As we celebrate the 246th anniversary of our great country tomorrow, I thought I would explain current tax theory, the historic role that taxes have played in shaping our country, and the regulatory excesses and abuses that I have witnessed for the past 40 years.
Should citizens of the United States expect to be treated ethically and fairly by all government agencies, including the Internal Revenue Service (IRS)? The US tax code was developed after the 16th Amendment was ratified in 1913 (permanently amending the US Constitution). It has been amended several times, with the most recent major revision being the Tax Cuts and Jobs Act 2017. Every change to the tax code has been passed by the House and Senate and signed by the president; it is the law of the land.
Therefore, it must be studied, understood and followed. However, in my 40 years of experience in the US tax field, I have observed that the IRS is the worst abuse of the tax code.
In this series of articles, I will provide facts and cases that support this premise. In part two, I will discuss several sections (topics) of the tax code where the IRS distorts the common understanding of the wording of a section of the code to deny tax breaks deliberately put into the tax code by Congress.
Before continuing, I would like to give you a brief overview of taxation.
Taxes in a nutshell
- Taxes have been collected by governments for millennia.
- Taxes fund governments.
- There are no natural laws regarding taxes.
- Governments can choose to tax anything.
- However, tax payers should collect the tax: 1) is not excessive in amount, 2) efficient in collection, and 3) not arbitrary.
- The basic tenets of modern tax theory include the following (of which Adam Smith developed the first four):
- Equity: Tax should be proportional to income.
- Capacity (Certainty): The taxpayer must be able to calculate simply and with certainty the tax he is required to pay.
- Convenience: The time and manner of payment of tax must be convenient for the taxpayer.
- Economy (Efficiency): Taxes should not be imposed if the cost of collecting them is excessive. The cost of tax collection must be efficient.
- Neutrality: A tax should apply to everyone and not favor a certain group, race, political party, etc.
- Means of payment : Taxes should only be due when the taxpayer has the cash to pay the tax.
- Clarity (Transparency): Tax regulations would be clear, simple and unambiguous. They should be understood by the taxpayer and the administrator alike.
Our ancestors chose to revolt against the 18th century superpower, Britain, rather than continue to suffer taxes and attacks on their rights as free men and women. Below is a list of laws (taxes) imposed by Britain on colonial Americans before the Revolutionary War.
- 1733 Molasses Act, which established a trade barrier to protect British exports from the West Indies to the American colonies.
- 1751 Currency Act, which prohibited the issuance of letters of credit by the New England colonies to ensure that British merchants received the full value of payment of their debts.
- 1764 Sugar Act, which amended the Molasses Act by increasing duties on imported molasses. More importantly, it was strictly enforced.
- 1765 Stamp Act, which required the purchase of stamps (duties) on 55 different public documents. This law was considered the first time that a tax was imposed simply to raise funds. The opposition was widespread because it represented an attack on the rights of the settlers.
- 1766 Quartering Act, which required local governments to lodge and feed British soldiers in American barracks and public houses.
- The Declaratory Act of 1766, which passed concurrently with the Stamp Act, was repealed. He stated that the colonies were dependent on the Crown and that Parliament had the power to pass laws which applied to the colonies.
- 1767 Townshend Act, named after Charles Townshend, the Chancellor of the Exchequer. The law imposed duties on 72 different items, including tea, paint and paper. The revenue generated by this act was used to support colonial officers and administrative staff, loyal to the Crown. Protests against this law led to the Boston Massacre.
- 1773 Tea Act, which grants the East India Company a monopoly on the importation and distribution of tea in the colonies. This doubled the price of tea and harmed the economic interests of shippers and traders. On 12/16/1773, colonial patriots disguised as Native Americans dumped 342 containers of tea into Boston Harbor.
- The Intolerable Acts of 1774, also called Coercive Acts, were a retaliatory response to economic loss resulting from the Boston Tea Party. The Intolerable Acts were a set of five statutes: 1) Boston Port Act (a British blockade closed Boston Harbor), 2) Massachusetts Government Act (the colony’s charter was revoked and replaced by a royal governor), 3 ) Administrative Justice Act, 4) Quartering Act (settlers were required to provide accommodation, food and drink to British troops. Often this meant that landlords were forced to vacate their comfortable homes under threat of a gun and move into the barn.), and 5) the Quebec Act.
In response to the cruel British punishment of the Boston colonists, the First Continental Congress met in Philadelphia from September 5 to October 26, 1774. Initially, the purpose of the First Congress was to impress upon Parliament their grievances, to have repealed many laws and gave the colonists representation in Parliament.
This is part of an ongoing series.
Aric Schreiner, CPA, PFS, Certified Tax Strategist, helps successful professionals and small business owners develop strategies to reduce tax and audit risk.