The current Tax Code is exceptionally difficult to understand primarily because we do not necessarily know and understand the language within. The United States Tax Code is enormous and complex. Dominick Peruso, professor of accounting at Juniata, provides his viewpoint on the current Tax Code and how we can more easily understand it as well as offer a personal solution to how we can improve the current Tax Code.
1. It is very hard to understand the current Tax Code. How can they make this tax code understandable or is the tax code just too complicated?
The U.S. Tax Code is enormous and, in many cases, certain provisions contradict other provisions. The Code was not created overnight and it’s very unlikely any substantive changes will occur quickly. President Obama’s Deficit Reduction Plan, while still lacking much detail, is an attempt to simplify the Code by reducing the number of brackets and cutting “inefficient and unfair tax breaks.” The President’s plan would generate additional tax revenue by increasing tax rates and limit or eliminate tax deductions for “high income” taxpayers.
2. From an accounting/tax standpoint, why is it that we cannot understand the current Tax Code?
The devil is in the details and the Administration has provided few details. For example, the so-called Buffet Rule is designed to make sure households making over $1 million are not paying a smaller share (known as the effective tax rate) of income than middle-income taxpayers. The rule is named after billionaire Warren Buffet who has routinely claims his secretary pays taxes at a higher rate than he does. His assertion is true. Taxpayers generally pay 15 percent on their investment income which differs from earnings which are taxed at 15 percent or higher subject to various deductions and credits. Many media outlets have erroneously reported him as saying he (Buffet) pays fewer taxes than his secretary. Although mentioned several times by the President and White House staff, the Buffet Rule remains ill-defined.
3. How will the current Tax Code affect the poor? Middle class? Rich?
Depending on how you define the poor, middle class, and rich, the President’s proposal affects each group differently. The poor and lower middle class will see no change because they comprise the 40-50 percent of tax filers that do not pay any taxes. Depending on your definition, upper middle-class and rich tax filers will see an increase in the top two income tax rates to 36 and 39.6 percent. The current 10, 15, 25, and 28 percent rates will be extended. Additionally, new tax law, related to the health care bill, will take effect in 2012 and will increase the amount of Medicare and self-employment taxes on wages and a roll out a new Medicare tax on unearned income of 3.9 percent.
4. Why do richer people not pay anything at all? Do they get the most tax breaks?
“Rich” people pay taxes. That they don’t pay taxes is a myth.
5. Are there taxation models elsewhere that are better?
Better than the President’s Deficit Reduction Plan? Certainly not Herman Cain’s 9-9-9 proposal. The flat tax has some supporters and, by some estimates, would be around 17 percent of income. The Fair Tax is another option that would replace the income tax with a national sales tax. The authors of the Fair Tax contend that roughly $13 trillion will move back to the U.S. and out of various international tax shelters. These alternatives all have their problems with issues of fairness, revenue neutrality, and enforcement.
Mary Munion ’12, Juniata Online Journalist