‘In this world nothing can be said to be certain, except death and taxes.’
Benjamin Franklin’s maxim about the inevitability of taxes is so familiar that it has the ring of a cliche. But it suggests a profound truth: Taxes are a certainty we dread almost as much as death. No matter what our politics may be, when tax time approaches we all do our best to pay as little as possible. Some people go so far as to avoid taxes altogether.
Taxes and tax law may seem like dry subjects, but they’ve incited passions from the beginning of time. Even the American Revolution, with its rallying cry of ‘No taxation without representation,’ had its roots in a quarrel over taxation. Years later, the Founding Fathers’ need to repay the debts of that war resulted in an excise tax on whiskey, which sparked the ‘Whiskey Rebellion,’ crushed by George Washington in the backwoods of Pennsylvania.
In the next century, protectionist tariffs on imported goods perceived to favour the fast-industrialising North helped divide the nation before the Civil War. In the late 1970s, a popular uprising in California against excessive taxation eventually led to Ronald Reagan’s election as president.
We so detest taxation that some people will resort to truly desperate measures. Lady Godiva’s famous ride was prompted by indignation over excessive taxes. Her nobleman husband agreed to honour her pleas for tax relief for her fellow citizens – but only if she rode naked through town. Her resulting one-woman protest made history, exposing the unfairness of taxes – and then some.
Today, hardly a day goes by when we don’t read about someone going to jail for tax avoidance. A handful of Americans have even given up their citizenship and moved abroad. Most of us condemn these tax dodgers, but shouldn’t the tax code get some of the blame?
Given America’s history of tax-o-phobia, how in the world did we end up with what we have today: our horrifically heavy, appallingly complex, corruption-inducing tax code? A monster of a system that not only reaches deep into our pockets – but overreaches into our lives? It influences our behaviour, distorts our economy, and – yes – ruins our quality of life as individuals and a society.
Most of us don’t get ensnared in the agency’s toxic web. But even for the average taxpayer, the system is riddled with injustices. We all know the complaints.
First and foremost, we pay too much…and more than you’d think. Most Americans don’t realise how far the politicians reach into our pockets. Everything we do is hit with some sort of tax, fee, or toll.
Politicians and many economists insist that ‘only’ about one-third of our ‘economic output’ – i.e., what we the people produce in goods and services each year – goes for taxes. But actually, when you get away from their weasel definitions of what constitutes a tax, you probably pay something like half of the money paid by your job – or more.
Feel like calling Uncle Sam to complain? Watch out. You’d pay taxes on that phone call in the US – including an excise tax of currently 3% passed as a temporary financing measure to pay for the 1898 Spanish American War! The politicians have anesthetised the citizenry to the scale of their tax larceny. Did ‘We the People’ really give them the mandate to empty our wallets like this?
Another complaint: Taxes are too darn complex, especially the US federal income tax code. Consider this, for starters: Abraham Lincoln’s Gettysburg Address, which defined the character of the nation, is all of 268 words. The Declaration of Independence runs about 1,300 words. The Constitution, which has served America for more than 2 centuries, comes to some 5,000 words. The Holy Bible has 773,000 words. The US federal income tax code and all of its attendant rules and regulations: 9 million words and rising.
An appalling fact about the US tax code is that no one really knows what’s in it. That’s why there are endless court cases over what our system actually allows and doesn’t allow. And it’s why there is so much ambiguity and confusion, why so many people and small businesses miss out on taking lawful deductions or end up making mistakes. It’s why people with similar salaries can end up paying wildly different amounts of tax.
Indeed, how could anyone possibly know what’s in the code when it reads like the following passage from the 2004 American Job Creation Act. And we quote:
‘Sec199(c) Special rule relating to election to treat cutting of timber as a sale or exchange.
‘Any election under section 631(a) of the Internal Revenue Code of 1986 made for a taxable year ending on or before the date of the enactment of this Act may be revoked by the taxpayer for any taxable year ending after such date. For purposes of determining whether such taxpayer may make a further election under such section, such election (and any revocation under this section) shall not be taken into account. (p.23)’
Uh, run that by us again. For those not fluent in taxcode-ese, the passage is explaining how cutting timber fits into the scheme of the new deduction for income from domestic manufacturing. If an owner of timber decides to cut and sell some trees, he can ‘revoke’ his decision to file as having sold these trees for a gain under the new rules passed by Congress in October 2004.
We’ll take their word for it. Little wonder that experts deciphering the code’s perplexing prose are regularly flummoxed, as was powerfully illustrated in 1997 by a Money magazine survey. The editors gave 45 expert tax preparers a return to fill out on behalf of a fictional family, ‘the Bakers’. What did they owe Uncle Sam? The experts came up with forty-five different answers! Not one came up with the right answer – or at least what Money thought was the right answer. Differences in their calculations ranged from a few hundred dollars to over $50,000. At least that confusion was make-believe. Most of the time it is all too real.
