May 21, 2022 6 min read

Benjamin Franklin once said, “nothing is certain but death and taxes.” Nobody likes taxes, but they are necessary for a functioning society. I have studied taxes academically and, as a small business owner, I’ve also experienced the business end of our tax code. Our current tax system is inefficient, creates unnecessary pain and anxiety, and has become a tool of the powerful. We can do better.

For brevity’s sake, I will focus on the income tax, which became institutionalized with the ratification of the 16th Amendment in 1913. Initially, it affected only the very wealthy (only 357,000 out of 97 million people paid it, and the maximum rate was 6%). That changed when the costs of waging WWII overwhelmed the tax revenue system, and the income tax became a mass tax, with 40 million people contributing.

In 1986, President Reagan implemented a bipartisan tax reform bill that greatly simplified taxes, and eliminated the distinction between types of income (interest, capital gains, wages, etc.). This eliminated an entire industry of tax shelters that were designed to allow taxpayers to change wages into capital gains to reduce taxes. Since then, complexity has crept back into the tax code, with a reduced rate for capital gains (which is why Warren Buffet pays a lower tax rate than his secretary) as well as a growing number of tax credits and deductions. There is no good reason that income earned as wages should be taxed at a higher rate than income generated by wealth, other than the wealthy have more influence in Congress. The same tax rate should apply to all income.

Since Republicans have opposed (non-defense) government spending, but can tolerate tax cuts, Democrats have used the tax code to achieve policy objectives in lieu of new spending programs. Policies such as the Earned Income Tax Credit (EITC) complicate the tax code, and ironically, led the IRS to audit low-income taxpayers (making less than $25,000) at five times the rate of everyone else. Focusing on low-income taxpayers ignores where most tax revenue is lost, the tax returns of the wealthy. The IRS estimates that $600 billion in taxes are owed, but not collected, with 28% of that being owed by the top 1%. The IRS had fewer than 10,000 auditors in 2017, numbers not seen since 1953, when there were dramatically fewer returns that require auditing.

The anti-tax rhetoric has been weaponized by Republicans and used to cut funding for the IRS, as if preventing the IRS from enforcing the tax laws were the same as reducing taxes (Republicans have cut the IRS budget by 18% in the last decade, while making the tax code more difficult to enforce). This is incredibly short-sighted, because tax laws still apply, so law-abiding citizens (which I hope we all aspire to be) still pay their taxes, but people who are willing to break the law but now have no fear of being caught, don’t. Defunding the IRS shifts the tax burden from scofflaws to the people who don’t cheat on their taxes. If enough people avoid taxes, people who are still paying begin to feel like suckers, and are more likely to cheat as well. An example of what this looks like was the Greek debt crisis, where the government and economy were in crisis partly because of the government’s inability to collect taxes.

The IRS budget should be expanded, because when the IRS hires employees, they bring in much more revenue than they cost. The IRS estimates that spending an additional $80 billion would bring in $400 billion, while also increasing compliance. This would improve the experience of most taxpayers, making it easier for the IRS to respond to questions, for example.

Additional funds would also allow the IRS to create tax software that would make it easy (and free) for taxpayers to file their taxes. Since the government has most of the required information to determine the taxes due, filing should be as easy as confirming the government’s figures, as is done in many other countries, where most citizens spend little time or anxiety on taxes. The government does not already provide this service because of the political influence of the large corporations that profitably sell tax preparation software (Intuit, H&R Block). They lobbied Congress to prevent the government from creating such software because that software would cut into their business. In return, the companies promised to make their own software free for low- and moderate-income taxpayers. But the companies made it so difficult to access, very few people ever actually used it for free. It was essentially a bait and switch scam, with a lot of upselling. That agreement has now lapsed, and the government should do what it should have done a long time ago.

One way to simplify paying taxes would be for all governments to define taxable income in the same way. If they did that, the federal government could collect income tax on behalf of the states and localities. Each government could determine the tax rate they charge, but ideally, governments could simplify their taxes enough that a taxpayer could file one form. The federal government should collect income taxes for the states and cities, and simply transfer the money. Other taxes (sales, real estate) would not be affected.

One of the most complicated aspects of doing taxes is dealing with retirement savings, which are often shielded from taxes. Their complexity allows people with smart lawyers and accountants to game the system, which not only deprives the government of revenue (raising taxes for everyone else) but also means productive talent is wasted on tax avoidance instead of more socially productive uses. An egregious example of this is that billionaire Peter Theil created a Roth IRA in 1999 that will allow him to avoid paying taxes on $5 billion in income.

Paying taxes should be seen as a patriotic duty, and those who pay a lot of taxes should be honored for shouldering such a large share of our common expenses. Paying taxes should be made as simple and inexpensive as possible. We can do better.

Kent James has a doctorate in History and Policy from Carnegie Mellon University and is an adjunct in the History Department at Washington & Jefferson College.