Simplicity just isn’t a word synonymous with taxes.
With nearly $150 billion spent annually on compliance, federal taxes are a confusing web of seemingly arbitrary rules, endless line items, schedules and worksheets. Even with multiple instruction books, maneuvering the maze of the tax code is costly and time-consuming.
Individuals and businesses must participate in a national discussion about a simpler tax system, one that collects sufficient revenue to meet appropriate federal responsibilities, but one resting on a broader, fairer tax base without penalizing saving and investing, the backbone of a strong, decentralized and thriving economy.
Some disturbing facts face taxpayers today:
- Prior to the temporary fix recently approved by Congress, the Alternative Minimum Tax (AMT) was anticipated to affect 21.6 million middle-class taxpayers in 2006. Without a permanent repeal of the AMT, that number will total 52 million, 45% of all taxpayers, in 2015.
- A recent study indicated that 2 million taxpayers collectively paid over $1 billion in additional taxes by making the wrong decision between itemizing and taking the standard deduction.
- The IRS estimates that in 2001 between $281 billion and $322 billion went unreported on business and individual tax returns, amounting to a tax increase of more than $2,000 per year for honest taxpayers.
The current tax system discourages saving and investing, encourages fraud and incurs inordinate cost burdens due to complexity. Certain provisions, namely the AMT, unfairly penalize taxpayers making more than $45,000.
One year ago, a bipartisan advisory panel was created to assess our tax system and recommend improvements. Panel members visited with citizens nationwide and took comments online and by mail. From dozens of witnesses at 12 public meetings and thousands of written comments, the panel’s final report, submitted in November, outlines simple, fair and logical ideas that promote economic growth vital to individual and collective success. These proposals will be thoroughly debated and discussed in Congress in the upcoming months.
This was a significant undertaking. For example, one proposal reduces the schedules, forms and worksheets related to Tax Form 1040 from 53 to 10. Panel members also address outdated problems such as basing computer depreciation schedules on depreciation of government typewriters in the 1970s. The panel proposes eliminating double taxation on corporate savings: corporations are taxed once on earnings, and then these dollars are taxed again when distributed to shareholders. Another proposal combines 15 different tax provisions for at-work, health, education and retirement savings into three simple tax-friendly saving plans.
Ironically, our current system rewards individuals and businesses for debt but penalizes for saving. Some proposals dealing with mortgage interest deduction and employee stock ownership plans are controversial and require careful consideration and detailed debate before changes are made.
The writing is on the wall. Household net savings for France, Germany, Italy and the Netherlands exceed 10%; the United States lags behind at less than 2%. Increasingly, the employer part of payroll taxes is shifting to employees as lower wages and reduced benefits. We’re at a critical juncture in tax reform and must closely examine realities of our economic future.