Even the US government’s own tax pros don’t understand the system. A 2003 Treasury Department study found that IRS experts manning the agency’s toll-free help lines gave the wrong answers to tax-related questions more than 25% of the time. And yes, you are still liable for any errors, even if it’s the IRS that makes the mistake!
Then there are those tax issues that are more exasperating – and inane – than the most arcane questions of medieval theology. Back then, they used to debate how many angels can dance on the head of a pin. Today’s equivalent: How should trees be treated for tax purposes? Trees take decades to grow, which make them very different from cars. An auto today can be manufactured in sixteen to twenty hours. Therefore, shouldn’t the sale of trees be treated as capital gains?
Do you really want to know the answer? Amazingly, countless treatises and legal briefs have been written by lawyers and academics debating what the proper tax status of trees should be! Ready to throw your hands up in despair? You’re not alone.
America’s federal income tax code is the chief political contaminant inside my nation’s capital, encouraging the crassest, crudest political conduct. Consider this: Fully one in six private-sector employees in Washington DC is employed by the lobbying industry. Half of their efforts are directed at wrangling changes in the tax code. Each congressional term, endless interest groups and well-connected individuals push amendments with lucrative tax breaks favouring specific industries, companies – or themselves.
Many of these petitioners seek tax changes ostensibly designed to improve Americans’ lives. Shouldn’t we help encourage homeownership? Institute tax-relief on buying a home.
Shouldn’t we help people adopt children? Give them a tax credit of up to $10,390 for expenses paid to adopt a child under 18.
Shouldn’t we help reduce the marriage penalty? More credits and bigger exemptions for married couples.
As appealing and well-intentioned as they appear to be, such popular tax breaks, including the mortgage deduction, are too often a cover for myriad payoffs to politically potent special interests.
Besides, if tax rates were low and reasonable in the first place, would we need all these credits? The answer for most deductions, exemptions, credits, deferrals, et cetera is an emphatic ‘No’.
The tax code’s ambiguity and incomprehensibility invite abuses. Too often, tax breaks benefit the few at the expense of the many. For example, during the 1990s, complicated corporate tax shelters proliferated. Their sole purpose was to cut companies’ tax payments to Washington. Most pretended to be legitimate business devices even though no real business purpose was served.
To see how the process of tax legislation has become a feeding frenzy, consider the American Jobs Creation Act that came before the US Congress last year. What started out as an attempt to abolish a paltry $5 billion a year export subsidy turned into ‘the most important tax bill in the last 20 years.’ It included about $140 billion of tax breaks. America’s representatives in Congress somehow managed to find room for a $519 million tax break for small aircraft producers, a $44 million handout for importers of foreign-made ceiling fans and an $8 million loophole for bow and arrow makers (the US Defense Department is looking to transform the military, after all). Starbucks (yes, Starbucks) notoriously had itself proclaimed a manufacturer and thus also qualified for a lower corporate tax rate.
After each round of new tax legislation, there is always strutting and breast-beating by lobbyists for those industries getting the most breaks. Publications routinely run lists of those who won and lost in each particular tax bill.
Ultimately the public is the loser. The Long Island Business News most aptly summed up the entire exercise: ‘American Jobs Creation Act: a 650-page boondoggle.’ Too many tax code amendments and laws are the product of – and the excuse for – the exercise of raw political power. Politicians gladly rake in contributions – a form of extortion or protection buying – from groups or people wanting changes in the code.
Astonishingly, members of Congress’s House, Ways & Means Committee, which originates US tax legislation, usually rake in more contributions each election cycle than do most of their peers. Perhaps surprisingly, Ways and Means Committee members usually get more than even their colleagues on the House Appropriations Committee, which decides how and where US tax dollars are actually spent.
No wonder congressmen and congresswomen fight fiercely to be on that committee – you’re set for political life if you are. Lobbyists, trade groups, and individuals will shower you with money in hopes of ‘gaining access’ when new tax laws are written, which happens just about every year.
Chief Justice John Marshall once famously said, ‘The power to tax is the power to destroy.’ He also might have added, ‘And the power to reward favoured interests.’ Think of it this way: Washington politicians take one dollar from America’s pocket – and then return fifty cents in various tax deductions. Wouldn’t it be better if they taxed only that fifty cents in the first place? We would be better off – we’d keep more of what we earned – with a simple, flat tax.
By Steve Forbes for The Daily Reckoning
The above essay has been adapted from Steve Forbes’ latest book, ‘Flat Tax Revolution’, available from all good bookshops. Steve Forbes is president and chief executive officer of Forbes and editor-in-chief of Forbes magazine. In both 1996 and 2000, Forbes campaigned for the Republican nomination of the US presidency. Forbes continues to promote his agenda of a flat tax system. He lives with his wife and family in New Jersey.