“Can I deduct the cost of marijuana if it’s for medical use?”
“Only if you’re filing a joint return.”
The Cato Institute has an excellent short film on all that is wrong with the federal tax system. In short, that system violates all four principles of taxation described by Adam Smith:
1. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.
As Warren Buffett complained, his effective tax rate is half that of his secretary.
2. The tax which each individual is bound to pay ought to be certain, and not arbitrary.
The system is so complex that not even professionals can be sure what people owe. Send out the tax information of a middle-class couple with children to six tax accountants and they will come up with six different sums owed. That experiment has been run numerous times. The advice the IRS itself gives out is frequently wrong.
3. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it.
Most people never see the money, as it never gets into their paychecks. Those with incomes not subject to withholding must estimate in January, April, July, and October, regardless of whether those months are convenient.
4. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state.
Well over 50 percent of filers hire people to fill out the forms because they can’t understand them. The corporate income tax is even worse. As the Wall Street Journal explains today, the cost of complying with the corporate income tax this year will equal 89 percent of the revenues received by the government. General Electric’s tax return, filed electronically, will be the equivalent of 24,000 pages long.
The current tax system benefits two groups: the rich and powerful, who are able to lobby Congress for loopholes, subsidies, tax credits, etc. etc., and the 535 members of Congress, who sell those loopholes, subsidies, tax credits, etc. etc. Yes, sell. They are traded for campaign contributions. It’s as legal as it is disgraceful.
There is no reforming the current system, as it is permeated with corruption. But Congress is utterly unable to write a new tax code from scratch. If this country is to ever get out from under a tax code that has become a clear and present danger to American prosperity and power, it will have to be done using a means similar to the military base closings after the Cold War: in secret, with Congress voting up or down, no amendments.
Only overwhelming pressure will make that happen. That’s another reason why the 2010 election might turn out to be the most consequential midterm election in American history.