Is there a good alternative to the current US tax system?
April 12, 2011 7:48 AM Subscribe
US Tax Reform Filter:
Our current system is too complex, and has way too many loopholes. What are some great alternatives to the current US tax system?
I'm no professional tax guy, or even a tax geek by any stretch of the imagination, but when I look at our current tax system from a 30,000 meter view I feel that it's outdated and could "easily" be changed to be simpler to implement, manage and certainly easier for citizens to "do their taxes" (assuming a new system wouldn't do away with the current norm). Oh, and of course make it harder to cheat the system.
So, that being said what are the logical arguments against doing away with our current tax system (income, land, sales, ...) and having only a Flat Tax across all income higher than x $s? How about just a Consumption Tax? How about a mixture of the two (high consumption with low income. low consumption with high income). How about other options? Is land tax a dinosaur?
I'm absolutely convinced we can have a fair tax law. "fair" of course is up to your own definition :D
I'm no professional tax guy, or even a tax geek by any stretch of the imagination, but when I look at our current tax system from a 30,000 meter view I feel that it's outdated and could "easily" be changed to be simpler to implement, manage and certainly easier for citizens to "do their taxes" (assuming a new system wouldn't do away with the current norm). Oh, and of course make it harder to cheat the system.
So, that being said what are the logical arguments against doing away with our current tax system (income, land, sales, ...) and having only a Flat Tax across all income higher than x $s? How about just a Consumption Tax? How about a mixture of the two (high consumption with low income. low consumption with high income). How about other options? Is land tax a dinosaur?
I'm absolutely convinced we can have a fair tax law. "fair" of course is up to your own definition :D
Best answer: oh you don't even need to make that big of a change - just eliminate every single deduction (including mortgage interest) and lower the tax rates to keep the whole thing revenue neutral. Make the brackets more progressive, eliminate the cap on SS contributions (those should probably be progressive as well), means test SS benefits. Done. Capital Gains taxes I'm not quite sure what the answer is, but they need to be fixed as well. Eliminate the AMT.
Flat taxes, and anything other than insanely complex consumption taxes (the rich save a greater % of their income) are just terribly regressive and unfair.
posted by JPD at 7:53 AM on April 12, 2011 [3 favorites]
Flat taxes, and anything other than insanely complex consumption taxes (the rich save a greater % of their income) are just terribly regressive and unfair.
posted by JPD at 7:53 AM on April 12, 2011 [3 favorites]
I'm absolutely convinced we can have a fair tax law.
You are convinced it is possible to have one? Or are you convinced that you have some solution to the political process in which every special interest lobbies to have changes made to the tax law in its benefit? Because the reason we have the crazy tax law is due to our representative politics. No offense, but your question is not well defined. There are many possible alternatives for some definition of fair or great; there are few that could be practically implemented.
posted by procrastination at 7:59 AM on April 12, 2011
You are convinced it is possible to have one? Or are you convinced that you have some solution to the political process in which every special interest lobbies to have changes made to the tax law in its benefit? Because the reason we have the crazy tax law is due to our representative politics. No offense, but your question is not well defined. There are many possible alternatives for some definition of fair or great; there are few that could be practically implemented.
posted by procrastination at 7:59 AM on April 12, 2011
what are the logical arguments against ... having only a Flat Tax across all income higher than x $s
The problem with a flat tax is that it fails to take into account two things:
1. The utility of money is not linear.
2. The utility of government services is not linear.
As to the first point: psychology and economics tell us that, for example, $100,000 is worth far more to someone who has nothing than to someone who already has a billion dollars. So, it's okay for marginal tax rates to go up as a person's income increases. The higher percentage is offset by the diminishing utility of increased income.
As to the second point: the public goods and services provided by government (e.g. defense, health care, infrastructure, financial regulations, the court system, police) are worth far more to someone who has a lot than to someone who has very little. As you have more to lose, the value of these protections go up. Therefore it is reasonable to expect the wealthy to pay a larger proportional share of the cost because they derive more proportional utility from the public goods and services.
How about just a Consumption Tax?
If you live paycheck to paycheck you consume everything you earn. The wealthy, by contrast, save and invest much more of their income. Also, the poor spend all of their money domestically, whereas the rich often consume abroad. So a consumption tax disproportionately places the burden on the poor, counter to the principles discussed above, and the rich can avoid it by taking vacations to cheaper places around the globle.
posted by jedicus at 8:00 AM on April 12, 2011 [15 favorites]
The problem with a flat tax is that it fails to take into account two things:
1. The utility of money is not linear.
2. The utility of government services is not linear.
As to the first point: psychology and economics tell us that, for example, $100,000 is worth far more to someone who has nothing than to someone who already has a billion dollars. So, it's okay for marginal tax rates to go up as a person's income increases. The higher percentage is offset by the diminishing utility of increased income.
