In 1913, Congress proposed, and the requisite number of states passed, the 16thAmendment to the Constitution of the United States, instituting a federal tax on revenue earned by individuals and corporations. There were seven tax brackets in the new income tax law, with rates ranging from one to seven percent. That first year, the top seven percent tax rate was levied on incomes above $500,000 (over $10 million in today’s dollars).
Over the ensuing decades, the number of tax brackets and their rates fluctuated wildly. In 1933, for example, there were 55 brackets and a top rate of 63 percent. In 1944, in order to pay for World War II, rates topped out at 94 percent. In the mid- to late- 1960s and throughout the 1970s, there were 25 tax brackets with rates between 14 and 70 percent. In 1988, there were only two tax brackets. Currently, there are seven different tax brackets with rates ranging from 10 to 37 percent.
In addition to this roller coaster ride of rates and brackets, in just one century, the U.S. tax code morphed from its original 400 pages to its present, 2,600 pages, plus over 70,000 pages of regulations and associated case law. It has spawned a federal bureaucracy of 75,000 employees, a tax compliance industry comprised of countless thousands of accountants, CPAs and attorneys, and a waste of approximately $430 billion and 6.1 billion man-hours each year spent complying with the IRS tax code in all its endless forms and variations.
After 100 years of tinkering, aggrandizing, reforming, and manipulating, the federal income tax has become an ungainly Frankenstein’s monster that is unwieldy, unfair, and only intermittently enforceable. In fact, each fiscal year, there is a “tax gap” of nearly 15 percent – the difference between what people and companies pay and what the IRS says it expects to receive.
Approximately $300 – $500 billion is lost to tax evasion, i.e., the fraudulent withholding from the U.S. Treasury of what is owed because of under- or improperly reporting income or overstating allowable deductions. Added to that shortfall is the “legal” tax avoidance that large, multinational corporations and wealthy individuals employ each year when they channel money and profits to offshore tax havens in order to avoid paying their fair share. This costs the federal government another $150 billion per year. It is now estimated that between $21 trillion and $32 trillion in private financial wealth – roughly equivalent to the size of the U.S. and Japanese economies, combined – sits in offshore accounts, far away from the taxman’s grasp.
And who pays to fill the tax gap? The rest of us – that’s who. The average U.S. taxpayer must contribute an extra $1,026, and the average U.S. small business $3,067, to make up for the shortfall. But not only do the country’s wealthiest elites get away with paying far less than their fair share, when they actually do pay their taxes, because of all the various loopholes in the federal tax code, they often wind up paying at a lower rate than the rest of the overburdened and overtaxed middle class. We are all familiar with the story of billionaire Warren Buffet paying a lower effective tax rate than his secretary.
In addition, many well-known American-based companies, e.g., General Electric, Boeing, Pepco, Verizon, Wells Fargo, Goldman Sachs, Apple, and Google, among others, have paid little or no taxes over the past several years, because U.S. tax law allows them to “defer,” or delay indefinitely, paying taxes on what they claim are their “foreign” profits.
It should be clear to all right thinking Americans that the time has come to repeal the 16thAmendment, abolish the IRS, retire the federal income tax, and replace it with a system that is more fair, far easier to administer and comply with, much less prone to politicization and manipulation, and, most importantly, completely immune to avoidance, evasion, and fraud. It is time to institute a progressive, national retail sales tax.
Think of it: No more complicated tax forms, no more fear of audits, no more time wasted each April. Retailers would collect the national sales tax just as they do now with state sales taxes. You are no longer taxed on what you make, but only on what you spend. Everyone pays their fair share; with the rich no longer able to evade or avoid taxation as they do now. Corporations would no longer need to shelter their earnings in offshore tax havens to avoid paying taxes. They can now bring that money back into the U.S. to expand their businesses, provide jobs, and grow the economy. Small businesses would save on tax compliance costs, and the yearly Internal Revenue Budget, which now exceeds $11 billion per year, would virtually vanish.
A 23 percent national sales tax, sometimes known as The Fair Tax, would thus replace all federal personal, gift, estate, capital gains, alternative minimum, Social Security, Medicare, self-employment, and corporate taxes with one simple tax that is a fair, efficient, transparent, and intelligent solution to the complexity and inequity of our current tax system.
But there are two additional taxes that I would like to see imposed on two particular segments of our economy, both of which would not only bring in additional revenue but would likely go a long way in reforming egregious behavior that is inherently harmful to the general welfare of our nation – a financial transaction tax, and a tax on carbon.
A Financial Transaction Tax (FTT) of 0.5% (one half of one percent) on Wall Street trading could potentially generate billions in revenue to help our ailing economy, stimulate job growth, re-fund essential services, and discourage the reckless, high-volume/short-term profit, computer-driven, Wall Street gambling that led to the Great Recession and made our country poorer and less financially secure.
An FTT, which has already been successfully introduced in more than 40 countries around the world, would tax transactions of stocks, securities, options, credit swaps, foreign currency bets, and purchases of debts and derivatives. It would be cheap to implement and difficult to avoid. It would help curb speculation and make the banking system more stable. It could raise more than $350 billion annually, enough to close the funding gaps in every US state now facing deep cuts, with billions left to invest in job creation each year.And, by the way, an FTT is not a new idea. The United States had an FTT from 1914 to 1966. It’s a good idea that needs to be revived.
Finally, the next ten years is a critical decade for tackling climate change. It has been absolutely proven that the burning of fossil fuels, which create greenhouse gases, is responsible for global warming and the chaotic weather patterns that we are presently witnessing in our country and around the world. We must act now if we wish to bequeath a habitable planet to our children and grandchildren.
A relatively modest carbon tax on all fossil fuels – oil, gasoline, coal and diesel – would not only help cut our federal deficit in half over the next decade, it would force smart businesses to figure out ways to pollute less, so that they will have to pay less. It would also help spur the shift to alternative forms of clean, renewable energy making solar, wind, and geothermal models more economically attractive. The most efficient way to apply such a tax would be at the key points where flows of carbon are the most concentrated: trunk pipelines for gas, refineries for oil, railroad heads for coal, liquid natural gas (LNG) terminals, and cement, steel, aluminum, and greenhouse gas-intensive chemical plants.
Several countries, including Australia and Sweden, already have a carbon tax. Were the United States to impose one, it would show that Americans are ready to acknowledge, finally, that we are part of the problem and are ready to take the initiative in slowing down global warming and protecting our fragile planet for future generations. It is the right and smart thing to do, and time is of the essence.
Supreme Court Justice Oliver Wendell Holmes once said, “Taxes are what we pay for a civilized society.” Let us tax ourselves fairly and wisely so that we can generate true wealth and prosperity in this country and continue to in live in a truly civilized American society.
We desperately need to renew our tax code. Now’s the time!