Tax experts discuss income tax law, loopholes and policy proposals.
This is how much President Donald J. Trump reportedly paid in federal income taxes each year in 2016 and 2017. Americans with adjusted gross income – the amount of money a person makes through wages, dividends, capital gains, and other sources minus certain deductions – of around $ 25,000 typically pay more income taxes than President Trump over those two years.
How can someone who claims to be worth $ 8.7 billion pay just $ 750 in federal income taxes?
Taxation occurs when an authorized agency, usually the government, charges an involuntary fee to raise money. The United States has federal, state, and local taxes. As a tax policy organization notes, taxes generally fall into three categories: “Taxes on what you make, taxes on what you buy, and taxes on what you own.”
Federal income tax, as the name suggests, is a federal tax on the income that individuals earn. The federal government derives its general tax authority from Article 1, Section 8 of the US Constitution, which states, “Congress has the authority to collect and collect taxes.” The 16th Amendment, ratified in 1913, further consolidates the power to tax income by giving Congress the “power to collect and levy taxes on income from whatever source.”
Congress has delegated much of its powers to administer tax laws to the Internal Revenue Service (IRS). In 1862, Congress established what Americans now know as the IRS to raise funds for the American Civil War. Since then, the income tax rates have fluctuated among different administrations. The Tax Cuts and Jobs Act of 2017, the latest in a litany of US tax law, “helped lower the tax rate for the 400 richest households below that for almost everyone else.”
This recent tax cut, as well as numerous loopholes that allow exemption from otherwise taxable income, have allowed people like President Trump to significantly reduce their tax obligations.
Critics point to this apparent inequality as yet another failure in America’s broken tax system. Although certain taxpayers may continue to boast of being “smart” in taking advantage of tax laws, some economists are pushing for a more progressive tax system – one where higher earners pay a higher rate of tax – along with increased enforcement of tax violations Control justice can contribute to the “remedy”. “
In this week’s Saturday seminar, the academics will discuss income tax law and proposals for changing an imperfect system.
- “America taxes wages, not wealth,” writes Edward McCaffery of the University of Southern California’s Gould School of Law in the Indiana Law Journal. McCaffery notes that this distinction between wages and wealth has enabled the savvy rich, who technically generate little to no annual income, avoid paying income taxes. New tax proposals from politicians like US Representative Alexandria Ocasio-Cortez (DN.Y.) and US Senator Elizabeth Warren (D-Mass.) Represent steps in the right direction, but always emphasize the distinction between wages and wealth not yet fully argued on. Instead, McCaffery is pushing for the current income tax structure to be replaced with an expenditure tax that “taxes people on what they spend, whether financed by wages or property.”
- A wealth tax would apply to all of a person’s wealth, including bank accounts, stocks, and luxury goods. Some critics argue that such a tax would be unconstitutional because it is a direct tax. All non-income direct taxes must be shared on the basis of the state’s population. The federal government cannot collect them directly from the taxpayer. However, Calvin H. Johnson of the University of Texas at the Austin School of Law argues that property taxes are not direct taxes and are exempt from the obligation to share. He explains that “wealth taxes were once considered direct taxes” because it was believed that wealth was “equal among states”. Since this assumption is no longer correct, Johnson argues that the founders’ definition of direct tax does not cover modern wealth tax. Like an import tax, the constitution allows the federal government to impose a property tax without apportioning, suggests Johnson.
- The tax reform debate focuses too much on economics and too little on promoting justice, argues James R. Repetti of Boston College Law School in an article published in the Florida Tax Review. Repetti advocates progressive tax structures that introduce a higher tax rate for wealthier people and a lower tax rate for poorer people in order to eradicate wealth inequality. Progressive tax systems promote democracy by “ensuring that the voice of the poor is not completely obscured by the rich,” claims Repetti.
- In an article published in the Houston Law Review, Heather M. Field of the University of California’s Hastings College of Law claims that the term “tax gap” describes a wide and varied range of regulations. Field fears that the lack of precision is tarnishing the discourse on tax policy. Rather than trying to define the term more precisely, Field argues that the true meaning of the “tax gap” could be revealed by identifying the normative policy objection and the individuals blamed for the problem. Understanding the contextual meaning of “tax loophole” can enable meaningful discussions about tax reforms.
- Most of the important regulations are subject to a central review by the Office of Administration and Budget (OMB) before they are implemented. However, tax regulations are not subject to this review, explains Clinton G. Wallace of the University of South Carolina School of Law. In an article published in the Alabama Law Review, he advocates requiring an OMB review for certain categories of tax rules. For example, if a regulation provides for private tax revenue for public use, Wallace recommends that OMB review the agency’s estimate of how much revenue the regulation would generate. This review would ensure that the Agency is properly implementing the measures intended by Congress when it gave the Agency the power to issue the regulation.
- Taxpayers use the IRS Form 1040 for personal income tax returns. Jay Soled, a tax professor at Rutgers University, and Kathleen DeLaney Thomas, director of the UNC School of Law Tax Institute, discuss in an article in the Boston College Law Review how 1040 forms are almost always filled out by tax filers or software companies. Both operate under “low supervision,” according to the authors, allowing the tax preparation services to exploit the gap between the goal of Congress to maximize tax revenues and the efforts of tax preparers to minimize their clients’ tax obligations. To fill this tax loophole and improve tax compliance, Soled and Thomas believe that Congress should improve oversight of both types of tax advisor.