Our 4,000-page (and growing) Internal Revenue Code is a horrible mess that needs to be cleaned up. Here are five changes I believe would be huge steps in the right direction -- and the reasons why I doubt we will see them anytime soon.
Stop Double-Taxing Social Security Benefits
Did you know that you pay federal income tax on the Social Security tax that is taken out of your paychecks? Well, you do. Even worse: When you start receiving Social Security benefits, up to 85% of that money can be taxed again. This is double taxation folks. Retirees who are at very low income levels don't have to pay this double tax, but those who are further up the retirement-age income scale get socked with it on anywhere from 50% to 85% of their benefits. Is it unfair? Of course! But your Congress likes this revenue stream and isn't going to fix the problem until millions of seniors start demanding it.
Eliminate 'Refundable' Tax Credits
I have no objection to the fact that those who qualify for so-called refundable tax credits can use them to offset their entire federal income tax bill. What I take issue with is that they can then collect any leftover refundable credits in cash. In other words, the government writes them a check. FYI: This is disguised welfare being laundered though the tax system. Plus, it encourages tax fraud. For example, an individual who owes no tax for 2011 can collect a $13,360 refundable tax credit by fraudulently claiming he adopted a child and including Form 8839 (Qualified Adoption Expenses) with his Form 1040, along with some easily-manufactured bogus paperwork. He won't get caught for stealing the $13,360 unless he gets audited, which is pretty unlikely. I hate to be the one to publicize this low-risk fraud opportunity, but there you go. If Congress wants to create welfare programs without any monitoring, that is a political decision that the populace can take into account when they vote. But Congress should not be allowed to sneak welfare payments through the tax system. That's deceptive and non-transparent.
Get Rid of Phase-Out Rules
Politicians often create tax breaks to score quick points with voters, and then take them away for those whose income is deemed to be "too high." For example, popular deductions like the child tax credit, the two higher-education tax credits, and many other breaks all became subject to phase-out rules which reduce or completely eliminate them for those with higher incomes. In effect, these phase-outs are disguised tax rate increases that Congress never has to admit to.
If higher tax rates are deemed necessary, the politicians should raise them in a straightforward and transparent way. Of course, many probably fear that such transparency would hurt their re-election chances. They might be right about that, but it's no excuse. Deception and lack of transparency make for horrible tax policy and, unfortunately, elected representatives won't change their behavior until voters make them.
Dump the Alternative Minimum Tax (AMT)
The AMT was originally conceived as an alternative individual income tax system that forced super-high-income folks who took "unfair" advantage of multiple tax breaks to pay at least some tax -- just like the rest of us. I have no problem with the concept. But over the years, the AMT has evolved into a scheme that mainly penalizes middle-income folks who have lots of kids and pay lots of state and local taxes. To avoid ruffling the feathers of a large number of voters, Congress tweaks the AMT rules every year to prevent millions more from getting hit with the tax. So why not simply repeal it and be done with it? Politicians want to keep the AMT around as a backup revenue source -- just in case. Once again, this is bad tax policy, because it's deceptive. If they want to squeeze more tax revenue out of the populace, they should be honest about it and simply raise rates in a way we can all understand.
Let Employees Deduct Health Insurance Premiums
Guess what? If you're an employee who has to pay for your own health insurance, you don't get any tax write-off unless your company provides a cafeteria benefit plan. Many small and medium-sized companies don't. So you have to pay the premiums with after-tax dollars. Meanwhile, employees with better benefit packages get tax-free health coverage, and self-employed folks are allowed to write off their health insurance premiums. This is completely unfair. Once again, however, the politicians are happy to get the extra tax revenue, and they are not going to fix the problem until you make them.
The Bottom Line
Lest you think otherwise, this column was not written from any particular political perspective. All the things I'm ranting about here have been around for years -- during which time both Republicans and Democrats have been in control. Bad tax policy is bad tax policy, regardless of one's political affiliation. We need to start demanding an Internal Revenue Code that collects taxes in an efficient and transparent manner. What we have right now doesn't do either of those things.
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