It was all over the news Tuesday that Tom Daschle had announced he “neglected” to pay nearly $150K in Federal income taxes, but he was sorry. He was still in the running for Health and Human Services Secretary, and still had the support of our new president, Barack Obama. Yesterday he announced he is bowing out of the running, citing concern over perceived integrity issues surrounding the tax questions. I don’t know a lot about Sen. Dashle, his policies, or his past, but I’m willing to say I highly doubt he is fully at blame for this situation.
Anyone who knows anything about taxes knows that the tax code is so confusing that unless you’re filing a 1040EZ form, you need to use a professional service or product in order to make sure it is OK. Some of us are just above the “EZ” level and simple do-it-yourself options like Turbotax suffice. Others, and I believe Daschle would fall into this category, really have no choice but to use a good CPA to make sure they are doing everything by the book.
I’m going to go out on a limb here and assume there was no intentional deception on the part of Daschle and it was in fact a legitimate oversight. With that said, that tells me there are 2 parts to the problem here. First of all, his CPA was incompetent. A CPA worth their weight in salt would have been asking enough questions of him to catch this mistake before they were filed, or at least long before it reached the $150K point. I think he could have saved himself by pointing this fact out. “I’m sorry, my CPA made a gross mistake. I trusted their professional opinion and they unintentionally misled me. I’ve paid the back taxes and subsequent penalties owed, and will be having my completed tax return reviewed by a 2nd CPA before filing from now on to make sure this never happens again.” No harm, no foul, and he’d probably already be confirmed as HHS Secretary by now.
Whether or not it was a mistake by the CPA, this does expose a very large problem with our tax system today: its horribly overcomplicated. If a CPA doesn’t know whether use of a car is a gift or considered income, when it is their sole job to know, we have a problem. Americans spend an estimated $300 Billion dollars per year on tax preparation services of some sort, and this does not include the cost to keep the IRS in place to monitor and enforce the tax rules. How much more money could Americans and American Corporations save if they could keep and invest this otherwise wasted money?
This is one of the reasons I’m a big proponent of the Fair Tax. In a nutshell, the Fair Tax system eliminates the income tax system and implements an across-the-board Federal sales tax. Calculations show that the tax rate would be in the 30% range, which would keep about the same revenue going to the government, and keep people’s tax liability roughly the same. Talk about simple! No more keeping shoeboxes full of receipts to sort through. No more IRS audits to see that you claimed an extra $50 in deductions that you weren’t entitled to. Did you buy groceries today? You paid your taxes. Did you buy that new vacuum sealer for your business? Your taxes are paid.
Under the current proposed Fair Tax, every person in the country with a social security number would receive a “prebate” for all taxes paid up to the poverty level. This means low income families would effectively not be taxed at all, which is how it works today for the most part. Any money spent above and beyond the poverty level would all be taxed at the same rate, meaning “the rich” will be paying exactly the same tax rate that the “middle class” families do. It is simply a fair way to do it.
Another huge advantage to the fair tax is there would be no more tax on savings and investment! This has phenomenal result. Since only spending would be taxed, any money placed into savings and into investments would grow completely tax free. It will also mean you can invest more too. If you make $40K and are taxed at say 20% if you have enough deductions, you have $32,000 after taxes are paid. If you spend $30K, that will leave only $2,000 to invest. Under the fair tax, if you spend that same $30,000 you would have $10,000 left to invest. I understand that you would probably spend more than $30,000 due to the increased sales tax, but it would make it easy for people to see where that money is going and would encourage them to save rather than spend. That $7 fast-food cheeseburger meal looks a lot less appetizing when you know you’re going to have to spend over $9.50 by the time federal and state sales tax is added. The old TV may last a bit longer when the $1,000 replacement will now be over $1,300. It is what is already happening, except it moves the tax visibility to the cash register receipt rather than seeing a number on the pay stub.
I believe if the Fair Tax were in place, we wouldn’t have all of the controversial “tax oversights” by people in the spotlight.