For many Americans, Tax Day is one of dread and loathing. It’s the time of year when millions of Americans hand over their hard earned money to the Federal government. Countless Americans even see it as a patriotic duty. However, frequent reports of egregious spending, tax breaks for special interest over average Americans, and a continuous lack of oversight has many Americans worried if the patriotic duty to pay their share is being abused.
Last year, Americans paid over $3.2 trillion in individual and corporate income taxes to the Federal government. However, all taxpayers and businesses do not share this burden equally. Littered throughout the tax code are provisions and loopholes that benefit those who can lobby for and identify the best tax credits, deductions, and carve-outs.
For example, the “Hollywood tax break” allows film and TV producers to deduct 100% of their costs up to $15 million, if 75% of the project’s compensation takes place in the United States. Since 2004, when Congress first passed the Hollywood tax break, it has cost taxpayers over $1 billion.
Furthermore, many tax credits end up being used by the well connected, while escaping those who were originally intended to receive the benefits.
One of the best examples is the New Markets Tax Credit (NMTC). The NMTC was created to spur job growth in low-income areas, but instead has been taken advantage of by wealthy investors and Wall Street banks, using over $1 billion of the provision’s benefits.
Throughout the tax code there is a theme. The biggest breaks go to corporations and individuals who can afford the best lobbyists, lawyers, and accountants, leaving everyday Americans to fill the gap. In fact, some corporations, and even millionaires, pay little or nothing in Federal income taxes.
According to the Internal Revenue Service’s (IRS) tax records, over 1,600 millionaires who filed taxes in 2011 paid no income tax at all. In addition, more than 15,000 millionaires claimed over $10 million worth of child care credits and 1,300 millionaires claimed $9 million worth of electric vehicle credits in 2012.
Like those millionaires who use the provisions scattered throughout the tax code to their advantage, corporations often find the best avenues to avoid paying their share.
According to one study, in 2014, 111 of 288 Fortune 500 companies surveyed either paid zero taxes or received a refund in at least one year from 2008 to 2012. Another mind-boggling truth is that in 2012, Facebook, the social media giant, did not pay one dime in Federal or State income taxes. Instead, Facebook said in a 2013 report, it received tax refunds totaling $429 million!
Many multinational corporations use the United States’ flawed worldwide tax system to harbor their earnings overseas. The worldwide tax system allows U.S. companies to defer foreign-earned income until it is repatriated. This system creates an incentive for multinational corporations, like Apple, to locate operations in countries with lower tax rates in order to avoid U.S. corporate tax.
Not only does this system allow corporations to take advantage of the system, but it also hurts the U.S. economy. According to securities filings, U.S. companies are holding over $2 trillion overseas. That’s about 14% of the U.S.’s total Gross Domestic Product.
Fortunately, tax reform is one area most Members of Congress agree should be a top priority, and it couldn’t come at a more opportune time.
The IRS estimates the net tax gap (the difference between taxes owed and taxes paid) is $406 billion, on average. In addition, the IRS estimates paying about $5.8 billion in fraudulent refunds in 2013. The IRS’s enforcement of tax laws also sits on GAO’s “high risk list” because of the failure to address the tax gap and fraudulent refund claims.
While it may be easy to blame the IRS for lack of accountability, there are controversies deeply rooted in the tax code itself, making it difficult even for the IRS to collect taxes.
The entire Internal Revenue Code is more than four million words in length, and over 9,000 pages long. That’s more than the Bible, War and Peace, the Harry Potter series, the Lord of the Rings trilogy, and the Twilight series COMBINED!
If that fact alone doesn’t draw attention to the need for tax reform, bear in mind there is an entire industry founded on helping Americans file their taxes. This industry employs over 300,000 people at 100,000+ tax preparation firms that generate upwards of $10 billion annually.
However, the tax code wasn’t always this complicated. Many lawmakers have pointed to the fact that just over 100 years ago the Federal income tax law was just 27 pages long, easily readable and could be understood by most Americans.
Simplifying the tax code should be the Administration and Congress’s primary goal when discussing a plan forward on tax reform. Addressing the complexity of the code will not only simplify tax time for Americans, but it will also untangle the complicated web of the well connected and close unfair loopholes and giveaways.
For far too long Congress has picked winners and losers in the form of spending through the tax code, leaving everyday Americans to pick up the tab. With reform just over the horizon, little will be accomplished if tax perks for select companies and industries are not completely cut out of the tax code.
The findings we reference in this article are primarily from former Senator Tom Coburn’s Tax Decoder, and reveals more than 165 tax expenditures costing over $900 billion. Tax Decoder is intended to ‘decode’ the tax code for every taxpayer, but can be used as reference for policy and decision makers in order to help make the tax code simpler and fairer.