The Income Tax Nightmare and the Gordian Knot
By Ken Hoagland
Once again taxpayers across the nation are struggling to find receipts, understand tax forms and get to the post office in time. And once again, politicians from both parties are making their annual empty promises that something really has to be done about the income tax system.
Most taxpayers will hire someone to help them. The taxpayer cost of compliance with a federal tax code not even the IRS understands amounts to a whopping $265 billion a year. The IRS will still come up at least $350 billion dollars short, both because of tax cheats and because the system is so complicated that people just make a lot of mistakes. The shortfall increases average taxpayer’s bills by $2,680 per family.
As bad as it is, it’s about to get a lot worse. Few Americans understand that the Alternative Minimum Tax has already started creating dramatically higher tax liabilities for the middle class. About 25 million taxpayers will be ambushed next year for not withholding sufficient funds to meet their 2007 tax bill. “Who knew?” they will say when faced with tax bills thousands of dollars higher than this year (and IRS penalties for their ignorance) and once again elected officials will solemnly declare, “We really have to do something.”
It is said that Alexander the Great solved the riddle of the Gordian knot by simply cutting it down the center. When it comes to the income tax system, however, we see only futile attempts to untie the convoluted mess of the income tax system one snarl at a time. It doesn't work. Instead of simplifying, the tax code always becomes more complicated. But there is a better way.
Instead of taxing earnings, scores of respected economists and a growing army of citizens have embraced the non-regressive national retail sales tax on consumption known as the FairTax. It is simple, transparent and applied fairly across the board. It eliminates all federal taxes on earnings and investments and unlike previous tax proposals pitting one income group against another; it has advantages for every income level. As such, the FairTax has the potential to unite a divided country against the dysfunctional income tax system.
Like cutting the Gordian knot, a whole range of problems are addressed with enactment of the FairTax. Highly regressive Social Security and Medicare payroll taxes are eliminated but by taxing all consumption a broader stream of revenue better supports these faltering programs. Millions of illegal immigrants will support our national government as consumers but a monthly universal rebate is only paid to legal residents-- making illegal immigration less desirable. Every wage earner sees a dramatic increase in take-home pay as all federal payroll withholding taxes are eliminated. Investors can delight that capitol gains taxes are eliminated as well as the much debated “inheritance tax”. The FairTax means business decisions will be driven by sound reasoning instead of arbitrary tax policy.
As significant, the FairTax solves the self-destructive federal tax policy of giving foreign manufactures and agriculture a tax advantage over the “Made (and grown) in America” label by eliminating the significant and hidden costs of income taxes that are embedded in the price of American goods. Economists predict the nation will see both jobs and trillions of dollars of American wealth come flowing back to native soil.
The “catch” slowing progress on this needed mother-of-all-tax-reforms is Congress. Because the FairTax eliminates the role of tax lobbyists seeking favors for wealthy clients and Congressional contributors, Congress has been unwilling to give up its power to manipulate the tax code. Camp followers who profit from the politics of the income tax code constantly lobby, research and opine on why the Gordian knot cannot be cut. Can federal public policy on taxes ever be made to simply favor the public? Yes. When enough Americans make Congress choose between self-interest and the public interest, the FairTax will be enacted and the Gordian knot will be cut.