As we approach another year’s tax filing deadline, let’s take a moment to marvel at how truly idiotic the tax code has become.
In its zeal to maximize revenue while advancing social good, Congress has created a code that produces enormous unintended consequences: It favors businesses over charities, subsidizes the wealthy’s conspicuous consumption, and even singles out youths for inheritance taxes.
The result: Our tax code is unfair. Here are just five examples:
It subsidizes health care for some, but not others. Over 57 percent of American workers receive health insurance benefits tax-free, either through their employers or through a self-employment tax deduction. But — except for the few taxpayers who both itemize their deductions and have medical expenses exceeding 7.5 percent of their adjusted gross incomes — everyone else pays full freight.
This is unfair. Let’s consider “Tom” and “Sam,” two single, 25-year-old males without dependents who receive the same compensation, $106,000. Tom takes $100,000 of his compensation in wages and the remaining $6,000 in the form of a company-sponsored health care plan. Sam takes all $106,000 of his compensation in wages and uses $6,000 of his income to buy health insurance on his own. Assuming both take the standard $12,550 deduction for single filers and have no other income, Sam would end up paying $1,440 more in federal taxes than Tom.
It imposes a punishing inheritance tax on children. Although the federal inheritance tax was abolished in 2001, inheritance taxes are still imposed through something called the “kiddie tax,” intended to discourage wealthy individuals from transferring assets to their children to reduce their tax rates. Under the tax, kids under 19 and dependent, full-time students up to 24 years of age must pay their parents’ highest tax rate — up to 37 percent — on every dollar in unearned income they receive exceeding $2,300. Thus, the kiddie tax is a de facto inheritance tax for many young people.
This tax was made even more burdensome in 2019 when the SECURE Act became law, requiring many inherited IRA beneficiaries, including grandchildren, to fully distribute IRAs within 10 years. And the costs can be enormous: A 14-year-old child who distributes $30,000 of an inherited IRA this year, for example, could owe up to $10,249, or 34.2 percent of the distribution, to Uncle Sam.
It subsidizes conspicuous consumption. The home interest mortgage deduction is largely a subsidy for the wealthy to buy homes larger than they would otherwise. While just 4 percent of taxpayers earning $50,000 or less take advantage of the mortgage deduction, 34 percent of those earning $200,000 do. The rationale for the deduction is that it promotes home ownership, but there is little evidence to suggest that it does. There is considerable evidence, however, that the deduction may encourage people to buy more expensive homes, potentially helping to increase housing prices and home price volatility.
It favors businesses over charities. The IRS recently announced that its 2022 standard mileage rates, which taxpayers use to calculate their automobile deductions, would be 58 cents for business purposes, 18 cents for medical purposes and 14 cents for charitable purposes. Even before this year’s massive gasoline price hikes, the average cost to operate a car was 63.7 cents per mile. Those operating motor vehicles for charitable and medical purposes don’t exist in a land of unicorns and fairy dust — they live in the real world, where their costs are more than fourfold the IRS allowance.
The tax code favors the politically powerful. What message is sent when our tax code allows the costs of gender reassignment surgery to be deducted as a medical expense, but not the costs of keeping special needs kids safe in their homes? It says LGBTQ+ groups are a lot more powerful than groups such as Autism Speaks.
Whatever one thinks of gender reassignment surgery, it is an elective procedure unnecessary to preserving life. The same cannot be said of home care services for some individuals with severe behavioral and developmental problems, such as those with autism. While the costs of other types of in-home nursing care can be deducted, the costs of technicians and family members trained to implement behavioral plans cannot. Whether a medical expense is deductible should depend on whether it is necessary — not whether it potentially produces votes at the ballot box.
In our effort to use the tax code to promote social good, we’ve created one that is unfair, and Congress time and again has proven itself to be incapable of fixing it.
It’s time we scrap the tax code, replace it with a flat tax, and move federal efforts to promote social good back where they belong: congressional appropriations. A flat tax would be simpler and easier for the IRS to administer, and fairer for all Americans.
David A. Ridenour is president of the National Center for Public Policy Research, a nonpartisan, nonprofit educational foundation based in Washington, D.C. He is the father of two children with autism.