When it Comes to Tax Reform, “Keep it Simple”

The debate on tax reform in this country has been around as long as there have been income taxes. The very first time a federal income tax was imposed was on August 15, 1861 as part of the Revenue Act of 1861 in order to help pay for the Civil War. The first peacetime tax was imposed in 1894 when Congress passed the Wilson-Gorman Tariff which imposed a 2% tax on all incomes over $4000 per year (that equals $107,446 in 2011 dollars) which meant that less than 10% of all households would pay any tax at all. The Sixteenth Amendment to the Constitution, passed in 1913, made income tax a permanent part of the U.S. Tax system. Things sped up quickly after that with annual internal revenue collections passing $1 billion for the first time in 1918 and hitting $5.4 billion by 1920. Withholding was introduced in 1943 and brought the number of taxpayers to 60 million and tax revenue to $43 billion by 1945. Since that time, the tax code has grown larger, more complex, and the revenues collected have also grown, but there is a problem in that you need to be a new york tax attorney to understand the tax rules. The IRS estimates that it currently collects about 84 percent of all levied taxes. They recently found that the cost of increasing that number to 86 percent would be so cost prohibitive that it didn’t make sense. At the same time, our population has grown to about 330 million citizens, we have undergone a serious financial setback in the form of the 2008 recession, from which we are only now slowly emerging and we have been involved in two very costly wars. The global financial markets are in the doldrums and even China’s fevered growth is slowing. The bottom line is that in order for our country to survive, the governments, both state and federal, need to be able to generate income in order to foster growth, maintain services, and keep our infrastructure functional. At the same time, individuals and businesses are feeling the burden of taxes at a higher level than ever and continued concentration of assets and wealth in the hands of a smaller and smaller group of people that, at this point, pay far less in taxes than they used to, has added to the problem. Everyone has heard the stories of how large corporations use loopholes and tricks to avoid paying taxes and how wealthy people hide funds off shore and so on. Again, this is a function of a highly complex tax code that has been modified and changed over the years to benefit certain groups at the expense of other groups. As this is an election year, the concepts of tax reform and tax fairness have been heavily discussed by many politicians on both ends of the spectrum, with various plans being thrown around and debated. Ultimately, simplicity is the key to solving many of these issues. If a simple flat tax was instituted and at a lower rate, then compliance would go up along with revenues. If the codes were stripped down and simplified in that manner then nobody would feel singled out and overburdened and instead of employing whole departments to find tax loopholes, large corporations could do one quick calculation and be done, just like individuals. In the long run, our country has evolved in a way that relies on taxation. If we simplify that system, then we can continue to grow without the burdens of paying for that growth being unevenly distributed over the population. The old principle of KISS (keep it simple, stupid) has never been more necessary than in the area of tax reform. A flat tax is what we need and all the political pontificating really means nothing in the face of cold, hard economic reality.