and to a lesser extent 13

Rationale - A:    The problem with our taxes and the tax code is that they are constructed by politicians (Congress) who have a political view of taxes rather than an economic, practical, informed and reasoned understanding of taxes and the connection of taxes with the real world and the nation’s citizens. Creating a tax system based on ideological views, including favors and pay-backs for supporters, and failing to include any internal consistency and results-based implementation produces the tax systems that have evolved to require ‘fixes’ again and again. It’s the common problem of wanting things to work the way you want them to, rather than seeking to understand how things actually work.

Items 2 and 3 result from a flawed approach and are not the cause but rather the symptom of what has been done badly.

Items 5, 6 and 7 only reflect how the system was implemented to achieve what politicians thought would work. If they had known what they were doing then why would the system be broken? If you just blame the ‘other’ team then you haven’t been paying attention to who moved the ball.

Item 8 just restates you view, it doesn’t cause the ‘unfair’-ness that you believe exists.

The rest of the items are claims that “this” is unfair. None of them provides an explanation of why they are ‘unfair’ and what detrimental effect comes from them, other than an ‘unfair’ tax system.

Answer - B:  Yes

Rationale - B:    Our tax system is ‘unfair’, though in all ‘fairness’ that doesn’t mean that there is a tax system that will be viewed as ‘fair’ or even ‘fairer’. The problem with providing an adequate and accurate answer is that this question is exceptionally vague and undefined? What we think constitutes a ‘fair’ tax system requires information, details and understanding that are not clearly in evidence at this point in the test. I will however posit a likelihood that we could easily demonstrate that our tax system is ‘unfair’ as it is currently formulated.  If a tax system recursively concentrates wealth to fewer and fewer people and entities then that system is ‘unfair’ because it is harmful to the economic soundness of a nation and erodes democratic principles and our freedoms.

Answer - C:  8

Rationale - C:    I suspect the first reaction to this answer by many will be, “It can’t be unfair to everyone!”; but what did you think ‘unfair’ meant? Now you’re shaking your head and wondering, “What did I mean?”

‘Unfair’ should include the concept that it harms one person’s interest at the expense of another’s; that it does damage to someone(s). Where the purpose of a tax system is to generate the revenues for a society’s government in support of its citizens, doing damage would not only be contrary to that that goal but leads towards a failed society. So ‘harmful’ or damaging is one ingredient in a bad tax system.

‘Unfair’ should also include the concept of equal treatment being violated; i.e., not fair. This creates a requirement that variations from one individual or group to others that don’t receive strictly equal treatment need to be explained as to why the unequal treatment is beneficial to both, does no damage, and is not biased. This is where so much of the activities that Congress engages in goes awry.  

Answer - D:  3, 6, 7

Rationale - D:    Yeah, Yeah, I know. If everyone is treated unfairly by our tax system then how is it possible that some benefit from it? Well, to quibble, I would point out that the entire concept of ‘unfair’ contains the very requirement that some benefit at the expense of others that it harms. But that is not what Question C’s response was intent upon explaining. ‘Unfair’-ness to quote a powerful member of our government is “more complicated than anyone knew”. This is how our tax system’s unfairness benefits some and not others.

Rules, regulations and processes that apply only to those who have incomes in the upper income percentages are differences in treatment that come at someone’s expense. There was some reasoning behind the differential treatment that ‘justified’ it; but that doesn’t mean that someone isn’t harmed by it. Lots of the rules that the tax system has are focused on very specific groups and conditions. Part of the decision process that these selective rules undergo would presumably include a cost-benefit analysis which looks at the costs; that isn’t equally applied to everyone or else there wouldn’t be a cost to achieve the benefits.

So, just as in Question C the ‘equal’ treatment concept which is oft used to criticize the current tax system is not a condition that can be easily accounted for in any but the most simplistic and unworkable tax system. Equal treatment and fair are not equivalent requirements which means that each must be reliably and rigorously defined in the tax methodology that will be implemented under the “Reformed” tax system.

Answer - E:  6 and 7

Rationale - E:     Items 6 and 7 defines a condition that explains how one set of people benefit from a tax system at a cost to the nation and others. The ‘unfair’-ness is based on the requirement that a government of a democracy is obligated to benefit the nation and its citizens in aggregate, and to explicitly not choose who is to receive favored treatment at the expense of everyone else.

Answer - F:  No

Rationale - F:     The current system doesn’t tax the person, it taxes the income. Both are taxed exactly the same for the corresponding amount of income. Yes, the rich person has more income and pays a tax on that amount above the income which the poor person doesn’t have; but then the poor person doesn’t have the income that they would have to pay the same taxes on. So, they are not taxed differently when you look at each dollar that they each have in common with each other. Thus, they pay the same amount on each dollar earned. Well, if there aren’t any exemptions or deductions that the higher earner can get that the lower earner cannot, and it impacts the taxed income amount that they have in common. So, if the system is unfair, it isn’t because one is taxed more than the other.