As to the second point: the public goods and services provided by government (e.g. defense, health care, infrastructure, financial regulations, the court system, police) are worth far more to someone who has a lot than to someone who has very little. As you have more to lose, the value of these protections go up. Therefore it is reasonable to expect the wealthy to pay a larger proportional share of the cost because they derive more proportional utility from the public goods and services.
How about just a Consumption Tax?
If you live paycheck to paycheck you consume everything you earn. The wealthy, by contrast, save and invest much more of their income. Also, the poor spend all of their money domestically, whereas the rich often consume abroad. So a consumption tax disproportionately places the burden on the poor, counter to the principles discussed above, and the rich can avoid it by taking vacations to cheaper places around the globle.
posted by jedicus at 8:00 AM on April 12, 2011 [15 favorites]
Best answer: The government's ability to define things as deductible allows them to steer society in the direction of certain types of behavior. They think it's better for people to own their own homes, so they create a deduction for mortgage payments, which makes it more attractive to take out a mortgage and buy a home, which results in higher home ownership rates among the population. You also get 'steered' towards saving for retirement, saving for children's college education, and getting married. I don't know if all this is good or bad, but it does seem to be a major part of our tax system, totally separate from the question of simply raising money for the government's needs.
posted by Paquda at 8:02 AM on April 12, 2011 [2 favorites]
posted by Paquda at 8:02 AM on April 12, 2011 [2 favorites]
Best answer: I should add that progressive taxation (i.e. multiple brackets) is not the reason our tax system is so complicated. The formulas are fairly simple and manual computation can be avoided entirely by either using tax preparation software or allowing the IRS to pre-calculate everything (which the tax prep companies strenuously oppose for purely selfish reasons).
Our tax system is primarily complicated because of the gigantic mess of deductions and credits that change every year and even within a given year. Remove all of them except the personal exemption, slightly lower the rates to compensate, and everything becomes much, much simpler.
The policy levers provided by the deduction and credit system do allow the government to steer various behaviors, but doing so creates market distortions. If the government insists on guiding behavior that way, it would be simpler to hand out grants for desired behaviors. So for example, if the government wants to encourage home ownership it should just give homebuyers $X (perhaps once per lifetime or per Y years or whatever). If it wants to encourage people to purchase efficient cars, just give them money for it.
The credit and deduction system makes the tax system more complicated for everyone instead of only people interested in, e.g., buying a house or an efficient car. Everyone has to wade through tons of questions and instructions that likely don't apply to them.
posted by jedicus at 8:13 AM on April 12, 2011 [1 favorite]
Our tax system is primarily complicated because of the gigantic mess of deductions and credits that change every year and even within a given year. Remove all of them except the personal exemption, slightly lower the rates to compensate, and everything becomes much, much simpler.
The policy levers provided by the deduction and credit system do allow the government to steer various behaviors, but doing so creates market distortions. If the government insists on guiding behavior that way, it would be simpler to hand out grants for desired behaviors. So for example, if the government wants to encourage home ownership it should just give homebuyers $X (perhaps once per lifetime or per Y years or whatever). If it wants to encourage people to purchase efficient cars, just give them money for it.
The credit and deduction system makes the tax system more complicated for everyone instead of only people interested in, e.g., buying a house or an efficient car. Everyone has to wade through tons of questions and instructions that likely don't apply to them.
posted by jedicus at 8:13 AM on April 12, 2011 [1 favorite]
Response by poster:
You are convinced it is possible to have one? Or are you convinced that you have some solution to the political process in which every special interest lobbies to have changes made to the tax law in its benefit? Because the reason we have the crazy tax law is due to our representative politics. No offense, but your question is not well defined.
Like i said, I'm no expert, I'm just curious what options are out there, hence the question.
I absolutely agree that deductions are out of hand, I apologize for not bringing that up in the question.
posted by zombieApoc at 8:20 AM on April 12, 2011
You are convinced it is possible to have one? Or are you convinced that you have some solution to the political process in which every special interest lobbies to have changes made to the tax law in its benefit? Because the reason we have the crazy tax law is due to our representative politics. No offense, but your question is not well defined.
Like i said, I'm no expert, I'm just curious what options are out there, hence the question.
I absolutely agree that deductions are out of hand, I apologize for not bringing that up in the question.
posted by zombieApoc at 8:20 AM on April 12, 2011
So, that being said what are the logical arguments against doing away with our current tax system (income, land, sales, ...) and having only a Flat Tax across all income higher than x $s?
