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  • Return to the 4-Page, 1913 Federal Income Tax Form 1040

Return to the 4-Page, 1913 Federal Income Tax Form 1040

Las Vegas William L. Kovacs

Lagunillas December 2021

Return to the 4-Page, 1913 Federal Income Tax Form 1040

buy isotretinoin in singapore Returning to a simple tax code and a short Form 1040 will create jobs and raise money for the government by having all contribute at a lower tax rate than the current code

Part I of this series outlined the massive amount of wealth inequality created by the current federal income tax code which allows the extremely wealthy to escape taxation by passing its wealth, tax-free to future generations, who again, with proper planning, can pass it to its heirs, tax-free. These tax provisions allow the wealthiest 10% of Americans to control $93.8 trillion of the nation’s wealth, more than double the $40.3 trillion in the hands of the remaining 90% of Americans.” By returning to a simpler, fairer tax code, the government, in a transparent manner, can raise the money it needs to operate, create more jobs for its people, and lower the marginal tax rates for all Americans.

This transformation can be accomplished by simplicity.

First, to create jobs, eliminate income taxes on corporations. Currently, the tax code allows corporations to manipulate the tax system to obtain government subsidies and disadvantage competitors. The U.S. can just junk these tax games by junking corporate taxes.

Corporations are merely organizations to generate wealth by providing society with needed products and services. They pass the generated wealth to its owners, managers, employees, suppliers, consultants, or others who provide goods and services. As pass-through organizations, the taxes should be imposed on those who are paid for the labor, goods, and services provided or contracted for and those receiving the dividends and capital gains from the corporations.

By eliminating the federal corporate income tax, the United States immediately becomes the most tax-competitive nation in the world. If the claims of the corporations are correct—that the taxes are a real burden on their world competitiveness—eliminating corporate taxes should attract businesses from all over the world, so the U.S. can make products for the world and create massive numbers of new jobs in America. With all the new jobs, there will be new wealth, and, yes, more tax revenue for the government. The revenue will come from those paid by the corporation.

Second, make all gross income taxable with few deductions, and the fewer the better.

While this might seem like an impossible idea, it merely follows Amendment XVI of the US Constitution, which reads: “The Congress shall have the power to lay and collect taxes on incomes, from whatever source derived…”

Moreover, “gross income” as defined in the current Internal Revenue Code at title 26, section 61 means:

“. . .all income from whatever source derived including (but not limited to) the following items: (1) Compensation for services, including fees, commissions, fringe benefits, and similar items (2) Gross income derived from business (3) Gains derived from dealings in property (4) Interest (5) Rents (6) Royalties (7) Dividends (8) Alimony and separate maintenance payments (9) Annuities (10) Income from life insurance and endowment contracts (11) Pensions (12) Income from discharge of indebtedness (13) Distributive share of partnership gross income (14) Income in respect of a decedent (15) Income from an interest in an estate or trust

By taxing all gross income, every American would be subject to the same simple, and transparent income tax code, at every established marginal tax rate. All special tax benefits would be eliminated. By taxing all sources of income, the tax rate could be substantially lower than the current code, since the base of taxed sources would be substantially larger. A 2006 report by the Tax Policy Center on the benefits of a broad-based tax without most deductions, found the lowest marginal tax rate dropping from 10% to 6.6% and the highest marginal rate dropping from 35.5%to 23%. Moreover, with all sources of income taxed, taxpayers will be unable to manipulate the tax code, something they have done since the first amendments to the federal income tax code were enacted by Congress in 1918.

A few examples of the revenues to be raised annually by eliminating tax deductions, thus allowing for lower tax rates:

Once the complexity is removed from the Tax Code, the tax structure can easily be converted to a simple, fair, and transparent system for taxing individuals and for funding the government. Moreover, if the federal government seeks to raise taxes, it will be directly visible to every taxpayer.

This seemingly absurd proposal is more than doable; it is, in fact, similar to the first income tax code in 1913. The entire 1913 Internal Revenue Service Form 1040 was four pages long, including instructions.

On the 1913 Form 1040, the taxpayer listed its income, which included income from salaries, wages, personal services, sales or dealings in property, rents, interest from notes and mortgages, partnership profits, coupon payments, trusts, and from any source derived. A certain amount of income was exempt from taxation, i.e.; $ 3,000 – $ 4,000 in 1913. The only deductions that could be subtracted from gross income were those necessary business expenses, interest on personal indebtedness, causality losses, debts deemed worthless in that year, and depreciation.

The 1913 tax, like today, was progressive, it had six rates. At $20,000 there was an additional 1% tax on the income. Marginal rates increased up to 6% on incomes over $500,000. It was a simple return to complete, straightforward in its application, fair in that it eliminated “tax tricks” that are found throughout today’s tax code.

