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.