The “Tax Cuts and Jobs Act” is NOT tax reform.
The Act adds more complexity to the Tax Code than it provides simplification. And it retains most of the current complexity.
Deductions, credits and loopholes that provide special treatment for specific actions, industries, and groups, the distribution federal government social welfare and other program benefits, and refundable credits still remain in the Tax Code.
Here is, in my opinion, what true tax REFORM would look like -
PRINCIPLES OF TAX REFORM
I believe -
The new Tax Code must –
(1) Be simple – easy for everyone to understand. Simplicity for simplicity’s sake.
(2) Be fair and equitable - treat all taxpayers equally.
(3) Be consistent – treat specific conditions, situations, and activities, and maintain specific definitions and descriptions, the same in all instances.
(4) Encourage savings, investment, and growth.
(5) Index for inflation all allowable deductions and credits.
The new Tax Code must not –
(1) Be used for social engineering, to redistribute income or wealth, or to deliver social welfare and other government benefits.
(2) Encourage or discourage certain economic decisions (other than savings, investment, and growth), or provide exclusive benefits for specific industries, business activities, or classes of taxpayers.
(3) Contain any refundable credits, or any phase-outs, exclusions or adjustments based on Adjusted Gross Income or Modified Adjusted Gross Income.
(4) Contain any “alternative” tax calculation systems (such as the current “Alternative Minimum Tax”).
(5) Contain any temporary deductions, credits, benefits, or provisions.
“The tax system should be designed to impose and to collect taxes, not to administer social programs.” – Donald Alexander (Commissioner of Internal Revenue May 1973 - February 1977)
I believe that the one and only purpose of the Tax Code is to raise the money necessary to fund the government.
One of the biggest problem with the current system, and a large source of its complexity, is the use of the Code to deliver government benefits. The Internal Revenue Service, and the tax professional community, should not be required to act as Social Workers and administer and verify government program benefit payments. This practice is not only inappropriate, but it also invites and encourages tax fraud.
I am not saying that the government shouldn’t provide financial assistance to the working poor and college students, provide encouragements for purchasing health insurance, making energy-saving purchases and improvements and other ‘worthy’ actions. What I am saying is that such assistance and encouragements should not be distributed via the Form 1040.
The benefits provided by the Earned Income Tax Credit and the refundable Child Tax Credit should be distributed via existing federal welfare programs for Aid to Families with Dependent Children. The benefits provided by the education tax credits and deduction for tuition and fees should be distributed via existing federal programs for providing direct student financial aid. The benefits provided by the Premium Tax Credit, the energy credits, and other such personal and business credits should be distributed via direct discount payments to the appropriate vendors or direct rebate programs, similar to the successful Cash for Clunkers program of a few years ago, funded by the budget of the appropriate Cabinet departments.
Distributing the benefits in this manner is much better than the current method for many reasons:
1. It would be easier for the government to verify that the recipient of the subsidy, discount or rebate actually qualified for the money, greatly reducing fraud. And tax preparers, and the IRS, would no longer need to take on the added responsibility of having to verify that a person qualifies for government benefits.
2. The qualifying individuals would get the money at the “point of purchase,” when it is really needed, and not have to go “out of pocket” up front and wait to be reimbursed when they file their tax return.
3. We would be able to calculate the true income tax burden of individuals. Many of the current “47 percent” would still be receiving government benefits, but it would not be done through the income tax system, so they would actually be paying federal income tax.
4. We could measure the true cost of education, housing, health, energy and welfare programs in the federal budget because benefit payments would be properly allocated to the appropriate departments.
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