You may not have noticed, but last Friday our country passed a major milestone: our current income tax regime turned 100 years old. The first income tax was established during the Civil War, but the current regime has existed since October 4th, 1913 following the passage of the 16th Amendment.
CNBC’s Mark Koba wrote about the anniversary:
"One expert sees the 100 years as a system run amok. . . . ‘In 1913, the tax code consisted of 400 pages,’ said Timothy Nash, a professor of free market economics at Northwood University. . . . ‘By 2012, the tax code was 73,608 pages,’ he said. ‘We have gone from a simple tax system to a complex, unfriendly system.’
The tax code is now 185 times longer than it was in 1913, and that creates a host of issues. The National Taxpayer Advocate’s Annual Report estimates that individuals and businesses spend 6.1 billion hours doing their taxes and complying with the tax code annually. Since 2001, there have been more than 4,680 changes to the tax code. The code is so complex that a majority of individuals, unable to navigate the code themselves, hire a professional, and the IRS’ own experts answer tax queries incorrectly about 10% of the time.
These statistics point to some troubling issues. The complexity is literally a drain in both time and money on the economy that costs $168 billion a year on compliance. It is also a haven for tricks by politicians. The complexities and constant changes mean that politicians can point to tax breaks for their constituencies while still getting your money in other less obvious ways. A tax cut for the middle class might be met with a new corporate tax, which gets passed back to consumers when the products they buy cost more money or when employee wages are cut. That’s how politicians can often get away with saying they cut your taxes while also expanding the welfare state – they confuse who pays the IRS with who the tax burden falls on. This past summer we also got to see the tremendous potential for IRS auditors to abuse their power for illegitimate reasons.
Americans understand the importance of paying taxes to support essential government services, but how can we reform the behemoth that is our tax code? The idea has bounced around the USA for decades, but the timing might be right for a flat tax. A true flat tax would have no deductions whatsoever, collecting the same percentage of personal income from everyone. Regulations would still be needed to determine what was considered income, but the code could certainly be small enough for an American to actually be able to read.
Milton Friedman theorized a “negative income tax” which would set simple deductions for a family based on the number of dependents; if the family’s deductions were greater than their income, they would actually get money back from the government. Friedman envisioned that this would replace the current welfare system. Others have advocated abolishing the income tax and replacing it with a sales tax, arguing that abolishing an income tax would make America a haven for business while still taxing the wealthier at a higher rate than the poor (since presumably they would spend more money).
Either way, Americans have options in the ongoing battle to replace the colossal mess that is the U.S. tax code. A flat income or sales tax would be much fairer to all and easier for ordinary Americans to understand; it would also save businesses and individuals billions during tax season. Finally, a simpler tax would probably result in lower taxes for all because politicians wouldn’t be able to hide taxes on their constituents, and that may have the incidental benefit of reducing tax revenues and slimming down the government.
*Thomas Warns is a J.D. Candidate, class of 2015, at NYU School of law, Staff Editor on the NYU Journal of Law & Liberty , and author of the weekly column "Consider This a Warning."