The tax code in the U.S. is so unbelievably complex that the time has come to throw out the whole tax system and begin anew. One would guess that even a brilliant mathematics professor would have trouble figuring out the current tax code that is a quagmire.
The easiest way to pay tax is to have a flat-rate income tax — like 10 percent — on all income. A form the size of a postcard could replace federal Form 1040, with its myriad of lines and many schedules like Schedules A, B, and C.
THE BEST TAX CODE SOLUTION
A flat-rate tax should be configured so that there are no deductions and no exemptions. A deduction like the one for home-mortgage interest might lead to fewer people buying houses more people investing in some organization that makes food cheaper or solar power more affordable.
The current tax code based on income has four major loopholes that allow a person to deduct part of his gross income from the tax man.
The four loopholes of the tax code are: the interest payments on a home mortgage; compensation for employer-provided health benefits; certain regional and local taxes (like property taxes); and contributions to charitable organizations.
In theory, a person with an income of $100,000 per year, might have $40,000 in deductions and pay income tax on his remaining $60,000.
Why not tax the full $100,000 of income and eliminate all deductions and special subsidies? To make the system more acceptable to those who would have to forego deductions, the federal government should lower the tax rate. Ten percent sounds like a reasonable number.
Today, the tax rate could, with or without deductions, be as high as 40 percent. And the 40 percent rate does not cover other taxes such as excise taxes, utility taxes, and special taxes to support such government programs as the Affordable Care Act (Obamacare).
Sometimes an employee obtains compensation that is tax-free. For example, if an employee receives, from his boss, $10,000 per year in health benefits, there is no tax on the $10,000. Why should health benefits be tax-free income? The effect of tax-free health benefits is to increase the demand for health services. And when demand goes up, so does the price.
A flat-rate tax and a lower tax rate on income should free up money to allow entrepreneurs to create new goods, cheaper products, and more jobs.
The time has come to let people decide where to put their money. It’s time for government to stop playing favorites with the tax code.