There isn't a logical argument for a flat tax percentage. The complexity of the tax system, if you've ever done your taxes, is not in the percentage-- that's just a quick calculation or a quick lookup on a table. The complexity of the tax system lies in determining what your "taxable income" is-- accounting for all of those deductions and adjustments to determine what the final amount you're taxed on is.
And even then, it's pretty simple. How could you simply the tax system for individuals? Everything should be done automatically-- your W2s and 1099s already get reported to the IRS. Have the mortgage holders report your deductible interest while recipients of charity report their donations to the IRS. Then the IRS sends you a tax form with everything already calculated and filled out. The taxpayer checks to make sure everything's accurate and signs on the dotted line.
For individuals, the system isn't that complex. The places where complexity is found are the places that retain tax lawyers. These are generally corporations, because our corporate tax system is designed to allow almost all "income" to be deducted (once again, back to the part where the complexity lies in the deductions, not the multitude of progressive rates).
posted by deanc at 8:20 AM on April 12, 2011 [1 favorite]
There isn't a logical argument for a flat tax percentage. The complexity of the tax system, if you've ever done your taxes, is not in the percentage-- that's just a quick calculation or a quick lookup on a table. The complexity of the tax system lies in determining what your "taxable income" is-- accounting for all of those deductions and adjustments to determine what the final amount you're taxed on is.
And even then, it's pretty simple. How could you simply the tax system for individuals? Everything should be done automatically-- your W2s and 1099s already get reported to the IRS. Have the mortgage holders report your deductible interest while recipients of charity report their donations to the IRS. Then the IRS sends you a tax form with everything already calculated and filled out. The taxpayer checks to make sure everything's accurate and signs on the dotted line.
For individuals, the system isn't that complex. The places where complexity is found are the places that retain tax lawyers. These are generally corporations, because our corporate tax system is designed to allow almost all "income" to be deducted (once again, back to the part where the complexity lies in the deductions, not the multitude of progressive rates).
posted by deanc at 8:20 AM on April 12, 2011 [1 favorite]
Best answer: when I look at our current tax system from a 30,000 meter view I feel that it's outdated and could "easily" be changed to be simpler to implement, manage and certainly easier for citizens to "do their taxes"
Even excluding state and local taxes, you are talking about 4 trillion dollars in yearly tax revenue. Any change is going to have an enormous impact. Just changing the current top marginal rate (which only affects a fraction of the tax revenue for a fraction of taxpayers) by a few percentage points can mean the difference between a balanced budget and billions of dollars in debt. A complete overhaul would be a massive, unprecedented change in the US. And when taxes are brought up as a political issue, it's almost always about the amount of taxes that any given person has to pay, and what those taxes are spent on, so compared to that ease of actually doing taxes is a minor detail. Most alternative tax schemes that are proposed use simpler than the current system as a selling point, but the actual reason they are proposed is to make more fundamental changes to how the tax system works.
So, that being said what are the logical arguments against doing away with our current tax system (income, land, sales, ...) and having only a Flat Tax across all income higher than x $s?
Again, aside from the fact that this will be a massive change that will affect all sorts of things, what really matters is how the actual system changes with such a flat tax. Let's assume that the US budget remains the same and this is just a new way to take in the same amount of revenue. That means that the overall tax burden on the US is the same. Most flat tax proposals I have seen involve some sort of credit system to exclude very low income households from most of their tax burden, but overall aren't as progressive as our current system. So the main impact would be that the middle class pays for a higher percentage of the overall tax burden. This is the direction that our current system has been going since Reagan so it is not much of a surprise, and the politicians who have suggested these sorts of flat tax schemes have been in line with that way of thinking. It would possible to design a flat tax system that keeps the system progressive, but I haven't seen one seriously proposed that has been that way.
How about just a Consumption Tax?
This one is a lot easier, wealthy people spend proportionally much less on consumables, so it will decrease their tax burden in proportion with everyone else considerably. And they would be able to adjust the amount they spend on taxable items a lot more easily than someone who has to spend most of their income on consumables to survive. So it would be extremely difficult to implement a purely consumption tax system and keep it as progressive as our current system is.
