THERE ARE A LOT MORE THAN 20 REALLY STUPID THINGS IN THE US TAX CODE!

The title of Robert W Wood’s FORBES.COM blog post - “20 Really Stupid Things In The U.S. Tax Code” - grabbed my attention immediately.

My first reaction - only 20?

Robert’s opening paragraph is a wonderful, and spot on, description of the mucking fess that is the current US Tax Code –

“The U.S. tax code is the most complex in the world by any measure. It is chock full of perks to special interests, political pork and social engineering. Like a hodgepodge built with spare parts and constant add-ons, some of the results it produces are pretty unjust. In short, our tax code cries out for reform in practically a primal scream.”

The 20 “really stupid things” to which he refers are highlights from retiring Oklahoma Senator Tom Coburn’s “Tax Decoder”, which reveals more than 165 “giveaways” worth over $900 billion in 2014 and more than $5 trillion over the next five years.

Here are some of the 20 items listed by RWW, followed by my comments –

“1. In 1913, our whole tax law was 27 pages. It’s now over 4 million words, 9,000 bloated pages. From 2001-2012 alone, there were 4,600 changes, more than one a day.”

The one and only purpose of the federal income tax is to raise the money necessary to run the government.  Period.  The majority of the growth from 27 pages to 9000 pages represents the “perks to special interests, political pork and social engineering” Robert references in his opening statement – which have absolutely nothing to do with raising the money necessary to run the government.

“4. Many individuals pay nothing. Of 145 million personal tax returns in 2011, 54 million (more than a third) had zero tax liability or got refunds.

6. The Earned Income Tax Credit is plagued by fraud, up to 29% of all payments. The IRS paid out $125 billion in fraudulent refunds in the last 10 years, over $12 billion a year.”

Here we see what I truly believe to be the biggest problem with the current Tax Code.  It should NOT to be used to “redistribute income” (the Tax Code is not Robin Hood) and should NOT be used as a way to deliver social welfare and other government benefits.  The Earned Income Credit and the refundable Child Tax Credit, the education tax credits and deduction, the energy credits, and many other “tax expenditures” do NOT belong in the Tax Code.

I am not saying that the government shouldn’t provide financial assistance to the working poor and college students, or provide encouragements for making energy-saving purchases and improvements. What I am saying is that such assistance and encouragements should not be distributed via the 1040.

The benefits provided by the Earned Income Tax Credit and the refundable Child Tax Credit should be distributed via existing federal welfare programs for Aid to Families with Dependent Children. The benefits provided by the education tax credits and deduction for tuition and fees should be distributed via existing federal programs for providing direct student financial aid. The benefits provided by the energy credit and other such personal and business credits should be distributed via “Cash-For-Clunkers”-like direct discount or rebate programs funded by the budget of the appropriate Cabinet department.

“10. The alternative minimum tax (AMT) is a complex parallel tax system that has grown like cancer. It’s results are hard to predict and can be perverse. If you win a lawsuit and pay contingent legal fees, you can end up taxed on more money than you received. AMT can ruin your stock options too.”

The dreaded Alternative Minimum Tax, referred to years ago by a colleague (I forget who – it was back in 2007) as “the poster child for complication, frustration, indiscriminant penalization, and a disregard for the best interest of Americans”, should be abolished. 

The existence of the dreaded AMT is a prime example of the laziness of the idiots in Congress.  When told in 1969 that 155 individuals with Adjusted Gross Income of more than $200,000 (over $1 Million in today’s dollars) paid “0” tax on their 1967 tax returns, rather than responding by acting logically, and eliminating the loopholes in the Tax Code that allowed the high income individuals to avoid paying tax, the idiots reacted and created the complicated alternative tax system.

The 20, and the many more in Coburn’s report, include many examples of ridiculous corporate loopholes which lobbyists paid the idiots in Congress to pass.  They have absolutely nothing to do with proper tax administration – they just unfairly benefit specific industries.

All industry-specific loopholes should be removed from the Tax Code.  Businesses, whether they be treated in the Code as corporations, partnerships, or sole proprietorships, should be taxed on net book income with minimal, if any, adjustments.  There should be a “dividend paid deduction”.  If corporations want to reduce their income tax liability they can distribute profits to shareholders in the form of dividends and claim a tax deduction.  

As I said in the BUZZ reference to Coburn’s “Tax Decoder”, I will continue to refer to the members of Congress as idiots as long as they continue to act like idiots – but I will also acknowledge a Congressperson who actually says something smart (a rarity).

Coburn tells us -

“Ideally, Congress would throw out the entire tax code and start over, but at the very least the code should be made simpler, fairer and flatter.”

I believe that “at the very least” we need to shred the current Tax Code and start from scratch.  Start with “everything is taxable” and “nothing is deductible” and add back only those exclusions and deductions that are absolutely appropriate.

Coburn is correct in saying that the code should be simple, fair, and flat.  Most importantly, when writing a new Tax Code the idiots in Congress must “keep it simple, stupid!”  The simpler the better.  Simplicity for simplicity’s sake.

Will this ever happen?  I expect not in my lifetime, and certainly not before I have completed my 50^th tax filing season and officially retire.

TTFN