Christopher Bergin is the president and publisher of Tax Analysts and a former editor of Tax Notes.
In the first From the Publisher column, Bergin discusses the 100th anniversary of the federal income tax and laments that it might be time to retire the tax because of its growing complexity, regressivity, and lack of transparency.
I'm a huge fan of the income tax (at least the form of it I learned), and I have been since law school. I like talking about it. I like writing about it. I like reading about it. I even take Tax Notes to the beach. People have long ribbed me about that -- and I've never minded.
Call me odd, but I like concepts such as adjusted gross income. I find rate tables fascinating. I think Form 1040 is mostly a beautiful thing, given what it needs to do.
To me, the two most compelling characteristics of income tax systems are that they can be progressive, and they can be transparent. That should not surprise anyone since I work for Tax Analysts. Also, I have long believed that if the income tax system went bad, policymakers could fix it. That's mostly rooted in my experience with the tax. I was a young tax professional when I first read the 1984 Treasury report on tax reform. I found it brilliant. I covered and wrote about the 1986 Tax Reform Act. That reform was far from perfect, but to me it was inspiring. I've been chanting the "lower the rates, broaden the base" mantra ever since.
The U.S. income tax turns 100 this year. And for the first time, despite my long affection for it, I'm thinking that it may be time to begin retiring it.
Why? Because I'm facing the fact that our system of income taxation is turning away from progressivity and transparency. And I'm beginning to worry that policymakers can't fix it.
You can hardly call an income tax system "progressive" when almost half the people earning income of some kind don't pay the tax. I believe in progressivity because I believe that those who have more should carry a heavier load of support -- that's revenue support -- for their government. I believed that when I paid little income tax, and I believe it now that I pay much more. But I also believe everyone should pay something in income tax -- if for no other reason than to reinforce her obligation of citizenship in a free society.
Further, a revenue system that is as dizzyingly complex as our income tax system is not only opaque, but it also creates huge economic distortions.
The recent report from the Office of the Taxpayer Advocate (Doc 2013-504, 2013 TNT 7-17) states: "It takes U.S. taxpayers (both individuals and businesses) more than 6.1 billion hours to complete filings required by a tax code that contains almost four million words and that, on average, has more than one new provision added to it daily." Moreover, the report says, nearly 60 percent of taxpayers who file income tax returns hire paid preparers, and 30 percent use commercial software to try to figure out what they owe in income taxes. No system like that can possibly be transparent.
The alternative minimum tax is a parallel income tax system that was originally designed to ensure that wealthy U.S. citizens paid at least some income tax. It's now just a stealth money grab. President Obama and Congress recently enacted two provisions (known as PEP and Pease) to place limits on personal exemptions and itemized deductions, and they amount to two more stealth taxes. Those provisions, too, are hardly signs of transparency.
Our income tax system is also egregiously unfair. It's riddled with what we call tax expenditures (because they are sneaky ways of spending) that favor some groups over others. Put up for sale to the highest bidders, our income tax code has become a bewildering maze of winners and losers, and that's unfair on its face. America's taxpayers know that the income tax system is not equitable -- and that's not good for a tax system that relies largely on self-assessment.
Then we have the U.S. corporate income tax. It is, in a word, a joke. How else would you describe an income tax system with the world's highest marginal tax rate but meager effective tax rates, thanks to things like transfer pricing rules that are facilitated by secret deals between our government and multinational corporations (otherwise known as advance pricing agreements)?
The corporate income tax system encourages debt over equity, and it encourages U.S.-based multinationals to shift their profits and investments overseas. It's incredibly burdensome for both taxpayers and tax administrators. And it's arguably the wrong system for a global economy -- which would explain why, all across the world, governments are becoming less reliant on income taxes. I guess the plus side is that it keeps a lot of tax lawyers employed.
I have had faith that if our income tax system goes off the rails, policymakers could fix it. I watched it happen before. Now, however, I find my faith is not only shaken, but stirred. And that's not just because I've misplaced the innocent naïveté of my youth.
We lack the statesmanlike leadership of, for instance, President Reagan and Sen. Bill Bradley. Policymakers in Washington no longer even vaguely agree on what tax reform means -- and in recent years, the two sides have grown further apart on the issue. When progressives talk about tax reform, they really mean wringing more money out of the system. When conservatives talk about tax reform, they really mean cutting rates and broadening the tax base in a way that's revenue neutral. (I've never understood how revenue neutrality became a principle of tax reform in the first place.)
But today, tax reform faces practical political problems. In terms of progressivity, how can we raise income taxes on the nearly half of income earners who haven't paid the income tax in years? And how do we scale back tax expenditures? After all, a lowdown, stinking, unfair tax break to one guy is another's tax break.
Finally, we come to the most basic problem of all: The income tax system doesn't perform its fundamental function -- it doesn't raise enough revenue to pay for the government that we taxpayers and non-taxpayers alike seem to want. And it never will.
One hundred years is a good run. And happy anniversary to the income tax. But maybe it's time to start looking for something a bit more modern.
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