TAX REFORM, TAX REDUX OR TAX REFLUX?

The federal tax deadline has come and gone. But there are no signs that the Tax Code will get any better or simpler despite presidential primary campaign rhetoric.  What is really needed is a taxpayer-friendly tax code. Here are a few suggestions to that end.

1. Simpler Forms

Taxpayer-friendly means that tax forms should first be easy to navigate. In response to my comment that only a sick mind could have devised such complicated tax forms, a continuing education tax course instructor told me that the "architecture" of the tax forms are brilliant. (Spoken like a true accountant.) But Form 1040 is a complicated form. Filling it out is a lot like doing what the lyrics to the old Boy Scout Hokey Pokey song tells you to do.

You put your right hand in,

You put your right hand out,

You put your right hand in,

And you shake it all about,

You do the hokey pokey

and you turn yourself around

That what it's all about.

One can get dizzy doing this song and dance. It's the same thing with Form 1040. Taxpayers have to jump from line to line and from form to form just to get your AGI (adjusted gross income, lines 23 to 37, plus filling out several additional forms). This is after going through lines 7 through 22 to figure out how much income one made in a given tax year. 

Simpler Days - The 1913 version of Form 1040

Since the first 1040 made its debut in 1913, the form(s) have become increasingly more complicated and at times reflecting less than honorable political motives, i.e., vote buying, by giving financial goodies.

An example of this political posturing is the Earned Income Credit, Internal Revenue Code §32. A good, yet simple definition of the Earned Income Credit is found in, of all places, Wikipedia.

The  United States federal earned income tax credit or earned income credit (EITC or EIC) is a refundable tax credit for low- and medium-income individuals and couples, primarily for those who have qualifying children. When the credit exceeds the amount of taxes owed, it results in a tax refund to those who qualify and claim the credit.

To qualify for this credit, a taxpayer must answer numerous qualifying questions about dependents, filing status, foreign income, etc. This a tedious task. This example also emphasizes the need for simpler tax forms without the overly complicated calculation formulas. There is an added bonus in that a form that enables easier compliance ensures compliance.

2. Some Other Suggestions

Here are a few suggestions to make the Tax Code an engine of economic prosperity.

• Exempt the first $15,000 of income from taxation. An informational tax return would be filed for incomes falling between $5000 and $15000. This would also  establish a baseline for low income taxpayers wishing to use income averaging when their financial ship comes in. (See below.)
• Exempt individual saving accounts up to a limit of $10,000 per year from taxation.  This should be the average daily balance of the savings account for each quarter.  This could be calculated the same way that average daily balance is calculated for your credit card bill. This would help to create capital for economic growth as well providing an incentive to savers to plan for their retirement or big purchases.
• Bring back income averaging to allow taxpayers to not get financially reamed if they land a good job or for those taxpayers that have landed their first good paying job.
• Provide a lower corporate tax rate for those companies that build and maintain factories for a minimum of five years in the United States or its possessions. It wouldn't matter for tax purposes if they are foreign or domestic companies.
• Provide a tax amnesty for taxpayers out in the cold. To  provide an incentive to pay back taxes, reduce the amount of back taxes due ranging from 10% to 50% based upon cooperation and other factors. For taxpayers that cooperate, remove all penalties from the tax bill. For those that don't take advantage of the amnesty add 10% to 50% to the tax bill due; on top of the interest and penalties already due.
• Except as noted above, everybody pays something. That means that traditional 503(c)(3)s and foundations would pay a small percentage of the lesser of gross value of its holdings or its income, e.g., (0.01 * gross value = taxable amount). Many universities that charge an arm and leg for student tuition accumulate vast endowment funds and give nothing back. 
• Expand Roth IRAs and phase out traditional IRAs by allowing liberal rollover provisions, including a low tax rate for converted IRA withdrawals deposited into Roth IRAs. 

These suggestions are intended to be dialog starters. It's not a mentally taxing exercise if we have the will to make the change.