As we approach another year’s tax filing deadline, let’s take a moment to marvel at just how silly the tax code has become.
In its zeal to maximize revenue while advancing the social good, Congress has created a code that produces huge unintended consequences: it favors corporations over charities, subsidizes conspicuous consumption by the wealthy, and even isolates the young people for inheritance rights.
The result: Our tax code is unfair. Here are just five examples:
It subsidizes health care for some, but not for others. More than 57% of working Americans receive tax-free health insurance benefits, either through their employers or through a self-employment tax deduction. But – with the exception of the few taxpayers who itemize their deductions and have medical expenses exceeding 7.5 percent of their adjusted gross earnings – everyone pays full freight.
It is unfair. Consider “Tom” and “Sam”, two 25-year-old single men with no dependents who receive the same compensation, $106,000. Tom takes $100,000 of his compensation as a salary and the remaining $6,000 as a company-sponsored health care plan. Sam takes all $106,000 of his earnings in wages and uses $6,000 of his income to buy health insurance himself. Assuming the two take the standard deduction of $12,550 for single filers and have no other income, Sam would end up pay $1,440 more in federal taxes than Tom.
It imposes an inheritance tax penalizing for children. Although the federal estate tax was abolished in 2001, estate tax is still imposed through what is known as the “tax for childrenintended to discourage wealthy individuals from transferring assets to their children to reduce their tax rate. Under the tax, children under the age of 19 and full-time dependent students up to the age of 24 must pay their parents’ highest tax rate – up to 37 percent — on each dollar of unearned income they receive over $2,300. Thus, the kiddie tax is de facto an inheritance tax for many young people.
This tax was made even heavier in 2019 when the SECURE Law became law, requiring many inherited IRA beneficiaries, including grandchildren, to fully distribute IRAs within 10 years. And the costs can be enormous: A 14-year-old who distributes $30,000 from an inherited IRA this year, for example, could owe Uncle Sat.
It subsidizes conspicuous consumption. The mortgage interest deduction is largely a subsidy for the wealthy to buy bigger homes than they otherwise would. While only 4 percent of taxpayers earning $50,000 or less take advantage of the mortgage deduction, 34% of those earning $200,000 do so. The rationale for the deduction is that it promotes home ownership, but there is little evidence to suggest this is the case. There is, however, ample evidence that the deduction may encourage people to buy more expensive homes, potentially contributing to higher house prices and house price volatility.
It favors businesses over charities. the The IRS recently announced that its 2022 standard mileage rates, which taxpayers use to calculate their automobile deductions, would be 58 cents for business purposes, 18 cents for medical purposes and 14 cents for charitable purposes. Even before this year’s massive gasoline price hikesthe average cost of using a car was 63.7 cents per mile. Those who drive motor vehicles for charitable and medical purposes don’t exist in a land of unicorns and pixie dust – they live in the real world, where their costs are more than four times the allowance of the car. ‘IRS.
The tax code favors powerful politicians. What message is sent when our tax code allows costs like reassignment surgery to be deducted as medical expenses, but not care expenses for children with special needs safe at home? He says LGBTQ+ groups are much more powerful than groups like Autism Speaks.
Whatever one thinks of sex reassignment surgery, it is an unnecessary life-saving elective procedure. The same cannot be said for home care services for some people with severe behavioral and developmental problems, such as people with autism. While the costs of other types of nursing home care can be deducted, the costs of technicians and family members trained to implement behavioral plans cannot. Whether a medical expense is deductible should depend on its necessity, not its ability to produce votes at the ballot box.
In our efforts to use the tax code to promote social good, we have created one that is unfair, and Congress has time and time again failed to fix it.
It’s time to scrap the tax code, replace it with a flat tax, and move federal efforts to promote social good where they belong: congressional appropriations. A flat tax would be simpler and easier for the IRS to administer, and fairer for all Americans.
David A. Ridenour is President of the National Center for Public Policy Researcha nonprofit nonpartisan educational foundation based in Washington, D.C. He is the father of two children with autism.