Taxes loom large in the minds of the American people. How much is too much in taxes to pay? Would those who pay no income tax be better off, having more skin in the game, if a different sort of tax required them to divvy up financially to help support running the government?
Author Dan Pilla’s booklet, Ten Principles of Federal Tax Policy, as discussed at a Heartland Institute Author Event on Thursday, November 14th, was written by Pilla to pull back the covers to show how our present Federal Income Tax system falls far short of what should be the template for a federal tax policy that is fair, efficient, and easily understood.
See Part 1: Author says Federal Income tax unfair; ignores sound economic policies
Pilla’s ten principles can be applied to all tax systems at any level of government, but because income taxes collect by far the most revenue and affects the most people in the U.S., it is the income tax that most often violates what Pilla considers sound tax policy as set forth in his booklet, Ten Principles of Federal Tax Policy. Download for free at www.heartland.org. Print copies are available at a cost and can be ordered online at heartland.org or call 312-377-4000.
Pilla’s comments, directed at seven of his ten principles of Federal tax policy, follow:
1. Simplicity – Citizens have a fundamental right to know what tax laws require, and compliance should be easy andinexpensive.
A tax code must be such so that people are able to understand the law. The scope of our present tax law contains four million words. It is so vast that not even the IRS knows what is going on. Being that the tax code is so broad, it’s impossible for the administration to do its job. There are 140 individual tax penalties in the current tax code. Difficulty in understanding the tax code breeds non-compliance by the public. Many individuals are subject to tax penalties (punished) based on lacking an understanding of the tax code.
2. Noninvasiveness - A minimally invasive tax code encourages voluntary compliance and reduces the need for enforcement. so many burdens.
3. Efficiency – The total cost of collecting taxes can be reduced by lowering the number of collection points
Some have called the IRS the most efficient agency funded by government. How could this be so? Operational costs in the federal budget total $2 billion a year. There are 93,000 employees, soon to be 100,000 with Obamacare. The IRS collects $2.4 to $2.5 trillion in taxes every year, but four out of every five dollars are not collected by the IRS. 98% of individuals “voluntarily” pay what they owe to the IRS, while only 2% of IRS revenue is received through IRS enforcement. A broad-based retail tax is needed to reduce the 250 million collection ports to 50 (number of states). It is not uncommon for businesses to be required to file 5 different tax forms.
4. Stability – The tax code should be stable and reliable from year to year and generation to generation.
Don’t individuals and businesses have the right to know that the language today is the same as the law will be tomorrow and will likewise serve us in the future? How is it that numerous tax preparers can arrive at different amounts owed by the same taxpayer and with such a variance of the amounts owed? From 2001 – 2008 over 3,250 tax change regulations were put in place. Changing laws with such frequency breeds confusion and results in the the assessment of penalties by the IRS, which leads to zero stability. The federal income tax affects every area of our lives and the most personal ones such as marriage, children, home ownership, personal investment, charitable giving, etc., giving rise to such questions as whether or not to save money or whether or not to get married.
5. Visibility – The cost of government should be readily apparent to taxpayers.
It is important for the American people to know what the tax is on a product or a service to foster understanding about the cost of government. Government costs money, but many times the taxes we pay are invisible. This results in the American people having no idea of what their tax liability is. For people not having skin in the game — and there are entire segments of the population who meet this qualification — it doesn’t matter what government costs. One example of this lack of understanding as noted by DanPilla: An individual, having received an income tax refund of $1,000, never realized that his W2 form showed he had paid $5,000 in wage withholding taxes. Not looking at the top line of his pay check, the individual didn’t see the hidden Social Security tax that had been taken directly out his pay check, having noted only the bottom line which showed his take home pay.
6. Neutrality – Taxes should not fall more heavily on one industry or class of individuals than on others.
7. Economic Growth – Taxes should not impede the investment and consumption decisions that make economic growth possible.
Any tax system must not burden the engine of growth. Although no tax system is a panacea and all taxes result in income distribution, to be considered is where the least amount of damage will be done so economic growth can be encouraged and not stymied. Our Founding Fathers expressly rejected the idea of imposing direct taxes as a means of funding the economy on income, savings, and investments, but instead favored an indirect tax on consumption. The following sound economic principles must be kept front and center in all discussions regarding taxation: 1) What you tax you get less of, and 2) what you subsidize you get more of. The economy can’t grow when the engine of growth is heavily taxed. For every dollar paid in taxes, businesses have a least one less dollar available for other things.