Answer - G:  None

Rationale - G:    All these items are changes, but none of them creates a ‘fair’ or ‘fairer’ tax system. Tax rates have been higher and lower, the tax system was no more or less fair because of a rate level. It may be more or less effective, or appropriate, or responsible, or rationale, or reasoned, or economically sound to have a rate that corresponds to the nation’s needs; but that isn’t necessarily met by a ‘lower’ rate.

The ‘flat’ concept isn’t ‘fair’ just because it has a mathematical sense of being ‘equal’.

Deductions, we ought to assume, had some value-based economic or national benefit for Congress to have approved them to start with. That value presumably accounts for the ‘difference’ in treatment that makes it ‘fair’ in some context. Removing them therefore doesn’t necessarily make the system more ‘fair’.

If fewer made it ‘fairer’ than the logical extreme would be a ‘flat’ rate which isn’t a remedy that defines a ‘fairer’ tax system.

The ‘wealth’-based approach is just another method for deciding how to tax citizens. There isn’t an a priori ‘fair’-ness in any method based on its mechanics. Fairness is derived from the rationale and logic that explains what the basis for the system is founded upon, and how (and if) the system includes a principle of applying taxation on the economy of a nation and without regard to individuals. A tax system shouldn’t care about individuals but about the nation and its economy.

Answer - H:  Yes

Rationale - H:    Individuals, Small Businesses and Corporations are treated differently; thus, their respective incomes/earning are treated differently.

Wages are treated differently from Capital Gains.

One can argue that the tax brackets are a form of treating income differently across earner groups.

None of the differences in treatment is necessarily ‘unfair’, nor necessarily ‘fair’. As stated before, what constitutes a ‘fair’ treatment requires a more reasoned argument than one where there are no ‘differences’.

Answer - I:  You can rank the beneficiaries from most to least: 6, 5, 4, 3, 2, 1

Rationale - I:       This answer can be made on several lines of argument.

On a rather simple basis, purely mathematical count, the more you make the more you get out of a tax cut.

If one considers that there is a ‘minimal’ income level required to support a basic existence in America, then the value of income changes with increasing earnings. There is no value to income below the ‘subsistence’ level (other than being able to live) because it is necessary to just survive. Above that basic level, the value of money rises in allowing you to do more than just get by. Extra income presents opportunities in a number of ways/areas. As income level continues to rise, the opportunities to use some income to generate additional income becomes greater. Interestingly, at some level of income and with a given tax rate there is a mathematical point that defines where those above that income point will become income earners who accumulate more income at the expense of those below that level. The ‘transfer of wealth’ to the wealthy phenomena.

Answer - J:  3 and 6

Rationale - J:     Item 6 (which includes item 3) is a prerequisite for a ‘fair’ tax system, because if the nation doesn’t have the means to pay for its spending then eventually the ‘bill’ comes due and there are consequences for living beyond your means to the point of insolvency.
Contributors

Answer - K:  Contributors

Rationale - K:    Tax-exempt organizations create a segment of society that are somehow considered valuable to society but not expected to contribute to its fiscal requirements. Like any other entity, they extract benefits and impose costs on the nation; but unlike other entities they don’t cover their share of those costs which are passed on to the class of entities that pay taxes.

Answer - L:  No

Rationale - L:     It’s not that there is a Law of Physic violation that prevents Congress from defining a ‘fair’ tax system. The problem for Congress is that you are asking for a group of ideologies to create a rational and realistic approach and method for taxing the economy of the nation. Congress lacks the knowledge, experience, skills, and intellect to understand the problem that this task requires to be solved. Without adequate competencies and problem solving skills applicable to the task, there is little to no hope that they would be able to define and detail a tax system and the tax code that is required to enable it successfully. Further, as politicians, there is little chance that they would not overtly include elements into the tax code that are strictly partisan and favoring contributors and supporters that have no interests in a ‘fair’ and democratic tax system.

American Intelligence Test: Tax Returns. Why The Question Is So Burdensome

What with tax season coming to its annual climax, even if only one party is happy about the ending, there is a carry-over issue from the 2016 election that is the most prominent and news ‘worthy’ (‘worthy’ is used in the context of it being sensational) for the public; that issue: Trump’s tax returns. This left-over issue is an example of where politics displays its duplicitous nature. The stance that those aligned with one party or the other takes on the issue will shift depending upon who is being tarred and feathered by the issue. We have come to expect this of politicians, but that is a defect in our thinking which erodes our values since accepting behaviors and actions by politicians that we find dishonorable is what allows the politicians to persist and prosper in those corruptive endeavors. So, what is important is the question of what is important about knowing about the taxes of our President?

