Our tax system is broken — let’s discuss why
By Bob Baldwin
Our tax system is broken, and the solution isn’t simply having more bodies working for it. When I say the system is broken, I mean from the ground floor up — from federal taxation to state taxation and even local taxation. Quite simply, it’s too complex, and my proof speaks for itself. First, the system cannot handle the current level of complexity. Second, we cannot trust that our financial information is secure. Third, you, the taxpayer, probably can’t make heads or tails of any of it. Fourth and finally, the system lacks equity.
The easy solution is this — we need to make taxes simple, perhaps not shifting all the way to a flat tax, but something close to that. Let us consider first the evidence at the federal level.
In the news recently, you may have heard mention of the Annual Report of the Taxpayer Advocate to Congress for the 2021 year. Excluding the 58-page executive summary, the 166 page “Purple Book” report is recommending legislative changes, a term long tossed around the Senate and House floor. Within the verbiage of this document are just a few interesting and sometimes startling facts about what the previous year’s tax system looked like.
Going into the 2020 tax season, the IRS was behind in 11.7 million returns, and it wasn’t until June of 2021 before they finished processing 2019 returns. In 2021, the IRS received another 17 million paper returns, and by the end of the year, they had over 2.3 million amended returns — none of which were processed. And now, we begin the 2021 returns. The bottom line is, the government cannot handle the paperwork. I have not even touched on the thousands of notices mailed by our government to taxpayers claiming they owe money when in reality the IRS could not process the checks remitted. Tax professionals are being told now to expect major delays in the processing of returns in 2022. I ask you — does this sound like a system that is broken?
The Internal Revenue Service, which holds all our financial information, cannot effectively protect our private information as they are legally required to do. I could argue information sometimes leaks like a sieve, particularly information of an electronic ilk. How do I know? See ProPublica and their report of June 2021 — they were able to access thousands of tax returns. Moreover, South Carolina’s own tax system was breached several years ago. I ask you again — does this sound like a system that is broken?
So, what broke the system? Simply, it is too complex. Our tax system is not being run to collect revenues. It is being operated to manipulate our behavior. From the earned income credit to the childcare credit, our tax system is being used as a welfare system. The tax system should collect revenue, not disburse cash — and this is one of the main reasons the IRS is behind. Recent administrations have used the IRS to dispense welfare to both our citizens and noncitizens — just look at stimulus checks. How do you understand that tax system? Sometimes items are deductible and sometimes they are not. The rules change annually. Anyone with any tax complexity at all must hire professionals to prepare their tax returns and get advice on how to reduce their tax bills. I ask you once more — does this sound like a system that is broken?
Finally, let us discuss equity. I could write for hours about it but let’s start with a few key questions. Why do homeowners get an interest and property tax deduction but home renters do not? Why do the same progressive tax rates apply in the city and country, regardless of the costs of living? Why do some taxpayers get a deduction but others don’t, simply on account of their income? Why do electric car purchases get a credit and those buying regular cars don’t? Why do realtors get to use their losses against other income but non-realtors don’t? Why do citizens of S.C. have an income tax, a sales tax, a property tax and a tax on fuels and utilities? Does this sound like a system that is broken?
The answer by the politicians is the following: The system is fair. I claim otherwise. Our system is broken and the only cure to this drag on our economy is simplification, not more rules and regulations. It’s not too late for our representatives to simplify this mess. If we don’t fix this mess, the system is not just going to be more broken; it is simply going to fail us.
Bob Baldwin, founding member of Baldwin & Associates, has been serving the Lowcountry for three decades, and the state of South Carolina for longer. His expertise combined with that of his team runs the gambit of all things finance and accounting services and sets them apart through their extra touch of Southern service. A loyal Georgia Bulldogs fan, Bob can be reached at Baldwininfo@baldwincpa.com.