8. Broad-Based – Broad tax bases allow rates to be kept low, which in turn encourages voluntary compliance.
This nation is doing the opposite with its federal income tax system where fewer and fewer people are paying into the system. According to Treasury data: Tax payers in the top 20% of the income distribution pay 70.6% of all federal taxes, while taxpayers in the bottom 20% pay 0.4 percent. More than half of federal taxes are paid by taxpayers in the top 10 percent of the income distribution. Described by Pilla was the “Disney World Syndrome. This syndrome happens when people elect not to pay income taxes, or perhaps mortgage payments, but elect instead to have fun with the money.
9. Equality - The tax system should treat people equally and fairly.
There is a push for equality across the board except when it come to the federal income tax, but does government have the right to steal from people what they earn and distribute to someone else? This “stealing” is done on the basis of success standards, reflected by ones social and economic standing, through the fixed arbitrary income rates designated in the Internal Revenue Code.
10. Constitutionally - Taxes must be imposed solely to fund clearly defined constitutional functions.
Since the 1930’s Congress has used the federal tax laws for purposes other than raising revenue. According to Article 1, Section 8 of our Constitution, it authorizes the federal government to 1) pay our debts, 2) provide a national defense, and 3) provide for the “general” welfare of the nation. General welfare has become the point of contention. The original intent of providing for the “general welfare” was that the provision had to benefit the nation as a whole and not one business or industry over another. The Founders were adamant that the taxing authority granted in the Constitution be used only to benefit the nation as a whole, not individual inhabitants or individuals classes of citizens at the expense of others Our present tax system has evolved into a great transfer system of wealth. There is no legal or moral authority in a free society that justifies using the power of government to take from some what they have legally and peacefully acquired and give to others who have not earned it.
What might be the best tax model for this nation? Democrats are fond of saying that all elections are local. They are local, but they are also personal. Democrats are able to convey a message to voters that asks them individually to consider what’s in it for me when casting their ballot. By handing out free things to different classifications or groups of Americans, Democrat party loyalty is bought and thus established.
Republicans must convince the American people why liberty is a better idea than socialism? Republicans in the past have been inapt in presenting cogent explanations. To be explained by Republicans: Why the freedom to make personal decisions wins every time over government control? How doing for self enriches lives?
It is unrealistic to expect Congress to be up to the task of changing this nation’s tax system unless it is stumbled upon accidentally. Granted, changing the tax system would also have to depend on what is politically doable. All considered, little will happen unless this nation’s tax burden becomes so unbearable that a majority of the American people start to suffer.
Mr. Pilla presented the three tax policy options open to this nation, reminding those assembled how the luxury tax flopped:
1. Current Federal tax policy.
2. Flat tax option.
3. Sales Tax option.
According to Mr. Pilla, we have only one chance to get it right. Pilla considers the value added tax a bad idea, while regressive taxes fall more heavily on the poor than the rich. Regarding a sales tax, Pilla rates it as neither progressive or regressive but proportional to what people buy. As such all Americans would have some skin in the game, with a dawning realization that what government freely gives isn’t free.
There have been three presidential commissions on taxes — 1995, 1996, and in 2005 under President George W. Bush. Each report insisted that a sound tax system must be mindful of the profoundly negative consequences taxes can have on the economy, yet none went beyond the paper they were printed on.
The clock is ticking. Hopefully politics won’t impede the way forward until such a time when this nation can no longer be rescued from it self-imposed downfall, precipitated by an all-powerful, reckless government whose goal it is to please what has become a nation of greedy, government-dependent Americans.
The next Heartland Author Series will be held on Thursday, December 12, from 11:30 a.m. to 1:00 p.m. Michael J. Lotus will speak on America 3.0: Rebooting American Prosperity in the 21st Century–Why America’s Greatest Days Are Yet to Come. Call 312/377-4000 or visit heartland.org.
Published, November 19, 2013, Illinois Review