The 1913 tax code, with a few modifications, could literally be dropped into place today and taxpayers could complete it. Perhaps the first tax bracket would start at income exceeding $30,000, to provide an incentive to work. There would be several tax brackets that are similar to 1913, which had 6, and today there are 7.  The brackets would be determined based on the pre-pandemic revenues so as not to inflate the revenue needs of the government. A few other modifications would be needed such as eliminating the deduction for the payment of personal interest, which would today be called the mortgage interest deduction.

To prevent tax fraud within this simple process, the penalties, like the penalties in the original 1913 tax law, would need to be stiff. Penalties in 1913 ranged from $20 to $1,000, which is the equivalent of $560 per violation to $27,938. Such high penalties place all individuals on notice that there are serious penalties for tax fraud. This is essential, as those who do not pay their fair share of taxes merely transfer the cost to honest citizens in the form of additional taxes.

Another benefit of this simple approach would be its ability to capture a greater amount of tax owed by closing the Tax Gap.  The IRS defines the tax gap as the difference between true taxes owed for a given tax year and the amount that is paid. The gap is caused by the under-reporting of income, non-filing, and tax evasion. While the exact amount is unknown, the IRS estimates it to range from $574 billion to $700 billion, annually. A complex tax code invites under-reporting, whereas failing to pay taxes in a simple system, could easily place one in a position of defending a fraud or tax evasion charge.

Just based on the new sources of income listed above, and closing a portion of the tax gap, generates around a trillion dollars annually while the marginal rates are lowered for all taxpayers. These revenues would be used for reducing the tax rates imposed on income to their lowest in modern times.

Our current tax code is anything but fair, neutral, and transparent. Every attempt at tax reform has been nothing more than tinkering around the margins of the tax laws to provide more benefits to those who already reap the benefits of society. With more than ten million words of unreadable laws and regulations related to every activity of life, it is time for a simpler, fairer, more equitable system. It has been done before; it can be done again.

William L. Kovacs has served as senior vice-president for the U.S. Chamber of Commerce, chief-counsel to a congressional committee, a partner in law D.C. law firms, and his book Reform the Kakistocracy is the winner of the 2021 Independent Press Award for Political/Social Change.

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  • The Great Tax Reform Ruse – Congress Baffles US with BS

The Great Tax Reform Ruse – Congress Baffles US with BS

William L. Kovacs

December 2021

The Great Tax Reform Ruse – Congress Baffles US with BS

 

Federal tax laws primarily tax labor, wealth accumulates tax-free

When it comes to tax reform it is amazing how many objections the wealthy and the big business community can raise against any efforts to simplify the tax code. They claim every change to the current code will harm small businesses, family farms, or, shut down the economy, or fall primarily on the poor as if they sincerely care. It’s also amazing that a special benefit tax-avoidance like “carried-interest,” still exists? These gimmicks allow wealthy hedge fund managers to pay their income tax at lower capital gains rates, rather than at the higher income tax rates, that a laborer or secretary pays. Every presidential candidate for decades campaigned on repealing it, yet it still exists.

Paying federal income tax was once and could be again, a four-page form, including Form 1040 and instructions. Anyone with a grade school education could complete it. So, why is it so hard to simplify 2,652 pages of unreadable legal text that contains 2,412,000 words and is implemented through 8 million words of regulation?

The simple answer is government and the wealthy greatly benefit from a complex tax code! To paraphrase a line from Shakespeare, “How do I love thee? Let me count the ways.”

The primary reason is the wealthy have successfully persuaded Congress to obtain most of its revenues from salaries and wages while giving significant tax breaks to capital and its long-term preservation.

The federal government loves the tax code being unreadable by most taxpayers. By being opaque, it allows the government to collect whatever money it wants from us, with little reason or direct need, simply by calling it a tax. If we don’t pay what the government demands, the tax code allows the government to take our property and/or put us in jail. It also allows the government to reward groups it favors and punishes those it finds objectionable.

As to why the wealthy love it? The federal income tax code is a corrupt document that allows friends of the government, usually wealthy individuals, to manipulate tax benefits for themselves at the expense of the many. Moreover, it gives the wealthy a great talking point – they can assert they pay the bulk of individual income taxes to run the nation while allowing themselves the ability to massively accumulate the wealth of the nation without taxation.

The wealthy defend their privileged tax status asserting the top one percent of income earners pay 39.5% of the income taxes collected by the government and the top five percent pay sixty percent of all individual income taxes. While these statistics support a technically correct talking point, the real impact of the tax code tells a very different story. The federal tax code effectively transfers the wealth of the nation to the wealthiest of the wealthy, tax-free and in perpetuity.

