Tax policy reform, part 1

Taxpayer organizations and the U.S. Tax Advocate have pleaded for decades to simplify tax law. Despite that, the U.S. tax code increased about 3-fold in length from 1975 to 2005 (U.S. Tax Advocate, 2010 annual report, page 4; Tax Foundation 2006 report). Neither the Democratic nor Republican parties have an interest in simplifying tax laws. There are good reasons for that.

A great ecosystem for corruption

The U.S. tax code is a political payback hiding place for campaign contributions and other sleaze. Few members of the public or the press understand the depth and scope of political corruption and economic waste buried in the tax code. The topic is dull and seemingly irrelevant, given other pressing concerns.

However, after considering how helpful fixing tax code and policy flaws would be, the topic is neither dull nor unimportant. In view of its blinding complexity and sheer length, the tax code is rich in known and unknown species** of ways to not pay taxes. No wonder it is so popular with people who know how to exploit those species.

** Unknown species of tax breaks are ones that congress unintentionally created and may or may not be aware of. Known species are tax breaks like the well-known deduction for mortgage interest. Some of the smartest minds in the U.S. economy do nothing other than hunt for those precious new species - the payoff can be worth hundreds of millions or even billions. For top tax attorneys and accountants, that is a hunt definitely worth going on.

Current tax code and policy has serious deficiencies. That threatens national security by damaging our economy. Among the major flaws are:

Intentionally lax tax collection efforts

Tax law enforcement is lax or nonexistent for some sectors of the economy. Both congressional Democrats and Republicans refuse to fund IRS tax law enforcement efforts. The Internal Revenue Service (IRS) estimated that the gross tax gap amounted to about $345 billion in 2001. IRS enforcement efforts subsequently recovered only about $55 billion of those evaded** taxes, leaving a net tax gap of about $290 billion for 2001. The current net tax gap is likely higher than the 2001 estimate. Studies have shown that for each tax dollar spent collecting evaded taxes, $3 to $4 is returned to the treasury. Given that, it would appear that tax law enforcement spending is an efficient use of tax dollars.

** Tax evasion is illegally not paying taxes. Tax avoidance is the legal use of tax laws to not pay taxes, regardless of whether congress intended the exemption (loophole or tax spending) or not.

Despite the obvious upside for taxpayers and the public interest, congress refuses to increase IRS enforcement efforts. In their ideologically driven hate of government and despite massive spending and budget deficits, Republicans actually want to reduce IRS enforcement efforts. That attitude prevails even though the current tax gap (uncollected taxes) is estimated at about $330 billion per year. The refusal of Democrats and Republicans in congress to make major changes is completely understandable. It allows campaign contributors to continue to evade taxes with impunity. And, for most Republicans, not collecting taxes nicely fits their anti-government ideology.

Other political ideologues such as Texas Representative Ron Paul would go even further than most Republicans. According to David Johnston, an investigative tax reporter and analyst, Mr. Paul believes that the requirement for businesses to keep tax records and to withhold taxes is unconstitutional involuntary servitude under the thirteenth amendment to the constitution (David Cay Johnston, Perfectly Legal, 2003, Portfolio publisher, chapter 14, Mass Market Tax Evasion, page 206). If nothing else, Mr. Paul's comments show intense contempt toward the tax code by some powerful members of congress. No wonder the tax code is a mess.

Part 2 discusses more tax code flaws