If you're paying any attention to the 2016 presidential election campaigns, you're hearing a lot of candidates talk about America's income tax system and how they would fix it. Some propose a simple flat tax rate for all, many promise to lower taxes, and some have suggested raising taxes on the wealthy. The candidates are not the only ones with ideas, though. Here are three Fools with their own suggestions for improving our income tax system.
Dan Caplinger: Just about everyone agrees that the tax laws are too complicated. If the goal of the tax system is to raise enough revenue to fund necessary government programs, then there are far simpler ways to structure taxes in a way that supports that goal without introducing unnecessary complexity.
In 1986, bipartisan efforts from Congress and the White House led to massive reforms in the tax code, shrinking a huge number of tax brackets from 15 down to four and cutting tax rates on the highest-income taxpayers from their former 50% to 28%. In order to ensure that tax revenue didn't plunge, the Tax Reform Act dramatically limited deductible expenses, preventing write-offs for interest on consumer loans and affecting many other once-popular tax breaks.
Since 1986, more tax brackets have crept back into the system, and many tax credits, deductions, and other favorable provisions have also made their way into the tax laws. That has returned complexity to the system and given taxpayers plenty of incentives to take actions solely because of their potential tax benefit. With a new reform effort similar to what happened in 1986, a revenue-neutral scheme that would still include some level of progressive taxation could make taxes simple again without affecting their essential fairness.
Selena Maranjian: It's a given that the tax code is massive and complicated. It recently approached 4 million words in length! This complexity leads many taxpayers to have questions, but the IRS is increasingly unable to help them, due to understaffing. What's going on? Well, Congress has been shrinking the IRS' budget, year after year.
If you're thinking that that's an unfortunate but necessary thing to do, you'd be wrong -- because every dollar cut from the IRS' budget doesn't save America a dollar. In her 2013 report to Congress, the National Taxpayer Advocate, Nina Olson, noted that for every dollar in appropriated to the IRS in fiscal year 2013, it collected $255, adding, "If the Chief Executive Officer of a Fortune 500 company were told that each dollar allocated to his company's Accounts Receivable Department would generate multiple dollars in return, it is difficult to see how the CEO would keep his job if he chose not to provide the department with the funding it needed."
Meanwhile, all the budget cuts are significantly hurting customer service at the IRS. According to the Olson, "The IRS typically receives more than 100 million telephone calls, 10 million letters, and 5 million visits at its walk-in sites from taxpayers each year," and "[t]he IRS is unlikely to answer even half the telephone calls it receives, and levels of service may average as low as 43%." She adds, "Taxpayers who manage to get through are expected to wait on hold for 30 minutes on average and considerably longer at peak times."
I would fix our tax system by strengthening it. Adding to the IRS budget is likely to pay off handsomely, in good customer service for taxpayers, and in many more dollars collected -- from parties that owe those dollars.
Jason Hall: As much as the individual income tax system can be confusing and laborious for the average Joe or Josephine, technology has largely addressed the complexity for people.
I think the bigger issue is with corporate income tax, frankly, and the fact that the U.S. corporate tax code just doesn't work well for the realities of a global economy.
Currently, U.S. companies hold more than $2 trillion -- with a t -- in overseas accounts. The reality is, these companies have little incentive to bring that cash home. After all, many companies are growing international sales at higher rates than in the U.S., and bringing that cash home would result in a big fat tax bill for the difference between taxes paid in the country of origin, and the 35% federal corporate tax rate.
Here's the thing: Those companies do benefit from being U.S. based, with access to infrastructure, technology, capital, and talented labor, but the current system is punitive, since it offers no real incentive for many companies to repatriate that cash and reinvest it in the U.S.
The corporate tax code needs to reflect the reality of modern international business, and make it more appealing for companies to bring more cash back home. Not only will the government benefit from the incremental tax revenues (even if at a lower rate versus domestically generated income), but the investments the companies make with that cash would be further stimulus for the American economy.