The American income tax system is broken
Here are my top five reasons why I hate our income tax system:
1. Too complex – Even the professionals don't understand the entire code. There are volumes of books dedicated to translating the rules and helping tax preparers learn how to apply them. The number of different rules is astonishing, and it's no wonder that many mistakes are made on tax returns. Why have a system that the average taxpayer can't understand? Why make it so difficult that most people can't even prepare their own taxes anymore?
2. Loopholes to benefit special interests – It's no secret that all the special deductions and credits have their roots in the special interests of one group or another. Why is there a tax credit for one industry, but not another? Because the one with the tax credit probably lobbied more and threw more money at lawmakers. It's not right. It violates a basic sense of fairness and guarantees that the free markets aren't working on their own. We want the free market to decide what industries and activities are the most efficient and worthwhile. We don't need the government intervening to give a special advantage to one industry, at the expense of others. That's exactly what parts of our current tax code do.
3. Punishes productivity – If you make more, you're taxed at a higher rate. Sure, the theory is that if you're better off, you can "afford" to pay a larger share of taxes. But is that really necessary or even fair? Why should a high income individual have to pay 36% in federal income taxes on the top level of income they've generated? Do they not deserve to keep just as much of their earnings as the lower income person? Not under our tax system, they don't. The IRS admits that the top 5% of all taxpayers pay over half of all income taxes, even though they account for only one-third of the income.
4. Inherently unfair – The larger your family, the lower your income taxes. That sounds very unfair to me. Suppose you have a single man with no children who makes $60,000 and uses the standard deduction. He'll owe $9,243 in federal income taxes. Compare that to a man with a wife and four small children earning $60,000. He will pay no federal income taxes. (That's right. Zero.)
I understand that it's harder to support a family of six on $60,000 than a family of one. Yet the single man with no children had to work equally as hard to earn his $60,000 as the family man did, but the single man has a big tax bill to go along with it. Clearly, the family of six utilizes proportionately more government services than the single man does, yet they pay no income taxes. Is that fair? Of course not.
5. Tries to regulate behavior – Tax deductions and credits are offered for things that are deemed "good," such as charitable contributions or the costs of owning a home. But is it really the place of our government to try to encourage or discourage certain behaviors with monetary incentives and penalties? I'd argue that it's not.
Our tax system is so broken, that it can't be fixed. Our best alternative is to wipe out what we have and start over. We need to find a solution that gives everyone a stake in our government. That means everyone should pay, even if it's only a token amount.
The goal of a new tax system should be fairness across the board. Don't punish people who don't have families or who have found a way to make a lot of money. Don't try to punish or reward certain behaviors. Just have us all pay a small part of the tax bill so that no group of people is unfairly burdened by a bad and complicated system.
Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.