If tax cuts expire, every taxpayer will be impacted

Oct 2012

As most taxpayers are aware, unless Congress acts by the end of the year the Bush Tax Cuts will expire. It should be noted that these tax cuts were designed to expire when they were enacted. However, if they are allowed to expire it will result in an increase in marginal tax rates, capital gain rates, estate tax rates and many others effective January 1, 2013.

There is no question that if the Bush Tax Cuts expire, it will negatively affect every single taxpayer. Economists, commentators and pundits of all sorts have discussed whether the tax rates should be extended for everyone or for only some people. A key issue in the presidential election is whether the “wealthy” are paying their fair share or if they should pay more. Considering the state of the economy, the budget deficits and national debt, it is clear that something must be done regarding taxes. However, with the weak state of the economy, raising taxes on anyone is not good policy.

I don’t think anyone knows what Congress will do (or what they won’t do). What is clear is that the inability to address the pending deadline is not good for anyone. The President and Congress share blame for permitting this situation to occur. Taxpayers should not have to wait until the end of the year to know what the tax rates will be in 2013. The gridlock does not benefit anyone.

Although there can be much debate as to what tax rates should be and who should or should not be paying more in taxes, there can be no debate that our tax system is far too complicated. The more complicated the tax code, the greater the likelihood of errors occurring and people taking advantage of the complexity. Regardless of whether or not you use a professional to prepare your taxes (I believe that everyone should either hire a professional or use a tax preparation program), the complexity of our tax system produces waste and inefficiencies.

What both political parties want is a “better” tax system. However, what I have not heard from any candidate or party is the need for a simpler tax code. Simplifying the tax code will result in a higher level of compliance. Both corporations and individuals will make fewer errors which will result in more productive use of time and money. Even though no one I know wants to pay more in taxes (and many believe that tax rates are too high) all of the proposals that I have seen add to the level of complexity. This is wrong.

What contributes to the complexity of our tax system is that the purpose of the Internal Revenue Code is not merely to raise taxes but also to promote economic and social goals as well. For example, sales taxes or gasoline taxes are only implemented to raise tax revenues for the government. However, our tax code is also filled with provisions that have nothing to do with raising revenue but attempt to influence conduct (good or bad). For example, mortgage interest is deductible to make it less expensive for people to buy homes. Contributions to charitable organizations and retirement accounts are both deductible. The list is endless, and each party favors its own set of tax deductions or credits; no one is immune.

A tax system that is simpler would by definition be fairer and increase compliance. A complete re-write of the tax code is necessary with a goal of making the entire code easier to understand and easier to implement. The last attempt at seriously simplifying the code occurred during the Reagan administration. This bi-partisan revision enacted many changes that simplified the code.  For example there were only 2 tax brackets – 15% and28% – and ordinary income and capital gains were taxed at the same rates. Today there are 6 tax brackets which will increase next year.

Although it is politically unpopular, I believe in a flat tax rate. The reality is it will never happen because every deduction (mortgage interest, charitable deductions, retirement accounts, etc.), is backed by a very large and powerful special interest group that will lobby to assure that their deduction continues to be available.

As usual politics rather than common sense will probably win in the end. That unfortunately is sad.


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