It’s probably not surprising that most Americans consider the current federal tax system to be complex, incomprehensible and unfair.
One national survey found that a majority of Americans, about 56 percent, including similar shares of Democrats and Republicans, view the tax system as unfair. An even larger proportion, 60 percent, felt that some corporations and wealthy people don’t pay their fair share of taxes.
According to the commissioner of the Internal Revenue Service (IRS), most of the unpaid taxes are the result of tax avoidance by the wealthy and large corporations. No less than 55 of America’s largest corporations paid no taxes last year on billions of dollars of profit.
A proposal now being negotiated in Congress, but opposed by conservative political groups, is to strengthen the IRS with an additional $80 billion, which is aimed at enforcing existing tax laws for large corporations and people earning more than $400,000 annually. The proposal is estimated to yield $700 billion in tax revenue over 10 years. In 2020, the budget of IRS declined to $12 billion from an inflation-adjusted $15 billion a decade ago.
In addition to reducing the unfairness of taxes, many Americans would like to see a less complex tax system. Many economists agree that making the tax code more straightforward, transparent and fair would help the economy. The IRS currently estimates that the country loses $1 trillion a year in unpaid taxes.
Concerns, dislike and complaints about taxes are nothing new, having been part of American society even before the country’s Declaration of Independence in 1776. With the slogan “no taxation without representation,” colonists in the 1760s protested British taxation policy, which eventually led to the American Revolution.
After its founding, the U.S. imposed import taxes, poll taxes and property taxes on land and commercial buildings. Nearly a century later during America’s Civil War, the U.S. levied income taxes in 1861 that lasted for about 10 years.
In 1913, the 16th Amendment legalized a federal income tax across America. Subsequently in the 1920s and 1930s, many of today’s taxes were established, such as Social Security, estate tax and gift tax, with Medicare and Medicaid established in 1965.
During fiscal 2019, the government collected $3.5 trillion in revenue or approximately 16 percent of gross domestic product (GDP). The IRS processed more than 240 million tax returns and forms and approximately 60 million taxpayers were assisted by calling or visiting an IRS office. During that fiscal year, the IRS also issued more than $736 billion in refunds.
The federal government receives tax revenues from five major sources. The largest source, 50 percent, is derived from individual income taxes. The second-largest source, 36 percent, comes from payroll taxes, which are largely designated for Social Security, Medicare and unemployment benefits.
Taxes on the profits of corporations account for about 7 percent of collected revenue. Excise taxes on certain goods and activities, such as gasoline, alcohol and gambling contribute 3 percent, with another 3 percent coming from customs duties and estate and gift taxes.
In fiscal 2019, the federal government spent $4.4 trillion, or about 21 percent of GDP. Approximately 23 percent, or $1 trillion, was for Social Security and about 25 percent, or $1.1 trillion, went to four health insurance programs, i.e., Medicare, Medicaid, Children’s Health Insurance Program and Affordable Care Act.
Defense and international security received 16 percent of the budget, 8 percent went to safety net programs and 8 percent went to interest on the debt. The remaining 20 percent of the federal budget went to other public expenditures, including benefits for federal retirees and veterans, transportation and infrastructure, education, and science and medical research.
The Biden Administration is now negotiating to increase the federal budget to approximately $6 trillion. The funds are aimed at upgrading the country’s infrastructure and expanding the social safety net.
By and large, the U.S. federal tax code is progressive. Higher-income taxpayers pay a larger share of their income in taxes. However, there are various loopholes and methods to avoid paying taxes.
In addition, tax rates differ considerably according to the income source. Ordinary earned income is taxed at a much higher rate than income from dividends and investments. Consequently, the tax code’s favorable treatment of dividends and capital gains benefits those growing their wealth mainly through investment who pay comparatively little tax.
For example, while the median U.S. household earning about $70,000 paid 14 percent in federal taxes annually, the 25 richest Americans paid a true tax rate of approximately 3 percent on wealth growth of $400 billion between 2014 and 2018. The true tax rate was even lower for some billionaires such as Bezos and Buffet, at 0.10 percent and 0.98 percent, respectively, during that period.
It’s widely recognized that the U.S. federal tax code is complex, labyrinthine and interminable. The tax code, or Title 26 of laws that the IRS enforces, involves no less than 2,600 pages or well over 1 million words. Much of the tax code law, however, also involves IRS regulations, revenue rulings, clarifications, court decisions, notations and other information that together amount to a compilation of 70,000 pages.
Most Americans would like the U.S. tax code to be much simpler and understandable with less byzantine loopholes, shrewd tax shelters and devious mechanisms for tax avoidance, which especially favor the wealthy.
Also very importantly, Americans would like a tax system that is fair with large corporations and wealthy individuals paying their fair share of tax responsibilities, which is unquestionably not the case today in America.
Joseph Chamie is a consulting demographer, a former director of the United Nations Population Division and author of numerous publications on population issues, including his recent book, "Births, Deaths, Migrations and Other Important Population Matters."