President Biden committed $80 billion over the next decade to support the Internal Revenue Service (IRS) and provide help for IRS agents to get their job done. Republicans are crying foul, suggesting that every American will be targeted for unnecessary and unwelcomed harassment, especially small business owners. Like any partisan response, the truth typically falls somewhere in the middle.
Perhaps instead of throwing money at a tax code and taxation system that is designed, as some argue, to leave “billions on the table,” the time is ripe to revamp the tax code, which has almost 10,000 sections and has been amended over 4,000 times just over the past decade.
The goal should be to create a simplified taxation system so that everyone can better understand how much taxes they are paying, with the IRS bureaucracy minimized, and taxes collected with greater ease for all.
So, what are some options that are used in other countries?
A flat tax imposes a single tax rate for all taxpayers. A value added tax, or VAT, taxes consumption rather than income.
The argument against both these taxation systems is that they are not sufficiently progressive to tax high-income earners enough, and they overly burden low-income earners. Yet, this is exactly the effect of the current tax code.
The people who benefit the most from a complex tax code are high-income earners. They are the people who exploit tax laws and rules that enable them to pay less taxes. Many such efforts are legal and well within the tax code, either explicitly or by interpretation.
The problem is that as the tax code has been revised and updated incrementally over the years, it has created legal and legitimate tax avoidance crevices that those with high incomes and in many cases, diverse income sources, can exploit.
Simplifying the tax code will remove such opportunities and make it more difficult for anyone to avoid paying taxes.
Tax reform is often portrayed as needing to collect more taxes from the wealthiest earners. The data shows that high-income earners already pay a large proportion of federal taxes. For example, in 2019, the top half of all taxpayers paid 97 percent of all individual income taxes. Moreover, the top 1 percent of all taxpayers paid over 38 percent of all individual income taxes collected.
One question up for debate is whether such percentages are adequate. Should the 97 percent be 98 or even 99.5 percent? Should the 38 percent be 50, 60 or 80 percent?
Stories about how the wealthiest people in America avoid paying taxes contain some elements of truth, yet are facilitated by the current tax code. For example, capital gains are only taxed when they are realized, which makes sense. Moreover, the wealthiest “tax avoiders” are extreme outliers among not just all taxpayers, but also among the majority of American high-income earners. Lastly, these “tax avoiders” are just following the tax code. Articles about such tax avoidance strategies make good social media posts, fueling ill-will against such people, but result in no effective changes in our tax code.
Being wealthy or being a high earner should not be a crime nor viewed with disdain. Many such people worked long hours to achieve their income capabilities. Some were in the right place at the right time. Some were shrewd and calculated. Some benefited from good luck. Some won the genetic lottery and were born into wealth. Many amassed their wealth through intelligent risk-taking and hard work.
Throwing more money, in this case, $80 billion, at a broken tax code is nothing more than a bandage when more complex surgery is needed. Unfortunately, Congress does not seem motivated to undertake such a tax code revision. The tax preparation industry would lobby against it. Elected officials will not earn goodwill among voters. Revamping the tax code is viewed as a low-priority item compared to other more pressing issues that are under discussion in Washington.
Yet, a tipping point is fast approaching.
As the federal deficit continues to grow, now over $30 trillion, there will be a need to rewrite the tax code.
With higher interest rates that will increase federal debt payments, consuming a greater share of the federal budget, lawmakers will need to find ways to keep the government funded and open. Everyone will need to contribute, and the pain will be felt across all income levels. The alternative is the inability of the federal government to pay its bills. In such a case, the primary objective would not be fairness, but solvency.
To avoid such chaos, the time to revise the tax code is now.
Sheldon H. Jacobson, Ph.D., is a professor in computer science at the University of Illinois Urbana-Champaign. A data scientist, he applies his expertise in data-driven risk-based decision-making to evaluate and inform public policy.