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US Tax Code Fosters Inequality and Corruption

Posted by Steve Markowitz on January 3, 2016

As we enter 2106, the major economic problems facing the Country remain as they were last year; excessive debt and increasing income disparity.  Both are fostered by a tax code that is too complex and overly politicized.

The federal government’s excessive debt is simple to understand.  The debt comes from the spending more than incoming revenues over a prolonged period of time.  Deficit spending is a cancer on democracies, allowing politicians to hand out unpaid for benefits to constituents while bypassing the legitimate give-and-take of negotiations that would be required with a balanced budget.

By creating a tax code that is so complex, now including over 8,000 pages, only the very wealthy with access to expensive consultants and lawyers can understand and take advantage of the best loopholes.  In addition this complexity offers opaqueness to regulations making it difficult to determine who truly benefits from them.

It is natural for those with political clout to work to mold the tax code towards their benefit.  This has resulted in some of America’s largest corporations like General Electric paying little or no US income taxes in previous years.  But large corporations are not the only special interests helping control tax policies.  Hedge funds and individual wealthy Americans are heavily involved with the effort, as reported in the New York Times article, For the Wealthiest, a Private Tax System That Saves Them Billions.

Tax ChartWhile special-interest on the political Right has often been called out for efforts to lower taxes and take advantage of loopholes, the greedy Left often gets a pass.  Both political parties receive tens of millions of dollars from special interests.  While Democrats publicly demonize the Koch brothers for supporting Republicans, an issue often reported in the mainstream media, little publicity is given to the ultra-rich liberals, such as George Soros.  Soros has converted his nearly $25 billion hedge fund into a family office to take advantage of tax loopholes.  While Soros contributes to liberal politicians, his hedge fund manager, Stanley Druckenmiller, spends lavishly on the GOP.  Greed has no political affiliation.

The problems of income disparity and tax code manipulation started prior to the election of Barack Obama.  However, it has since worsened.  According to the New York Times, 20 years ago the highest 400 earners in the United States paid approximately 27% of their income to federal income tax.  In 2012, just after Obama’s second election, that figure fell to less than 17%.  In addition, during Obama’s first term the highest-earning 1000th of Americans’, the ultra-wealthiest, tax rates went down from 20.9 to 17.6%.

When the issues of income disparity and the tax code are raised, liberals come up with what sounds like a reasonable and simple solution; raise the tax rate on the wealthy.  That strategy is doomed to fail since it does not address the issues that helped create the disparity; tax code complexity and special interest access to politicians.  As stated by Democrat chief tax console for the Senate Finance Committee, J. Todd Metcalf, “our tax code is like a leaky barrel, unless you plug every hole or get a new barrel, it’s going to leak out.”

There is only one way to address these issues and that is a radically simplified tax code that eliminates all deductions.  It is not surprising that most politicians on both sides of the aisle give at best lip service to this type of solution.  Its implementation would remove the politicians’ power to buy votes through manipulating the tax code jeopardizing their reelection prospects.

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