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The following are some very personal reflections and commentary about my perceptions of how politics and taxes are intertwined. Some people won't agree with my political views and won't want to hire me for that reason. That's why I'm making my views public.

I prefer not to work for people who ask me to help them to find tax loopholes while advocating a political attitude that fosters more government spending and hence more taxes.
 

I rarely have a new client who doesn't at some point complain about the many ways the tax system is so unfair.

And it is unfair in many ways.
 

It's unfair to married couples but it's even more unfair to those who are separated or those with spouses who are not residents or citizens of the US. It's unfair to those who don't have children. It's unfair to those who are employees, with respect to travel costs. But it's also unfair to the self employed with respect to medical costs and retirement savings. 

So when a new client complains about this unfairness, that leads to a discussion of the political aspects of taxes. I've concluded that our tax system is absolutely the most discriminatory set of laws in the history of mankind. The politicians feed on the opportunity to grant favors to people through our tax system. It's not about fairness, or simplicity or even about economics. It's only about politics.  It's about using the tax system to reward political supporters and contributors and to punish political enemies.

The members of the House Ways and Means Committee and the Senate Finance Committee receive huge campaign contributions and are greatly sought after for favors by the other members of Congress. If you enjoyed this kind of economic and political advantage, would you willingly give it up? 

All of this talk about a "flat tax" seems to ignore the underlying reality that the tax system is a marvelous political tool to reward your political friends and punish your political enemies. The politicians don't have any desire to really change the tax system so that it will be simple and fair. 

Another somewhat preposterous aspect of the talk about a flat tax is that much of this talk assumes that the level of total government spending is a constant and that any new system of taxes must collect the same amount of revenue. What's the point of changing the tax system if we continue to let the politicians drain almost 40% of our gross domestic product into the political system? It's my view that there is no serious possibility of a flat tax until there is some massive and permanent reduction in the level of government spending.

And from what I've been reading, it seems that the biggest three problems in the spending area are Social Security, Medicare and interest on the national debt. These are virtually untouchable by the politicians. So if these entitlements or obligations aren't going to be seriously cut back, there isn't much room left in the rest of the budget to reduce the level of spending. It seems to me that talking about changing the tax collection system without changing the spending process is a lot like trying to push toothpaste back into the tube or like trying to swim up a waterfall. 

But my biggest complaint about all the talk in favor of a flat income tax system is that these people apparently don't have a very good memory and they obviously don't understand the word "income". President Reagan cut the top personal income tax rate from 70% to 50% in 1981. Then, from 1986 to 1988, he cut the top rate from 50% to 33%. For a short while, we had a pretty simple rate structure with four tax rates. (1) Zero %. (2) 15%. (3) 28%. (4) 33%. Now we have six brackets, if you include the zero tax rate. 

I believe the real problem of the income tax system is that it's the worst kind of tax base one could adopt - if one were being logical. But if you have political motivations, it's the most ideal type of tax system. As an accountant, I can tell you that it's easy to get a bunch of accountants into a heated argument about the meaning of the word, "income". Income is affected by the method of accounting that is used to measure the change in value of assets and liabilities and the timing of those changes. In order to have a "true" measure of income, you need to determine the current value of every asset you own and the liquidation cost of every debt that you have. "Income" is essentially the difference between the net assets (assets minus debts) from the beginning of some time period to the end of the time period. 

What a nightmare! If you let the economists get into the argument, the level of noise and rancor increases enormously. Accountants and economists do not really agree with each other on a number of fundamental issues. 

What a marvelous opportunity for a greedy politician who wants to favor his friends and punish his political enemies. 

I don't believe there is any way to have a simple and fair income tax system because the problem is not the rate of the tax, but the elusive nature of the word "income". It can mean whatever the politicians want it to mean. 

I've been accused of having a vested interest in the present system of taxation because I make my living helping people to save taxes. I'll admit that if a truly dramatic change did occur, it would represent a change in my life and work. However, I don't have to work to pay the bills so I'd be delighted to spend more time on  my Offshore Press web site and working on the web site for Positive Lights. Inc. - a non profit organization dedicated to improving the care of the elderly in nursing homes and similar facilities. 

 Vern Jacobs 

 July 3, 2003

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Vernon  Jacobs, C.P.A.

Books and Services

by Vern Jacobs

Free Answers to Your International Tax Questions	The Jacobs Report
How To Go Offshore Without Getting in Trouble with the IRS
The 3rd Edition of the Controlled Foreign Corporation Tax Guide
	Asset Protection for Investors
Legal Ways to Save Taxes Offshore & Onshore
	How to Be Sure Your Assets Are Safe Offshore
Asset Protection from  The Litigation Epidemic
	The Online Wealth Protection Library
International Tax Compliance Group, LLC