US Tax System Needs Overhaul

I am not sure who gets the credit as the candidate for tax reform, perhaps it goes back to the institution of the Internal Revenue Service itself and the first person to complain... Did you know that the Income Tax was not included in the original Constitution but added through Amendment in 1913? There was a short flirtation with an income tax during the Civil War (appropriate, don't you think, as the Federal government started replacing the State and local governance), the office of the Commissioner of the Revenue was created in 1862 as a means of paying for the costs of the war. This office lasted about 10 years, I assume until the financial and social crisis was seen to have passed. It was resurrected in the 1890's but deemed unconstitutional within a year by the Supreme Court.

Only in 1913 did the Income Tax "stick," creating the Bureau of Internal Revenue through the 16th Amendment to the Constitution. One assumes that this was another tool of the Federal government to use against those involved in unlawful enterprises as many of the "gangsters" of the day were jailed not due to their activities, but due to their failure to pay appropriate income taxes, as well as providing general income funds. The rates were generally low other than in years of wartime or distress, and the Bureau gradually evolved into the IRS that we know today that is tasked with providing the funds necessary to run our burgeoning bureaucracy. 

We have managed to allow the IRS to become the most feared government agency in existence, I think we would all rather the FBI was chasing us around than the IRS. We allowed government spending to increase to such a level that taxes are necessary to keep it afloat, but this agency was never a part of the plan of the Founders plan, it is a relatively modern invention, an agency tasked to do whatever it takes to raise funds and with the "teeth" to back it up.

I support those who want to do away with the IRS and the confusing tax codes, so confusing in fact that the CPA's and general accountants and clerks across America don't know much more than we do when it comes down to it, they rely on complex software packages to keep up with the rules. I personally prefer no tax at all other than to provide for the common defense and essential services that no one area can provide for itself, but even then the source of that revenue should be changed to something that makes more sense. 

The buzzword today is the "Fair Tax" or the "Consumption Tax," which has been passed around in elite circles for quite some time. Basically, if you buy a good or service, you would add a percentage to that purchase which would go to the Federal government, much like the Sales Tax that most States use. No muss, no fuss, simple and to the point, you keep all the money you earn to spend as you like with no one checking up on you once a year. I believe this is a much more favorable means of appropriately and fairly raising the funds needed to run the necessary programs, although the actual amount and the programs that would be funded is another subject entirely.

Think of our tax system in this very simplified analogy:

10 friends enjoy each other's company and like going to the movies together on Friday nights (had to pick a reasonable place and use nice, round numbers to simplify this for myself...). Their total cost for the night at the movies is $100. Using recent IRS rates to illustrate:

The first 4 (the poorest of the group) would pay nothing, the fifth pays $1, the sixth $3, the seventh $7, the eight $12, the ninth $18 and the tenth (the richest of the group) $59.

And they were OK with this arrangement, enjoyed their movie and just assumed the disparity in cost was fair. Now let's assume for a moment that the movie theater needed to create income for the snack bar, so they offered a 20% rebate on the cost of movie tickets. The total cost for the Friday night out would now be $80. They all still expected the first 4 to get their tickets for free, but had to decide how the $20 in savings would be distributed among the rest. $20 divided by the remaining 6 people would be $3.33 in savings each, but they quickly realized that they would end up paying the 5th and 6th moviegoer to see the movie which did not seem fair, so they decided to reduce each person's ticket by an amount relative to their current price, so:

The fifth now paid nothing like the first four, the sixth paid $2, the seventh $5, the eighth $9, the ninth $14 and the tenth $49. Pretty obvious that they were all better off than before, but pretty soon someone got out a calculator and figured out that although the sixth person saved 33%, that amount was only a dollar, and although the tenth person only saved 16% that amounted to a whopping $10 in savings.

This situation started a firestorm.

The fifth person was also upset that they only saved a dollar and the tenth person saved $10, the seventh joined in to exclaim how the wealthy get all the breaks! The first four people were up in arms at how this system did not give them anything back and was used to exploit the poor! Pretty soon the whole group was bickering over their own situation, which eventually turned into railing on the tenth person until that person quietly decided to move (the Cayman Islands I guess...) to avoid the whole mess.

The next Friday night at the movies the tenth person did not show up, and the other nine were shocked to find that even with the cost reduction, they did not have enough money between them to cover even half the tickets. Now what to do? 

We are presently right at the point of deciding what to do, how to get the same services (movie tickets) tomorrow that we are enjoying today, before the whole system blows up and we can't even afford half of what we have. Please consider the Fair Tax and its cousins as a viable alternative that is fair for everyone, simple to understand and necessary for the future growth of our nation. Compliments to David Kamerschen, Professor of Economics at UGA for the original premise of the tax illustration.