Long story short, most of the alternative tax systems that could realistically be implemented are mostly designed to shift more of the tax burden from the wealthy to everyone else.
posted by burnmp3s at 8:20 AM on April 12, 2011 [2 favorites]
Even excluding state and local taxes, you are talking about 4 trillion dollars in yearly tax revenue. Any change is going to have an enormous impact. Just changing the current top marginal rate (which only affects a fraction of the tax revenue for a fraction of taxpayers) by a few percentage points can mean the difference between a balanced budget and billions of dollars in debt. A complete overhaul would be a massive, unprecedented change in the US. And when taxes are brought up as a political issue, it's almost always about the amount of taxes that any given person has to pay, and what those taxes are spent on, so compared to that ease of actually doing taxes is a minor detail. Most alternative tax schemes that are proposed use simpler than the current system as a selling point, but the actual reason they are proposed is to make more fundamental changes to how the tax system works.
So, that being said what are the logical arguments against doing away with our current tax system (income, land, sales, ...) and having only a Flat Tax across all income higher than x $s?
Again, aside from the fact that this will be a massive change that will affect all sorts of things, what really matters is how the actual system changes with such a flat tax. Let's assume that the US budget remains the same and this is just a new way to take in the same amount of revenue. That means that the overall tax burden on the US is the same. Most flat tax proposals I have seen involve some sort of credit system to exclude very low income households from most of their tax burden, but overall aren't as progressive as our current system. So the main impact would be that the middle class pays for a higher percentage of the overall tax burden. This is the direction that our current system has been going since Reagan so it is not much of a surprise, and the politicians who have suggested these sorts of flat tax schemes have been in line with that way of thinking. It would possible to design a flat tax system that keeps the system progressive, but I haven't seen one seriously proposed that has been that way.
How about just a Consumption Tax?
This one is a lot easier, wealthy people spend proportionally much less on consumables, so it will decrease their tax burden in proportion with everyone else considerably. And they would be able to adjust the amount they spend on taxable items a lot more easily than someone who has to spend most of their income on consumables to survive. So it would be extremely difficult to implement a purely consumption tax system and keep it as progressive as our current system is.
Long story short, most of the alternative tax systems that could realistically be implemented are mostly designed to shift more of the tax burden from the wealthy to everyone else.
posted by burnmp3s at 8:20 AM on April 12, 2011 [2 favorites]
Having a variety of taxes makes it possible to relate tax revenue to particular sorts of behavior and pay costs associated with that behavior. Gasoline taxes are used to fund road repairs, so people who drive a lot, or who drive big, heavy vehicles, pay a larger share of road maintenance costs. Property taxes pay for services provided by your local municipality, etc. An oversimplified tax system would tend to disconnect behavior from associated costs, and thus facilitate a lot of individual choices that would be bad for the larger society.
posted by jon1270 at 8:22 AM on April 12, 2011 [3 favorites]
posted by jon1270 at 8:22 AM on April 12, 2011 [3 favorites]
Because we often want to tax income differently depending on how it was obtained. The most complicated pieces of taxation are keeping up with the basis for capital gains and business expenses. If you checked out the recent "how to pay no taxes" most of the loopholes centered on abusing those. The alternative to doing so is to tax business income as regular income, which makes is almost impossible to make money on many investments (cf gross receipts tax). Corporations and the existence of bankruptcy create a one-way flow of risk, and tax treatment is used to reduce abuses, ie, capital gains are taxed less than interest. Unearned income is taxed more than normal. As long as these kinds of distinctions exist the complex game of "hide where the money came from" will exist.
Asset taxes are complicated in that many assets are difficult to put a price on, and some are easy to hide.
Consumption taxes have the undesirable property of moving consumption outside your borders. They are difficult to calibrate without hurting the poor. Determination of who is an end user and needs to pay / collect tax turns out to be non-trivial.
posted by a robot made out of meat at 8:22 AM on April 12, 2011 [1 favorite]
Asset taxes are complicated in that many assets are difficult to put a price on, and some are easy to hide.
Consumption taxes have the undesirable property of moving consumption outside your borders. They are difficult to calibrate without hurting the poor. Determination of who is an end user and needs to pay / collect tax turns out to be non-trivial.
posted by a robot made out of meat at 8:22 AM on April 12, 2011 [1 favorite]
having only a Flat Tax across all income higher than x $s?
Brackets don't make taxes more complicated. Doing the calculation is trivial, and the complexity of cheating available is pretty small. Flat Tax advocacy is 100% about avoiding taxes on the rich. All the complexity is in deciding "what is income", which doesn't go away. This is discussed some in the wiki article you link.
posted by a robot made out of meat at 8:29 AM on April 12, 2011 [4 favorites]
Brackets don't make taxes more complicated. Doing the calculation is trivial, and the complexity of cheating available is pretty small. Flat Tax advocacy is 100% about avoiding taxes on the rich. All the complexity is in deciding "what is income", which doesn't go away. This is discussed some in the wiki article you link.
posted by a robot made out of meat at 8:29 AM on April 12, 2011 [4 favorites]
In 2008, Entrepreneur Magazine looked at two flat tax proposals that have enjoyed sustained political support. The magazine laid out a detailed analysis that concluded both would shift greater tax burden to the middle class.
