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Einstein on taxes

Einstein on taxes

Posted: Monday, December 27, 2010 8:01 pm
By: Douglas Cohn and Eleanor Clift

By DOUGLAS COHN
and ELEANOR CLIFT
WASHINGTON — It was more than 55 years ago when Albert Einstein said, “The hardest thing in the world to understand is the income tax.” He was a brilliant man, and what he said then remains true today. Our tax code is full of complexities, and it has spurred whole industries of lobbyists, tax preparers and lawyers to sort it out, exploit it, and evade it.
Politicians periodically vow to overhaul the tax code, and tinkering occurs to a limited extent all the time, mostly to benefit special interests and people at the higher end of the income scale. Jimmy Carter campaigned in 1976 on reforming the tax system, standing before a stack of books that he claimed was the tax code to illustrate how complicated and full of loopholes it had become.
President Carter didn’t get far with his reform plan, but President Reagan picked up the cudgel, and in 1986 the Reagan administration working with Democratic Senator Bill Bradley, enacted a substantial overhaul.
Tax rates were dramatically lowered in exchange for closing a number of loopholes that wealthier taxpayers had used to evade paying their fair share of taxes.
Everybody cheered the reforms, but that was almost 25 years ago, and an army of lobbyists have since inserted an array of new loopholes and tax dodges into the system. To make matters worse, the gap between the rich and the poor in America is greater today than at any time since the Robber Barons were accumulating their wealth in the early part of the 20th century.
The income tax came into being as a result of the 16th amendment in 1913, and it began as a millionaire’s tax, a way to address the disparity created by the Robber Barons. As the U.S. population grew, so did the federal government’s need for money to pay for wars, build infrastructure and provide social programs, and the income tax was a convenient way to collect funds.
It was meant to be a progressive tax, with the burden on people who earned the most, but it has become regressive because of the ability of higher earners to find ways to lower their tax burdens. Warren Buffett, one of the wealthiest men in the world, points out that his tax rate – the percentage of tax that he pays relative to his income – is lower than what his secretary pays on her earned wages. Unlike him, she pays for every tuna-fish sandwich she eats; there are no business-lunch deductions available to her.
That’s why Buffett has been among the leading voices calling for the end of the Bush-era tax cuts for people making over $200,000, and families making over $250,000. Republicans are not about to let that happen, and President Obama has agreed to a temporary extension in exchange for a variety of tax breaks that help the middle income earners, including a two percent reduction in the payroll tax, which affects working people.
Obama has joined Republicans in acknowledging the need for tax reform, and there is speculation that he will use his State of the Union address early next year to call for tax reform coupled with deficit reduction. The deficit commission that reported early this month proposed lowering tax rates on all income levels in exchange for closing some very lucrative loopholes, like the tax deduction on home mortgages.
Carter introduced that idea more than 30 years ago, and it was instantly rejected as waging war on the middle income earners. But that was before we had a class of super-wealthy people with multiple homes enjoying multiple deductions. The deficit commission suggested various ways of capping the deduction so that middle-income people with one home would still benefit without such a big giveaway to the rich. Sounds simple enough, but try to get it done, it’s more complicated than the Theory of Relativity, according to Albert Einstein.

Published in The Messenger 12.27.10

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