You Decide

…that the federal income tax code as it stands now is the only way to tax fairly?

Part of the joy of a flexible tax code like ours is that it can be tinkered with, not just to accommodate changes in the economy, but also to be fair.

Many analysts maintain that the Tax Reform Act of 1986 went a long way toward making federal taxes fairer. Here’s how:
It provided relief to the lowest-income earners by raising the “floor” of taxable income. According to some sources, nearly 7 million taxpayers — extremely poor ones — were dropped from the rolls, and another 3.7 million had their liabilities cut by more than half.

It broadened the tax base overall and reduced the number of tax brackets. This meant that there were fewer “special treatments” (i.e., loopholes) for the wealthy. (The “broaden the base, lower the rate” approach almost always means eliminating or limiting loopholes like pretax preference of capital gains, deductibility of interest on consumer debt, deductibility of state sales taxes and deductibility of interest payments on tax-free investments.)

More recently, President George W. Bush has signed several tax acts that ease the tax burden on those who are least able to afford their taxes, for example offering a $300 rebate per child. With Bush tax cuts, tax brackets have also been adjusted so that middle-income couples owe the same tax as comparable singles.

The federal income tax system as it stands allows the tax burden to be shifted to those who can most afford it.

…that the federal income tax system isn’t transparent, which means that the true cost of government is hidden from taxpayers, and lawmakers and lobbyists abuse that lack of transparency?

Federal income tax as it stands now is rooted in federal withholding from wages. That means, some think, that taxpayers never really “see” the money that they earn that goes toward taxes; withholding in effect obscures the sacrifice that taxpayers make, so they are less vigilant about holding government accountable for how their tax dollars are actually spent. Some argue that if taxes were more "painful" to taxpayers — like if they had to write a check every week — taxpayers would be more attuned to the cost of a large and growing government, and they would keep congressional expenditures in check.

Another argument against the current tax code is that it is an agent of inside-the-beltway political power: What better way to reward someone who has done you a favor than to hide a juicy loophole for them in the tax code? With a flat tax, there would far less room for backroom maneuvering and therefore far less room for congressmen and lobbyists to push through favors like loopholes.

But let’s take a look at the Iraq war as the penultimate example of how our tax system fails us. First of all, because we don't have a transparent tax system that would, say, demand that a war tax be levied (as has been the case with all previous wars in American history), the government has been able to get away with financing the war in Iraq with deficit financing, to the tune of $500 billion thus far. Meanwhile, the federal deficit has skyrocketed to about $9 trillion. Think that would have happened if taxpayers knew exactly how much they had to pay in taxes to finance the war, and when?

And how exactly is that money being spent? According to the book The Three Trillion Dollar War by Joseph E. Stiglitz and Linda J. Bilmes, since 2004, the average number of military personnel deployed in the region has increased by 15 percent, but the costs have ballooned by 130 percent. Why? Largely because of the hiring of private military security firms. In 2007, private security guards in Iraq accounted for $4 billion. How much did Blackwater Security get to guard L. Paul Bremer, the administrator of the Coalition Provisional Authority? In 2003, it was $27 million — that's $27 million to protect one man — and a staggering $100 million a year later. Meanwhile, the Defense Contract Audit Agency reported $10 billion in questionable bills, and another $8.8 billion from the Development Fund for Iraq has — oops! — disappeared. Our obfuscating tax code has meant that private firms and individuals have become fabulously wealthy — thanks to no-bid contracts — while the reconstruction of Iraq founders and the United States accumulates staggering national debt.

Bottom line: A cloudy, complicated tax system helps the government to obscure the true costs of government expenditures — including wars — and it fuels waste, greed and corruption.