In 1992, Jerry Brown ran in the presidential primaries against Bill Clinton, on a flat tax platform. He proposed to get tax returns down to a postcard. In 1996, it was Steve Forbes proposing flat tax while running for the Republican nomination. I remember both campaigns stirring serious mainstream debate about the merits of a national flat tax. You should be able to find a lot of articles from that period.
posted by nakedcodemonkey at 8:31 AM on April 12, 2011 [1 favorite]
In 1992, Jerry Brown ran in the presidential primaries against Bill Clinton, on a flat tax platform. He proposed to get tax returns down to a postcard. In 1996, it was Steve Forbes proposing flat tax while running for the Republican nomination. I remember both campaigns stirring serious mainstream debate about the merits of a national flat tax. You should be able to find a lot of articles from that period.
posted by nakedcodemonkey at 8:31 AM on April 12, 2011 [1 favorite]
Note that while deductions certainly help people lower their tax burden, there are several other methods for avoiding taxes. What it comes down to is that regardless of your definition of what an individual's tax liability is, there will always be people trying to change what this number works out to on paper. Looking closely at all of the loopholes out there might be a good place to start thinking about preventing them.
posted by kaytwo at 8:48 AM on April 12, 2011
posted by kaytwo at 8:48 AM on April 12, 2011
One of the reasons the deductions part is so insanely complicated is that while they are essentially the same thing as giving someone money, politicians can pretend that they are not spending money, so there's a strong temptation to use the tax code to encourage behaviors since it doesn't come with all the political baggage of cutting a government check.
posted by ghharr at 8:51 AM on April 12, 2011
posted by ghharr at 8:51 AM on April 12, 2011
Response by poster: Thanks for all the info. This is definitely a subject where I'm not well versed, so the links and insight is appreciated.
posted by zombieApoc at 8:57 AM on April 12, 2011
posted by zombieApoc at 8:57 AM on April 12, 2011
The first step to reforming the tax code is reforming campaign contributions and lobbying. So long as legislators (and the executive branch as well) are as beholden to major corporations as they currently are, they cannot be relied upon to propose ideas or revise the tax code in a way that's fair to the working and middle classes.
posted by aught at 9:29 AM on April 12, 2011 [2 favorites]
posted by aught at 9:29 AM on April 12, 2011 [2 favorites]
Best answer: A few major reasons against altering it to either VAT or flat tax is that taxation is used to accomplish:
Securing the interests of the state's weakest citizens
Influencing behavior (by encouraging/discouraging it via targeted taxes)
To the degree possible, redistribute wealth/income.
The last item is problematic. I maintain that while the poor and middle class may benefit most from public services for which they do not pay commensurately, they are the source of the upper class' wealth. The upper class is drastically benefitted from a stable, healthy society. Don't think so? Ask those in the French Revolution who had their heads lopped off.
Also the last item addresses the prevention of a permanent upper class via the inheritance/death tax. Hereditary wealth is just as bad as hereditary political power; dynasties progress through patches of incompetence and evil, and luck of birth is a poor basis for rewarding citizens for their efforts.
Unfortunately, the last few decades have seen a change in income and wealth stratification that is truly astounding. Rectifying this should (IMO) be the immediate short term project, followed later (much later) with a slower, more thorough, and gradual shift to a more optimum system. An optimum system should encourage activities that benefit the entire society (i.e., keeping jobs here), dealing with the fact that the first 100K is the most important 100K of income (that's an arbitrary number, btw), prevent and punish cheaters, and make abundant provision for society's weakest.
No one likes the 'special interests', of course. The definition is plastic, though, and is usually used to denigrate folks who get benefits other than the speaker gets.
Incidentally... Warren Buffet? Supports inheritance tax for the reasons above. So does Bill Gates. Ted Turner supports the latter reasons, and once observed that try as he could, he could only spend several million dollars a year.... there were only so many chances for travel and goods... so he spent his fortune on restoring prairie land and supporting the UN.
Rich folks are not all evil. They ARE disproportionately able to be heard, though, and therein lies the danger of catering to their every tax whim.
/rant
posted by FauxScot at 9:46 AM on April 12, 2011 [1 favorite]
Securing the interests of the state's weakest citizens
Influencing behavior (by encouraging/discouraging it via targeted taxes)
To the degree possible, redistribute wealth/income.
