Two months ago, Bloomberg showed how Google (Nasdaq: GOOG) uses a host of loopholes to bring its tax rate down to 2.4%. According to Forbes, General Electric (NYSE: GE) made $10.3 billion in pre-tax income in 2009, but didn't pay a dime to the Internal Revenue Service.

At the personal level, Warren Buffett noted that his 2006 personal income was $46 million, on which he paid 17.7% in federal taxes, while his receptionist at Berkshire Hathaway (NYSE: BRK-B), presumably making several hundred times less, paid 30%. And "I don't have a tax shelter," Buffett added.

Forget about whether this is fair. For every example I just pointed out, you can point to dozens of others that show top income brackets pay substantially all the income taxes. But that, too, just shows how wacky the tax system is. "Over 40% pay no income taxes at all," former Comptroller General David Walker said last summer. "They're getting a free ride. That's a dangerous disconnect from a political standpoint."

Regardless of which side of this debate you're on, ask whether the current tax structure makes sense. Is it doing a good job of raising sufficient revenue while properly incentivizing workers and businesses? If you could create a tax system from scratch, would it resemble our current one? Would it look like this?

Taxdec


Source: Joint Committee on Taxation and author's calculations.

Reuters blogger Felix Salmon used a similar chart a few weeks ago to make a few points worth repeating here. In his words:

  • "Federal taxes are the lowest in 60 years, which gives you a pretty good idea of why America's long-term debt ratios are a big problem. If the taxes reverted to somewhere near their historical mean, the problem would be solved at a stroke."
  • "Income taxes, in particular, both personal and corporate, are low and falling. That trend is not sustainable."
  • "Employment taxes, by contrast -- the regressive bit of the fiscal structure -- are bearing a large and increasing share of the brunt. Anytime that somebody starts complaining about how the poor don't pay income tax, point them to this chart. Income taxes are just one part of the pie, and everybody with a job pays employment taxes."
  • "There aren't any wealth taxes, but the closest thing we've got -- estate and gift taxes -- have shrunk to zero, after contributing a non-negligible amount to the public fisc in earlier decades."

And finally: "If you were structuring a tax code from scratch, it would look nothing like this. But the problem is that tax hikes seem to be politically impossible no matter which party is in power. And since any revamp of the tax code would involve tax hikes somewhere, I fear we're fiscally doomed."

The most sensible solution, I think, is something similar to what was recent proposed by the co-chairmen of the president's debt commission. Under their proposal, most tax breaks -- everything from the mortgage interest deduction to health insurance deduction -- are eliminated or scaled back, while in return marginal tax rates are lowered by as much as half. The result is more revenue that brings taxes as a percentage of GDP back up to historic averages with a fairer, flatter tax that makes much more sense than our current 67,000-page swamp of a tax code.

What do you think?

Fool contributor Morgan Housel owns shares of Berkshire Hathaway. Berkshire Hathaway and Google are Motley Fool Inside Value selections. Google is a Motley Fool Rule Breakers pick. Berkshire Hathaway is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Berkshire Hathaway, ExxonMobil, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.