President-elect Trump and Republicans say big tax changes are coming. It’s time. The US tax code is the most complex in the world, packed with benefits for special interests and social engineering. It is incomprehensible and often produces unfair results. In 1913, our all the tax law was 27 pages long. It’s now over 4 million words, 9,000 bloated pages. From 2001 to 2012 alone, there were 4,600 changes, more than one per day.
Individuals spend 6.1 billion hours per year doing their tax returns, the equivalent of a year of work for 3 million full-time workers. Many Fortune 500 companies manage to pay no taxes or get refunds. Of 145 million personal income tax returns in 2011, 54 million (over a third) had no tax or received refunds. 1,600 people who filed income tax returns with income of $ 1 million or more paid no income tax.
- The earned income tax credit is rife with fraud, up to 29% of all payments. IRS paid $ 125 billion of fraudulent repayments over the past 10 years, more than $ 12 billion per year. How about allowing American families to keep more of their own money, instead of taking it and distributing it inefficiently, losing billions to fraud?
- The alternative minimum tax – usually abbreviated as AMT – is a sort of tax rubik cube. It is a complex parallel taxation that grew like a cancer. Its results are difficult to predict and can be perverse. It was designed to target certain wealthy tax deductions and top them up for some sort of minimum tax calculation. But over four decades, it applies to a lot of deductions and is blatantly unfair. If you win a lawsuit and pay possible legal fees, you may find yourself taxed on more money than you received. AMT can also ruin your stock options.
- Private fund and hedge fund owners get âdeferred interestâ for their work. Their salary looks like a salary, but it is taxed at the capital gains rate. Hillary Clinton and Donald Trump have both said they will eliminate her, so that this sacred cow can ultimately go extinct. Even so, fund managers strongly argue that time, effort and risk are really capital investments. If so, perhaps the wages that all American workers earn should also be taxed as capital gains.
- Our tax-exempt organizational rules need to be reformed. Some tax-exempt charities end up giving little to their cause. Using names like “Find the Children,” “The Veterans Fund,” and “Cancer Fund of America,” Report Says America’s 50 Worst Charities Raised $ 1.3 Billion in Donations Over the Past 10 Years . Yet almost none of that money went to missing children, injured veterans or cancer patients. American Cancer Fund spent less than 1% of donations on charitable activities. Over 10 years, it paid $ 5 million to its founder’s family and spent $ 80 million on fundraising, but gave only $ 890,000 to cancer patients. There are plenty of good charities out there, of course, but the rules need to be reformed. Many other classifications of tax-exempt organizations should also be reformed. Despite millions in profits and revenues, the NFL, NHL, and PGA Tour are classified as non-profit, exempting their revenues from federal income tax. They avoid paying millions in taxes, but they pay salaries of a million dollars.
- Then there are the tax rates. Corporate tax rates in the United States are the highest in the developed world. To avoid paying them, large American companies keep their income abroad. US multinationals kept $ 2.1 trillion overseas in 2013. General Electric hid $ 110 billion overseas; Microsoft $ 76 billion; and Pfizer $ 69 billion. The Americans are losing all that capital. President-elect Trump wants to bring him back. But note that unlike large companies which may to avoid U.S. Taxes on Money Hidden Abroad, U.S. People Living Abroad Must File and Pay U.S. Taxes at the World level. And FATCA means that foreign banks often turn down US accounts entirely – dealing with US tax law is just too complex. Many expats suffer, and some are so fed up that they renounce their US citizenship.
- Many tax credits do not actually benefit the people they are intended to help. For example, the New Markets Tax Credit was aimed at creating jobs in low-income areas. Instead, he allegedly directed nearly $ 1 billion to wealthy investors and Wall Street banks. Likewise, the research and development tax credit was intended to encourage medium-sized companies to increase their R&D. Nevertheless, 80% would have gone to huge companies like Google, Intel, Boeing and Apple.
- Then there is the property tax. Whether you do a lot or a little in your lifetime, the notion of paying income taxes for life and then taxes on death too much seems wrong. That’s one reason Trump could finally do away with the death tax.
These are just a few provisions, mind you. There are thousands of pages of tax laws to reform. While some parts of our tax law make sense, many do not or lead to abuse. Plus, they inject a level of complexity that no one would want on anyone. We need a better, simpler, fairer and flatter tax system. A flat tax or a simple tax may not be perfectly fair and not improve all. But is there any other way but to go up?
To receive alerts on future tax articles, send an email me at [email protected] This discussion is not legal advice.