The last item is problematic. I maintain that while the poor and middle class may benefit most from public services for which they do not pay commensurately, they are the source of the upper class' wealth. The upper class is drastically benefitted from a stable, healthy society. Don't think so? Ask those in the French Revolution who had their heads lopped off.
Also the last item addresses the prevention of a permanent upper class via the inheritance/death tax. Hereditary wealth is just as bad as hereditary political power; dynasties progress through patches of incompetence and evil, and luck of birth is a poor basis for rewarding citizens for their efforts.
Unfortunately, the last few decades have seen a change in income and wealth stratification that is truly astounding. Rectifying this should (IMO) be the immediate short term project, followed later (much later) with a slower, more thorough, and gradual shift to a more optimum system. An optimum system should encourage activities that benefit the entire society (i.e., keeping jobs here), dealing with the fact that the first 100K is the most important 100K of income (that's an arbitrary number, btw), prevent and punish cheaters, and make abundant provision for society's weakest.
No one likes the 'special interests', of course. The definition is plastic, though, and is usually used to denigrate folks who get benefits other than the speaker gets.
Incidentally... Warren Buffet? Supports inheritance tax for the reasons above. So does Bill Gates. Ted Turner supports the latter reasons, and once observed that try as he could, he could only spend several million dollars a year.... there were only so many chances for travel and goods... so he spent his fortune on restoring prairie land and supporting the UN.
Rich folks are not all evil. They ARE disproportionately able to be heard, though, and therein lies the danger of catering to their every tax whim.
/rant
posted by FauxScot at 9:46 AM on April 12, 2011 [1 favorite]
I'm absolutely convinced we can have a fair tax law.
The notion of what is fair in taxation can depend upon the person being taxed, and that person's circumstance and spending habits, which is why there are so many competing tax schemes that are otherwise at odds with each other.
posted by Blazecock Pileon at 10:14 AM on April 12, 2011
The notion of what is fair in taxation can depend upon the person being taxed, and that person's circumstance and spending habits, which is why there are so many competing tax schemes that are otherwise at odds with each other.
posted by Blazecock Pileon at 10:14 AM on April 12, 2011
A flat tax and tax simplification are two entirely separate issues that have absolutely nothing to do with each other.
You can have a flat tax that is just a complicated as the present tax system with all the same complicated deductions from income. On the other hand, you could have the present progressive tax system with multiple tax brackets that could be completed on the back of a post card if you eliminated the complicated deduction rules.
The flat tax is a scam for lowering taxes on the rich under the deception that it is the only way to simplify taxes. The two issues are independent.
posted by JackFlash at 11:32 AM on April 12, 2011 [2 favorites]
You can have a flat tax that is just a complicated as the present tax system with all the same complicated deductions from income. On the other hand, you could have the present progressive tax system with multiple tax brackets that could be completed on the back of a post card if you eliminated the complicated deduction rules.
The flat tax is a scam for lowering taxes on the rich under the deception that it is the only way to simplify taxes. The two issues are independent.
posted by JackFlash at 11:32 AM on April 12, 2011 [2 favorites]
I have had similar discussions with some of my friends here in Germany about this very subject. Every now and then a German politician will give a stump speech where he proposes changing the income tax laws so that every citizen will be able to calculate his or her taxes on a beer coaster. The problems here are similar; you need to wade through all the mumbo jumbo to figure out what is deductible. And as you can imagine, the German penchant for rules and regulations can make this a bit frustrating.
There have been a few changes made in the past few years similar to what deanc mentioned above. I have to fill out a form with my name and a few details from the tax card I get back from my employer at the end of the year, including a code found on the card. I send in the form and based on this code, the proper deductions are made and I am sent a print out with all the numbers that I have to check. For most individuals it is not too difficult. For companies or freelance workers, it gets complicated.
There are 2 common things that are usually said when this subject comes up in my conversations with Germans.
1. Over 50% percent of all German literature is tax law. Probably an urban myth, but not hard to believe.
2. The German tax industry is so large, that if the German tax code were to be simplified, it would put so many people out of work. The tax industry and there lobbyists are very powerful and successful at convincing politicians that the tax system is just fine the way it is.
I can imagine their American counterparts are of a similar opinion.
posted by chillmost at 11:37 AM on April 12, 2011
There have been a few changes made in the past few years similar to what deanc mentioned above. I have to fill out a form with my name and a few details from the tax card I get back from my employer at the end of the year, including a code found on the card. I send in the form and based on this code, the proper deductions are made and I am sent a print out with all the numbers that I have to check. For most individuals it is not too difficult. For companies or freelance workers, it gets complicated.
There are 2 common things that are usually said when this subject comes up in my conversations with Germans.
