Monday, February 6, 2023


I very seriously and sincerely believe that the one and only purpose of the federal tax system is to raise the money necessary to fund the government.  
As a tax professional for 50 years I know too well that the US Tax Code has grown into a complicated and convoluted mucking fess.  The major reason for tax return errors, by both paid tax preparers and taxpayers who self-prepare, is the excessive complexity of the Code. It needs to be shredded and totally rewritten from scratch.
The new Tax Code must
(1) Be simple – easy for everyone to understand.  Simplicity for simplicity’s sake.
(2) Be fair and equitable - treat all taxpayers equally.
(3) Be consistent – treat specific conditions, situations, and activities, and maintain specific definitions and descriptions, the same in all instances.
(4) Encourage savings, investment, and growth.
(5) Index for inflation all allowable deductions and credits.
The new Tax Code must not
(1) Be used for social engineering, to redistribute income or wealth, or to deliver social welfare and other government benefits.
(2) Encourage or discourage certain economic decisions (other than savings, investment, and growth), or provide exclusive benefits for specific industries, business activities, or classes of taxpayers.
(3) Contain any refundable credits, or any phase-outs, exclusions or adjustments based on Adjusted Gross Income or Modified Adjusted Gross Income. 
(4) Contain any “alternative” tax calculation systems (such as the current “Alternative Minimum Tax”).
(5) Contain any temporary deductions, credits, benefits, or provisions.
And, except for a true national emergency, retroactive tax legislation that becomes effective for the current year must be required to be passed by Congress before the end of October.
The Tax Foundation, a nonpartisan, educational organization, has earned a reputation for independence and credibility.  The Foundation has identified the “Principles of Sound Tax Policy”, which should be incorporated in the new rewritten Tax Code.  
Simplicity: Administrative costs are a loss to society, and complicated taxation undermines voluntary compliance by creating incentives to shelter and disguise income.
Transparency: Tax legislation should be based on sound legislative procedures and careful analysis. A good tax system requires that taxpayers be informed and understand how tax assessment, collection, and compliance works. There should be open hearings, and revenue estimates should be fully explained and replicable.
Neutrality: Taxes should not encourage or discourage certain economic decisions. The purpose of taxes is to raise needed revenue, not to favor or punish specific industries, activities, and products.
Stability: When tax laws are in constant flux, long-range financial planning is difficult. Lawmakers should avoid enacting temporary tax laws, including tax holidays and amnesties.
No Retroactivity: As a corollary to the principle of stability, taxpayers should be able to rely with confidence on the law as it exists when contracts are signed and transactions are completed.
Broad Bases and Low Rates: As a corollary to the principle of neutrality, lawmakers should avoid enacting targeted deductions, credits, and exclusions. If tax preferences are kept to a minimum, substantial revenue can be raised with low tax rates. Broad-based taxes also produce relatively stable tax revenues from year to year.”
Put simply, good tax policy promotes economic growth by focusing on raising revenue in the least distortive manner possible.
One of the biggest problems with the current federal tax system, and a large source of its complexity, is the use of the Code to deliver government benefits.  Donald Alexander, Commissioner of Internal Revenue from May 1973 - February 1977, correctly observed - “The tax system should be designed to impose and to collect taxes, not to administer social programs.”
The Internal Revenue Service, and the tax professional community, should not be required to act as Social Workers and administer and verify government program benefit payments.  This practice is not only inappropriate, but it also invites and encourages tax fraud.
I am not saying that the government shouldn’t provide financial assistance to the working poor and college students, provide encouragements for purchasing health insurance, making energy-saving purchases and improvements and other ‘worthy’ actions.  What I am saying is that such assistance and encouragements should not be distributed via the Form 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 Premium Tax Credit, the energy credits, and other such personal and business credits should be distributed via direct discount payments to the appropriate vendors or direct rebate programs, similar to the successful Cash for Clunkers program of a few years ago, funded by the budget of the appropriate Cabinet departments.
Distributing the benefits in this manner is much better than the current method for many reasons:
(1) It would be easier for the government to verify that the recipient of the subsidy, discount or rebate actually qualified for the money, greatly reducing fraud. And tax preparers, and the IRS, would no longer need to take on the added responsibility of having to verify that a person qualifies for government benefits.
(2) The qualifying individuals would get the money at the “point of purchase,” when it is really needed, and not have to go “out of pocket” up front and wait to be reimbursed when they file their tax return.
(3) We would be able to calculate the true income tax burden of individuals. Many of the infamous “47 percent” of Americans - who either pay no income tax or get a “gift” from the government by filing a tax return - would still be receiving government benefits, but it would not be done through the income tax system, so they would actually be paying federal income tax.
(4) We could measure the true cost of education, housing, health, energy and welfare programs in the federal budget because benefit payments would be properly allocated to the appropriate departments.
Some people may wonder why a tax professional is calling for a simpler tax system. Does not each new tax law, and each complexity added to the code, put money in our pockets? Is not a more confusing Tax Code better for business?
I believe that a much simpler tax system would not hurt our business. I truly believe that if we did nothing but basic 1040s – the equivalent of the old “1040-A” - all day during the tax season, we would make more money, experience less agita, and substantially reduce the number of extensions needed.
I think many clients would not decide to do their own returns if the tax system was simplified; they would continue to come to us. Most taxpayers who use a tax professional simply don’t want to be bothered with the task of preparing their tax return, and want to make sure they do not miss anything.
Your thoughts?

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