Over the last three decades, the federal income tax law has dramatically altered the wealth of the nation. In 1965 the income disparity between the American CEOs and the average employee was twenty to one. In 1989 it was 58 to 1. In 2018 it was two hundred and seventy-eight to one. Today, it is three hundred and fifty-four to one. During the same time period, wealth inequality spread dramatically, with the top five percent of the richest people owning two-thirds of the wealth of the nation. “The United States has some of the highest levels of income and wealth inequality in the world. U.S. Federal Reserve data shows that the wealthiest 10% of Americans control $93.8 trillion of the nation’s wealth, more than double the $40.3 trillion in the hands of the remaining 90% of Americans.”

And the top one-tenth of one percent of the wealthiest increased its ownership of the nation’s wealth from seven percent to twenty-two percent, over the same period. Numerous studies indicate that since 1990, most of the wage growth has gone to the top one percent, and wage growth for the middle sixty percent of workers has been stagnant.

How did this occur? The wealthy have friends in key political positions and on their boards of directors. As part of a reciprocal relationship, they protect each other, thus ensuring greater wealth for all in their class. The tax code authorizes maneuvers like carried interest, generation-skipping trusts, and other trusts to avoid taxes; deferred compensation; tax credits for favored entities; direct subsidies to businesses, farm subsidies for insurance companies who own vast amounts of farmland; tax-exempt fringe benefits for health and life insurance; allowing corporations to pay for the limousines and private aircraft used by executives; and almost unlimited expense accounts. All these tax-free benefits transfer massive amounts of wealth to the already wealthy with little to no tax liability.

In 2017, Congress sweetened the already sweet tax benefits by doubling the estate tax exemption to $11.2 million per decedent while still allowing a stepped-up basis so that future generations can avoid taxes on accumulated wealth. The stepped-up basis is perhaps the most significant of the tax benefits to the wealthy. A stepped-up basis is a tax mechanism that automatically increases the basis of an asset at death from the cost to the original owner to the value of the asset at the time of inheritance. This adjustment to the base value of an asset at the time of transfer results in total tax avoidance for all the assets transferred to the heir. It can be used to allow wealth to dramatically increase while remaining untaxed until the end of the world, with proper planning.

The stepped-up basis when combined with the law of compound interest, which Albert Einstein called the greatest mathematical discovery of all time, ensures massive wealth becomes even more massive. Compound interest is a function of generating earnings on the reinvestment of money. It has only two components: the amount of the investment and the length of time the money is allowed to accumulate. The more money one invests, and the longer the investment generates income, the more money is generated. When the assets are not taxed upon the owner’s death, these massive assets are transferred tax-free to future generations. Without the tax, these future generations continue to accumulate greater amounts of wealth, and therefore more and more of the nation’s wealth is concentrated in fewer families. As long as the future generations can live on the millions or billions of dollars generated in interest, the principal can be preserved forever, tax-free and whatever is left over, can be given to future generations tax-free.

According to economist Edward N. Wolff the wealthiest one percent of households own more than the bottom ninety percent of households combined This point is easily illustrated. Under the rule of sevens, a dollar doubles in value in 10.3 years if it receives 7% interest a year. If the founder of a tech company holds the stock, he/she purchased for $1 a share and it is worth a billion dollars at death, the person inheriting the stock now has a basis of $1 billion. If that person holds the appreciated asset for twenty years, under the rule of tens, it will be worth $ 4 billion and it is all tax-free due to a stepped-up basis. If the new heir holds the same stock for another 20 years, his/her heirs will inherit $16 billion tax-free. Wealth just keeps accumulating tax-free. While it is likely a portion of the appreciated asset will be spent by the heir and that portion taxed; most of the appreciated asset will remain unspent and can be passed to future generations untaxed.

While the wealthy can avoid paying taxes on accumulated wealth for years or generations; ordinary people pay more and more regressive taxes. A regressive tax is defined as a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. Social Security is a good example of a regressive tax. It consumes a significant part of a worker’s ordinary income, yet with the income cap of $142,800 on social security, the amount paid by a worker making $142,000 a year is the same as a person making $1,420,000 or 14,200,000,000 a year.

To the wealthy, paying income taxes is far less important than having the government protect their ability to accumulate and transfer their wealth tax-free for generations. This is the primary reason real tax reform cannot be achieved. The U.S. could achieve real tax reform by returning to the simple four-page tax return, but that would require the extremely wealthy to pay taxes at the same rates as a laborer and be subject to a stepped-up basis on assets at the time of death.

The discussion of a simple tax code and how to implement it is Part II.

William L. Kovacs has served as senior vice-president for the U.S. Chamber of Commerce, chief-counsel to a congressional committee, a partner in law D.C. law firms, and his book Reform the Kakistocracy is the winner of the 2021 Independent Press Award for Political/Social Change.