1. Over 50% percent of all German literature is tax law. Probably an urban myth, but not hard to believe.
2. The German tax industry is so large, that if the German tax code were to be simplified, it would put so many people out of work. The tax industry and there lobbyists are very powerful and successful at convincing politicians that the tax system is just fine the way it is.
I can imagine their American counterparts are of a similar opinion.
posted by chillmost at 11:37 AM on April 12, 2011
Best answer: Long-winded answer here.
Any complication in the tax system, including all licenses, fees, fines and schedules at all levels of government, is unfair to poor and middle class because they have to spend time and/or money thinking about it. The rich just spend a small percentage of their income on a professional to not worry about it.
Taxes cause people two kinds of hesitancy: a) fear to try something because the tax law is unclear, b) fear to go above a certain level of income because deductions go away. The fear (a) can be removed by either spending productive time (read the Paperwork Reduction Act notices to estimate how much time is wasted), or by hiring accountants which effectively raises the tax rate by adding to the cost of taxes.
b) manifests itself in two ways and both are bad. It gives people an incentive to do less than they could. There's a donut between the phasing out of the Earned Income Tax Credit and the poverty line where, to some people, working more isn't worth it. This is a real disincentive with teeth that I have witnessed multiple times during my years as a tax preparer. The second manifestation is in the form of tax cheats. I don't need to explain this or how prevalent it is.
There are initiatives to reduce the mental cost of taxes on people who can't afford it, such as VITA. I support these efforts, but I also know that this does not eliminate the cost. The charity time and money spent preparing tax returns pro bono could be spent on other problems -- if the tax problem did not exist.
It's tempting to think that just a little complexity won't hurt anyone, but this isn't true. It can be hard to emphasize with people, but may help to remember that just five minutes could be the difference between someone thinking they have time to make another batch of bread or add a feature to software. It matters.
So, I favor absolutely dead simple tax systems, and the one I favor is for taxes to be collected by the county in a combination of sales tax and income tax, and then for each county to give to the state and the national government, and possibly cities, what is due. The dues at all levels would be based on an extremely simple chart with not more than 1-2 variables, possibly on a progressive scale but in a consistent way, that could fit on one form. The county would mail or post online a statement similar to current property tax statements, showing where all the money went.
This method would require people to deal with ONE source for everything. The rich would game residency, but that's no different than usual, and meanwhile, the rest of the country would not have to spend trillions of dollars of wasted money and time on our tax system as it does now.
tl;dr: Stop punishing the poor and middle class for the sins of the rich, and let the counties collect everything to reduce overhead by a ton.
posted by michaelh at 11:41 AM on April 12, 2011
Any complication in the tax system, including all licenses, fees, fines and schedules at all levels of government, is unfair to poor and middle class because they have to spend time and/or money thinking about it. The rich just spend a small percentage of their income on a professional to not worry about it.
Taxes cause people two kinds of hesitancy: a) fear to try something because the tax law is unclear, b) fear to go above a certain level of income because deductions go away. The fear (a) can be removed by either spending productive time (read the Paperwork Reduction Act notices to estimate how much time is wasted), or by hiring accountants which effectively raises the tax rate by adding to the cost of taxes.
b) manifests itself in two ways and both are bad. It gives people an incentive to do less than they could. There's a donut between the phasing out of the Earned Income Tax Credit and the poverty line where, to some people, working more isn't worth it. This is a real disincentive with teeth that I have witnessed multiple times during my years as a tax preparer. The second manifestation is in the form of tax cheats. I don't need to explain this or how prevalent it is.
There are initiatives to reduce the mental cost of taxes on people who can't afford it, such as VITA. I support these efforts, but I also know that this does not eliminate the cost. The charity time and money spent preparing tax returns pro bono could be spent on other problems -- if the tax problem did not exist.
It's tempting to think that just a little complexity won't hurt anyone, but this isn't true. It can be hard to emphasize with people, but may help to remember that just five minutes could be the difference between someone thinking they have time to make another batch of bread or add a feature to software. It matters.
So, I favor absolutely dead simple tax systems, and the one I favor is for taxes to be collected by the county in a combination of sales tax and income tax, and then for each county to give to the state and the national government, and possibly cities, what is due. The dues at all levels would be based on an extremely simple chart with not more than 1-2 variables, possibly on a progressive scale but in a consistent way, that could fit on one form. The county would mail or post online a statement similar to current property tax statements, showing where all the money went.
