By most accounts, Americans are more distrustful of big everything: big government, big business and the big IRS. Is it justified? Are we just scapegoating because we can? Are we more aware of Americans’ discontent with government because social media makes it easy to complain?

Private companies have been reengineering their process flow, reducing cost, becoming leaner and meaner over the last twenty years. Has our government? That’s up for debate.

One thing you can count on: the IRS will be restructured in our lifetime. Considering the mountain of discontent, this change may happen soon.

There are those who desire to repeal the 16^th Amendment, which gave Congress the power to “lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” Some suggest a flat tax. Others believe the IRS should be abolished altogether and replaced with a national sales tax. Still others want a negative income tax.

Americans want change. Should we be careful what we wish for? Here are some pros and cons of the alternatives
getting the most airplay.

Flat Tax

Proponents of the flat tax system claim that it would do away with the complicated tax code and tax forms. Using one form, you would add your income (pension, salary, other income) and pay 17% on the sum. Deductions and credits would be eliminated under this plan. Opponents of the flat tax system claim that it would favor the wealthy and could put a higher tax burden on those who earn less.

For example, person A makes $40,000 a year and would pay $6,800 in income taxes, leaving them with $33,200 of net income. A person making $250,000 would pay $42,500 in income taxes, leaving them with $207,500 of net income. There’s been discussion of establishing a taxable income floor so that individuals making less than a certain amount would not pay taxes.

National Sales Tax

Even more controversial than the flat tax rate is the idea of entirely repealing the 16^th amendment.

In place of an income tax, we would enact a national sales tax. President Bill Clinton pointed out one flaw in this system: it would leave the government without a steady flow of income. However, consumption is cyclical and can be forecasted, and the cost of collecting a national sales tax is much lower than the cost of the current income tax system. Thus, the government would have more disposable dollars after collections under national sales tax. Opponents of the national sales tax, like those opposing the flat tax, claim that it would put a heavier burden on the less wealthy. Additionally, they believe that for a national sales tax to be fair it would have to be applied to the purchase of stock and bonds. I can only imagine how the lobbyists for Wall Street would react to such a proposal.

Negative Income Tax

This idea, which was originally proposed by Milton Friedman, would do away with welfare and all government entitlement programs. This is essentially the flat tax system with a twist: you are allowed to utilize certain deductions against the tax, including a deduction for dependents. If your deductions total more than the total income you earn during the year, the government owes you all the taxes you paid during the year and a percentage of your negative income.

Opponents of this tax system claim that it is ripe for corruption because taxpayers have a major temptation to tweak their earnings to show negative income. Frankly, a similar temptation exists in today’s income tax system; if not, there would be no need for the IRS to conduct audits.

There are flaws in the current income tax system no one can deny. It is cumbersome, expensive, inefficient and ineffective. The current corporate tax rate of the United States, according to a study by the Tax Foundation in March 2011, was the second highest in the world behind only Japan (and Japan was planning on lowering their corporate tax rate). The current system costs billions of dollars to administer, and the average American cannot prepare his or her own return.

While our flawed tax system is not the only cause of our current financial woes, many believe fixing it would be good start. But what is the right solution? It’s probably some combination of the ideas presented above. Real bipartisan dialogue, which seems to be in short supply these days, is the first step.

Raul A. Garcia, CPA is an associate principal in the audit financial services department at Kaufman Rossin in Miami, Fla. He can be reached at rgarcia@kaufmanrossin.com.

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