Don’t blame Polis; fix the broken federal income tax

Much has been written recently in The Denver Post about Amazon billionaire Jeff Bezos not paying income taxes in some years, philanthropist billionaire Philip Anschutz’s efforts to get an $8 million tax refund, and Gov. Jared Polis not having paid income tax some years despite a net worth of approximately a third of a billion dollars.

In all of these instances, the truth is these wealthy individuals followed the law and were seeking to minimize their tax burdens. They weren’t cheating or doing anything nefarious. They simply were trying to make certain they availed themselves of the rules and regulations currently in place. The difference between these uber-rich individuals and the rest of us is that they qualified for certain tax benefits and could afford to hire the experts needed to accomplish their goals.

Rather than criticizing the wealthy for following the law, maybe it’s time to take away these advantages. With almost 100,000 pages of federal regulations and case law on top of thousands of pages of regulations and tax law each state imposes, our tax system is an unfathomable morass open to exploitation by those who can afford to hire lobbyists and secure benefits.

The Post editorial headline, “Jared Polis aggressively avoided income tax and tried to hide it” was bizarre in that it’s as if the expectation was that Polis should actively seek ways to pay more income tax than required by law. Don’t we all want the biggest refund or lowest tax bill possible?

Worse was The Post’s assertion, “Polis may not have broken any laws with his aggressive tax avoidance, but he certainly made some ethically dubious decisions.”

The Post’s examples are better used as arguments for supporting the simplification of our ludicrously complex and convoluted tax system. However, until that occurs, we should expect that anyone with wealth and expertise is likely to seek to minimize the taxes they pay.

Various studies place the annual cost of complying with our tax laws at between $150 billion and $950 billion, and that’s not even accounting for the loss of creativity and related productivity due to the time and resources spent complying with federal and state tax codes.

Too many businesses and individuals dedicate resources to devising strategies and making business decisions based on their tax implications rather than doing what may make more sense in a truly free market economy. This distorts the economic system in ways that can make it less productive.

The complexity of the tax system discourages innovation and creativity because some potential entrepreneurs are intimidated by the tsunami of regulations and paperwork they face when trying to start a business. Hence, our tax system functions as a barrier to entry at a time when we all want to see more competition — not less. It’s as if we’re pouring molasses onto the wheels of our economy.

One solution we all should embrace is a transition to a flat tax for individuals and businesses. Such a move easily could save half of the wasteful costs of compliance. It also could eliminate all the special interest benefits businesses and the wealthy receive which remain unavailable to most Americans.

Today, the corporate income tax rate is 21% of profits (reduced by Republicans in 2017 from a top rate of 35%). This generates approximately $250 billion a year for the country — substantially less than in prior years.

Many companies are spending more on compliance activities than the total of income taxes they pay the federal government.

A flat tax on businesses of just 4% of revenue would simplify life for the business world while generating approximately $600 billion in tax revenue annually. In essence, the net cost to businesses potentially could be zero due to the savings from reducing compliance expenses.

Of course, businesses still would have to track their revenues and expenses, but they finally would be able to make sound financial, economic and other business decisions based on what would make their operations more successful rather than focusing on what they should or shouldn’t do in order to minimize their tax burdens.

The same principle would apply to individuals. By exempting the first $25,000 in income for each person and then applying a flat tax of just 20% on all income, no matter how it is derived or what form it comes in, Americans could fill out a postcard form in several minutes and be done for the year.

While our current system appears to be one of “progressive” taxation — with higher income citizens paying income taxes at a higher rate — the reality is that many higher earners do not pay any income taxes on monies they receive outside of wages.

With such a simplified system — i.e., no matter how you received money, you’d be obligated to pay taxes on it — the Internal Revenue Service could focus its efforts on the accuracy of reporting and shed its responsibilities related to many of the complexities of the tax law.

Another benefit of a flat tax is that it would eliminate much of the involvement of wealthy individuals and corporations in our government. Both groups spend hundreds of millions of dollars paying lobbyists and supporting candidates and elected officials they want to influence while seeking laws and regulations financially beneficial to them.

Some people argue a consumption tax of 15% would be a better alternative to the federal income tax, especially if lowerincome people could have it refunded to them. Wealthy people consume more, and almost all the other developed nations have such a tax (e.g., a value added tax) so having one would make U.S. companies more competitive internationally.

The problem with a consumption tax, however, is that many Americans are not confident it would be used to replace the income tax; rather, they are concerned we would end up with both forms of taxation. To make it work, approval of the elimination of the income tax would have to accompany the approval of the imposition of a fair consumption tax.

For now, the best path is to put an end to the advantages businesses and the wealthy have by replacing our current federal income tax system with a flat tax that exempts those with relatively little income. Let’s put an end to special interest laws and regulations so everyone pays their fair share.