This intelligence test is about what the issue is and whether that issue is something of substance or a distraction and diversion? So, passing this test is a challenge of a different kind because of what it asks, more so than what you answer. Of course, that doesn’t mean there aren’t correct answers for the questions; just that the questions not being asked are essential to being an informed citizen. Time to tax yourself. Sorry about that.

Question A:   Is it important to know a President’s taxes?

(1). Yes

(2). No

Question B:   What is the value of having an elected official’s tax return made public?
Select all that apply.

(1). The public has insight into whether public policies advocated by a political leader would have a disproportionate advantage or disadvantage to the politician (or their family/business interests).

(2). There is no value to the public.

(3). The public sees how the tax system treats the person(s) that they will elect or have elected to compared to how the same tax system treats them.

(4). The public may be able to see what interests may have influenced or will continue to influence a politician’s views, policies and decisions.

(5). The public losses the opportunities for effective, smart and successful individuals to seek political office since forced tax disclosures may be prohibitive barriers for these individuals to run for office.

Question C:   Given the ‘need’ to fix the tax system, what does disclosing represent?
Select all that apply.

(1). Fixing the tax system doesn’t have any relationship to tax disclosures.

(2). Tax disclosures are an opportunity for addressing the tax-reform.

(3). Tax disclosures are a distraction that do not contribute to insuring that tax-reform is carried out effectively, rationally, and supportive of democratic principles and freedoms.

(4). Tax disclosures provide one means to engage the public in understanding the issues of a national tax policy, and hence tax-reform efforts.

(5). Tax disclosures would interfere with getting important changes to the system included in or accepted.

Question D:   Would most Americans gain much knowledge from a tax return disclosure?

(1). Yes

(2). No

Question E:    Should the nation require tax disclosures by politicians as a legal requirement?

(1). Yes

(2). No

Question F:    Once a President (or other official) leaves office should there be post-tenure period that politicians should be required to disclose their tax returns?

(1). Yes

(2). No

Question G:   What would be the most significant benefit from requiring tax return disclosures?

(1). Openness and transparency

(2). Fiscal responsibility

(3). Connecting a politician and their tax policy views to the public’s understanding

(4). Educating the public about our tax system and policies; and budgetary needs

(5). Connecting a politician and their tax policy views to the politician’s personal finances

(6). These is none.

Question H:   What would be the most significant disadvantage from requiring tax return disclosures?

(1). Smart, successful and outstanding leaders would be discouraged from running for political office and public service.

(2). Irrelevant issues and details about a politician’s income and wealth would become campaign issues distracting the public’s attention from national issues of importance.

(3). A significant number of current politicians would be embarrassed.

(4). It transforms an ethical decision into a mandatory legal requirement.

(5). There is none.

Question I:      In addition to the President’s and Vice-President’s taxes, what other officials’ tax returns should be disclosed?

(1). Senators

(2). Members of the House

(3). Supreme Court Justices

(4). Governors

(5). Cabinet members

(6). No others

(7). No one’s returns should be required

Question J:    Is the disclosure itself the relevant and effective requirement concerning the tax return?

(1). Yes

(2). No

Question K:   Does a tax return being audited prevent it being disclosed?

(1). Yes

(2). No

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ANSWERS:

Answer - A:  Yes

Rationale - A:      There are any number of reasons that having politicians disclose their tax returns would be a reasonable and perhaps essential requirement to running for and holding political office. A leading rationale comes from understanding that our government (any government) requires revenues from its citizens to fulfill its responsibilities. No matter what words, terms or concepts are employed to explain how the national treasury is filled the means through which the coins flow are taxes. Thus, the citizens should know how anyone who aspires to lead them or who is leading them is contributing to the public purse, is benefiting or not from that system, and how their actions to change the system will affect them in contrast to how the changes will affect the rest of those to be taxed.

The public would also be better informed about how an individual may have acquired their wealth, and whether it was at the public’s expense or to their benefit that that wealth was acquired. There’s nothing wrong with acquiring wealth at the public’s expense, as long as the public has the right to know that you did. We know for example that many business leaders acquire large fortunes often at the expense of their shareholders, corporations, their customers; or even the nation.

Answer - B:  1, 3 and 4

Rationale - B:      The value in disclosing politicians’ tax returns is that it illuminates the tax system, the government’s policies on how it is supported, and the extent to which an individual has contributed to the public coffers under the present tax system. This is rather a shallow value since it isn’t likely to be given much attention by the public.

There is another dimension of value that required tax disclosures would provide. It defines a test that politicians will know that they have to pass in order to be successful politicians, since you can’t be one at all unless you can pass the test. It would deter somewhat the corruption and corruptive elements from engaging in the influence business of our politics. It will not prevent corruption or abuse of the public trust, but it might reduce it slightly.

