Since all the attention is on the U.S. Senate now to see if they can pass a tax bill and get it to conference and to the president’s desk before the Alabama special Senate election on Dec. 12, consider the following facts about the US tax code in the following couplets:
- 45 percent of all taxpaying household units in America pay no federal income tax in the progressive tax structure.
- 100 percent of all taxpaying household units that reported earned income paid federal payroll taxes in what is essentially a “flat tax” on everyone.
- 70 percent of all taxpayers choose to use the standard deduction instead of itemizing deductions.
- Roughly 2.2 million people who use the standard deduction “overpay” their tax liability by not itemizing which leads to an overpayment of approximately $1 billion in federal taxes.
- The average annual “tax gap”— or the difference between collected taxes and potential tax revenues — is about $450 billion per year due to underreporting of income or flat-out fraud.
- 0.86 percent of all 136 million tax returns were audited by the IRS in 2016.
- The income tax was made constitutional by ratification of the 16th Amendment in 1913.
- Mandatory withholding of federal income and payroll taxes started in 1943 during World War II.
- There is more tax revenue sheltered by deductions, exemptions and credits, roughly $2.2 trillion and not paid to the U.S. Treasury, than the amount of income taxes collected each year, $1.8 trillion from individuals and $355 billion from corporations.
- Corporate income taxes amount to 10 percent of all tax collection, all of which is paid for by customers in the form of higher prices.
Other than winning bar games or perhaps beating Ken Jennings on “Jeopardy!” with “Odd Tax Facts,” what does all of this tax trivia mean today?
There is a vast amount of disinformation out in the public about our tax system.
We have a progressive tax system that really doesn’t “gouge” the rich since the uber-wealthy can afford so many tax shelters unavailable to most taxpayers.
We have a second “flat tax” system that is completely regressive since it takes 15 percent (half from the employee/half from the employer; 100 percent from self-employed) from each dollar earned by each and every salary wage-earner in the country, from the poorest laborer to an NBA star, up to $127,500 for Social Security and unlimited in Medicare.
About 2.2 million people don’t know they are paying too much in taxes by choosing the standard deduction instead of itemizing deductions such as mortgage interest, charitable contributions and state and local taxes.
Millions of taxpayers who do use the standard deduction are getting a good deal if they A) rent and don’t have a mortgage on which to pay interest; B) don’t contribute a lot of money to charity; or C) live in a state without an income tax. With the standard deduction going up to $24,000 for married couples and $12,000 for individuals, millions of taxpayers will get the benefit of tax deductions even if they don’t do anything specifically to earn them.
Almost all taxpayers — 99.2 percent — each year will not be audited by the IRS. The IRS does not have the time, resources or manpower to go after all but the largest discrepancies in the higher income categories. If every person had to pay one huge check on April 15 each year, we would have the largest tax revolution since 1776.
We are leaving at least $400 billion per year on the table in uncollected tax revenues. When you factor in the black market and illegal trade in America, it might be triple that number.
This tax reform package needs to be passed this year. But it should not be the last tax reform package we ever see.