COMMENTARY: Reflections On Income Tax

NORTHWEST ARKANSAS — When poet T.S. Eliot wrote, “April is the cruellest month,” he should have been referring to the tax filing season. We write a check or recover our interest-free loan to the government, we fill out jillions of forms, we wrestle with records. Despite its beauty, April is a cruel month thanks to income tax.

Our tax system serves at least three purposes: funding governmental necessities, redistributing wealth and modifying behavior.

Most everyone believes that taxes exist to fund government’s necessary functions, although we disagree about which are necessary.

Some believe that taxes “level the playing field,” taking from those who have too much and giving to those who don’t have enough. If you believe you have too much, you can give the excess to the government. In 2010, few people did: less than $3 million total. Few believe they have too much; it’s the other guy who does.

Some see taxes as a way to incentivize desired behaviors. For example, tax breaks now bribe people to buy the new Chevy Volt, and tax penalties encourage companies to leave production and profits overseas.

That’s a biased summary of purposes, but pretty accurate, I think.

Once, questions of purpose hardly mattered. Neither the government nor its taxes caused much pain. In the simpler times of the first modern federal income tax, the top rate was 7 percent on incomes over $500,000 (today’s equivalent, $11 million); the poorest paid 1 percent. The government of 1913 was also modest. Since then the government has taken on more responsibilities: employing 2.7 million people, funding a superpower military, providing worldwide disaster relief, mismanaging the economy, paying people not to work or farm,bankrolling unmarketable ideas, buying car companies, bailing out Wall Street and unions: Generally being a generous but destitute drunk uncle.

Today since all our labor until April 12 goes to pay taxes, purpose matters. And the principle we choose for reform will determine the purpose or purposes the tax code serves.

Fairness, sometimes called “social justice,” is a popular basis for reform. Fairness enables, without restraint, all three purposes of taxation. It demands continual adjustment of tax incentives and penalties as different conceptions of fairness achieve ascendancy. Fairness is a subjective value, but what most views have in common is that the other guy gets the bigger tax bill. Few of us want to be on the contributory end of social justice.

I believe our tax system should serve America’s social contract as expressed in the founding documents - personal freedom and equality under the law. With freedom as the basis, reform makes the tax code rational and simple. Reform means ending thousands of tax provisions that irrationally influence thousands of personal and business decisions.

Reforming taxes for freedom would simplify the tax code.

And it would feed freedom’s child, prosperity. For example, we might eliminate corporate taxes completely and treat all personal income equally. The 35 percent U.S. corporate tax rate disadvantages our companies when competing with those of other industrialized nations, whererates are about half ours. That high rate also inserts tax avoidance into business decision. Eliminate the corporate tax, and production and profits come home to invigorate the economy. As a bonus, no longer would tax deductions subsidize outsized CEO salaries - whatever they were paid would come right out of the bottom line.

Dividend income would just be income. Capital gains would be taxed as ordinary income, after adjustments for inflation.

Deductions, except those for charitable giving, would be eliminated, discouraging taxmotivated behavior. The charitable deduction should remain because charities perform social service functions more economically, more efficiently and with greater commitment of donor and recipient than do government programs. In fact, because charitable activities replace some government action and because they tend to build character, while welfare tends to destroy it, charity can reduce the need for government programs.

With rates lowered, compliance would improve and economic decisions would focus on productivity rather than avoiding taxes.

It is said that nothing is certain except death and taxes; I would add that the prospect of not having to file income tax is one of death’s compensations. But tax season need not be a such a cruelty to mind and spirit. Reforming our system to maximize freedom would help restore the economic freedom that underlies our prosperity and our other freedoms. It would help return the tax code to the purpose of funding government’s necessary tasks and, more importantly, make the act of paying taxes an expression of the our highest values.

BUDDY ROGERS IS A RETIRED ARMY OFFICER AND FORMER FINANCIAL ADVISER. HE NOW TEACHES AT NORTHWEST ARKANSAS COMMUNITY COLLEGE.