Lastly, the public focus on taxes may broaden from just the “I pay too much” issue to include assessments of is the system treating everyone equitably, or what elements of the tax system are benefiting others at your expense and at the nation’s expense.

Answer - C:  2 and 4

Rationale - C:      The missed comprehension is that a politician’s tax disclosure presents an opportunity to confront the tax-reform issues that the nation, the public and (unfortunately) the Congress needs to understand. When you don’t pay attention to the opportunity, don’t even hear it, or just aren’t capable of understanding the very issue that you are attempting to handle then you are simply degrading your chance of success. You would think that politicians would be the first to recognize the opportunity, but that would also presume that politicians are adequately competent about tax issues to understand this; so that’s pretty much a no starter.

The connection between tax disclosures and tax reform is the central issue itself: our tax system. Yes, disclosure could be a distraction but only if you are too stupid to be a politician; so once again we have a premise violation.

Answer - D:  No

Rationale - D:      It is unlikely that the disclosure itself would contribute much to the public, especially as individuals. In part this is because I have little expectation that most people would pay all that much attention. Certainly, even fewer would attempt to understand what the tax return contains by way of insight. But more importantly, almost none would go through the efforts required to assess what the return would tell you about the politician. The disclosure itself isn’t the value-added act. What would provide the public value is a competent analysis and assessment of the return to provide the opportunities that would be useful and informative. This is not something that we would expect from politicians, nor are they likely to be able to do this themselves let alone understand the results of such a competent evaluation.

Answer - E:  Yes

Rationale - E:      The answer to Question B should be adequate to address this point.

A Mandatory Disclosure requirement would make the discussion of taxes a more central part of political campaigns, public policies, and improve the public’s connection between ideology and consequences.

Answer - F:  Yes

Rationale - F:      The public should be able to see the consequences their political leaders have in terms of how those leaders’ efforts have impacted (made a difference) in the public’s lives compared to how they affect their own life’s progress.

Answer - G:  4

Rationale - G:     Improving public understanding of our tax system is the closest thing to a benefit that disclosures would provide by themselves. To truly get some substantive benefits out of disclosures, the answer to Question D would be an additional requirement. Without an overt effort to explain the pros and cons of the current tax policies to the information presented in the tax return, there isn’t a great deal of value to be derived. Some small amount of preventative corruption may result but it is not clear that even that would happen without the effort demanded in D.

Answer - H:  4

Rationale - H:      On an aspirational level, we would want our leaders to show us who they are. This would include what they influence and what influences them in their private lives and business interests. This may be higher bar than we would want to clear ourselves, but that doesn’t mean that it shouldn’t be a measure of someone who wants our vote.

The presumption that you can be trusted to lead but that we can’t be trusted to judge how you conduct your financial activities is a request that is not worthy of a democracy.

Item 1 is a false premise. If you possess at least one of the qualities cited then there is no obstacle to pursuing political office.

Item 2 would only occur if you were a rather inept and unprepared person to run.

Item 3 represents the current reality of politics; how could it be worse under the requirement?

Answer - I:  1, 2, 3, 4

Rationale - I:        Given the public doesn’t trust our political leaders, or at least those not of their own breed, the rational requirement is for all the heads of our three branches should be viewed through the lens of fiscal entanglements. The  ever increasing interconnectedness of government and business, and their influence on the national and global economy means that the decisions and actions of our political leaders is to important to assume that their interests, the interests of special-interests, and the public/nation are beneficially aligned. If you have to trust your politicians then you are already past the point of reason and will pay for neglecting your civil duty.

Whether states’ political leaders should be under the same obligation to disclose is rightly a decision to be made by the citizens of each state. Perhaps some states trust their politicians while other states do not. Which is the better judge of reality is left to your own assessment.

Answer - J:  No

Rationale - J:       The disclosure is an opening move. It sets the stage for what can happen next. Mostly, or at least what has happened so far, is that most politicians have conformed with the recent exception of Pres. Trump. But neglecting to see beyond the initial move, or in the recent case of not making it, misses the opportunity. The disclosure is a pro forma act that is treated as if it were a significant event; however, it is the first step toward a great opportunity that no politician has recognized. This would appear to indicate that our politicians are not particularly adept at seeing or seizing the opportunity.  Questions D and G are referred to your attention.

Answer - K:  No

Rationale - K:      The fact that a return is under audit is a normal part of our tax process. It doesn’t preclude the return from being released. In fact, it is yet another opportunity to be leveraged by a savvy individual. Not seeing it as the opportunity that it is, that is the very reason that the tax system, tax reform, and the public’s perception of taxation is for poorly understood and mismanaged.