TAX SIMPLIFICATION

Tax simplification is a lie.

Every owner of commercial real estate gets an interest free loan from the U.S. government. Most homeowners with the same income and housing costs as renters pay less taxes. People who make the same amount income from investments pay lower taxes than their wage earning brethren. Real estate investors can rollover gains on multiple properties as frequently as desired. Many small business owners have the option of lowering their employment taxes by using S corporations or limited liability companies, techniques which are not available to wage earners. Many businesses can defer income by carefully choosing their method of accounting; wage earners are not permitted to choose an accounting method. Corporations can make lots of money and distribute it to shareholders tax free. Businesses can deduct interest; individuals cannot. Businesses can deduct bad debts; individuals cannot. Businesses can deduct many more types of losses than individuals. Virtually every resource industry has special code provisions to protect it from the normal tax code provisions that apply to you and me. And, of course, corporations never run out of accounting gimmicks to under report income or defer income recognition for as long as possible. FASB has never been much help to individual tax filers. Sourcing business income off-shore to avoid US taxation is a long-term tax avoidance technique.

The list goes on and on.

It’s true that income tax rates are progressive. The more income you make, the higher tax rates you pay. But the progressive nature of income taxation has been under attack for decades. In 1963, the highest marginal rate for married couples was 87%. In 1980, it was 70%. In 1986, it was 50%. Today, it is 39.6% and there is continuing political pressure to lower the top rate for high income people.

But the progressive nature of income taxes is about the only thing in the U.S. income tax code that is tilted against business or wealth. Almost every industry, every business, every form of wealth has favored income tax treatment in the Internal Revenue Code, treatment that is unavailable to the typical wage earner.

There are two kinds of welfare in this country. There is the welfare that normally comes to mind, like food stamps, Medicaid, Medicare, Social Security benefits, etc. Then there is the other kind of welfare. Business welfare. Wealth welfare. This form of welfare is structured fundamentally different. Instead of money going from the government to the welfare beneficiary, the money is simply not paid to the government in the first place. This form of welfare is found in the Internal Revenue Code. And the very complexity of the tax code makes this type of welfare practically invisible. The average guy on the street has no clue about the extent, nature, and operation of this form of welfare, which is exactly how the big boys want it.

Dump the income tax code for something truly simple, like a national sales tax or value-added tax, and this form of welfare for business and wealth would disappear overnight. The welfare for the wealthy and business will no longer be able to hide behind the fog of complexity.

Tax simplification is not going to happen. The symbiotic relationship between business/family wealth and our political culture insures that any threat to this form of welfare is absolutely dead-on-arrival. The vested interests are so diverse, so ingrained, so big, and so pervasive that it would be political suicide for a politician to give anything more than lip service to the idea of dumping the income tax code. Their political contributions would dry up overnight.

I’m so sure of that tax simplification will never happen that I bet my career on it.