This method would require people to deal with ONE source for everything. The rich would game residency, but that's no different than usual, and meanwhile, the rest of the country would not have to spend trillions of dollars of wasted money and time on our tax system as it does now.
tl;dr: Stop punishing the poor and middle class for the sins of the rich, and let the counties collect everything to reduce overhead by a ton.
posted by michaelh at 11:41 AM on April 12, 2011
Never mind the policy - I am OK with a progressive tax. I am not OK with the insanely stupid method of reporting and collection. I did our taxes last night and I have more gray hairs this morning, even though a) we are getting a modest refund and b) our taxes are really simple. I am literate and numerate; I enjoy reading legal contracts and doing math as a hobby. What upsets me is that the tax forms are designed by monkeys.
For example, you can download the forms in PDF format - yay. The California forms are actually pretty good; not only do you fill them out in PDF form, but they have data validation and math functions built in, plus they have you do everything to the nearest dollar instead of pissing about with cents. They could be improved, but at least they are quick to fill out.
So why is the 1040 PDF form such a pain in the ass? There is no excuse. It doesn't even link out to the corresponding instructions file, so that every time I need to check something I have to search/scroll through the instructions. It doesn't perform any data validation or math - I have to tab manually from the dollar to the cents field, and type in $ and comma signs manually if I want to use them, or have strings of 54321 digits if not. While I do math with a calculator program in another window, and then have to look things up in tax tables.
For an even more stark illustration of IRS fail, open up the 1040 and 1040A forms. I thought I could use the 1040A at first, before remembering I needed the full thing. That's fine, but what's not fine is the lack of consistency between the two forms. Look at the first section, where you enter the taxpayer(s) name(s), address(es) and social security number(s). This should be the same for both forms. On the 1040A, the SSN field is spaced out with little brackets for each digit, such as: |9|8|7+6|5+4|3|2|1|. As you type in the number, it's automatically formatted correctly. On the 1040, it's just a text field, in which you can enter the SSN as 987654321 or 987-65-4321 or JohnSmith or (*&^%$#@!.
Now, the 1040A is a special, simplified case of the 1040. The basic information collected on each to identify the taxpayer is identical. And yet the forms are slightly different, with one formatting the information correctly and the other...not - even on this very, very simple first section. It's not due to any shortcoming in Adobe Acrobat, which is quite capable of handling modular documents built out of standard components (such as 'Taxpayer ID section,' or 'voluntary contribution section'). That's just idiotic, and it's a major contributor to Americans' annoyance with bureaucracy and generalized dislike of paying taxes. Billions and billions of dollars are lost to the economy and thus (indirectly) to the treasury every April by the time wasted on filling out poorly-designed forms which need an instruction book of over 100 pages. I like the IRS. They are nice people, in my experience. I made a mistake on my return last year and had to write them a check for $250, and when I spoke to them on the phone they were helpful and professional, and I felt fine about paying my taxes. I would have felt even better if their forms were properly designed such that the mistake could have been avoided in the first place.
This is one thing I'm very pissed with Obama about. When he ran for office he claimed he would make people's tax returns simple and understandable. I really wanted him to do that, not because I have difficulty doing my taxes but because I felt the Democratic party needed to make it easier for people to understand what they owe and where those taxes go, so that citizens would be more equal participants in the social contract. The back end of this has improved substantially thanks to things like data.gov, which I applaud. So why is giving information to the IRS such a tortuous process?
posted by anigbrowl at 12:11 PM on April 12, 2011
For example, you can download the forms in PDF format - yay. The California forms are actually pretty good; not only do you fill them out in PDF form, but they have data validation and math functions built in, plus they have you do everything to the nearest dollar instead of pissing about with cents. They could be improved, but at least they are quick to fill out.
So why is the 1040 PDF form such a pain in the ass? There is no excuse. It doesn't even link out to the corresponding instructions file, so that every time I need to check something I have to search/scroll through the instructions. It doesn't perform any data validation or math - I have to tab manually from the dollar to the cents field, and type in $ and comma signs manually if I want to use them, or have strings of 54321 digits if not. While I do math with a calculator program in another window, and then have to look things up in tax tables.
For an even more stark illustration of IRS fail, open up the 1040 and 1040A forms. I thought I could use the 1040A at first, before remembering I needed the full thing. That's fine, but what's not fine is the lack of consistency between the two forms. Look at the first section, where you enter the taxpayer(s) name(s), address(es) and social security number(s). This should be the same for both forms. On the 1040A, the SSN field is spaced out with little brackets for each digit, such as: |9|8|7+6|5+4|3|2|1|. As you type in the number, it's automatically formatted correctly. On the 1040, it's just a text field, in which you can enter the SSN as 987654321 or 987-65-4321 or JohnSmith or (*&^%$#@!.
Now, the 1040A is a special, simplified case of the 1040. The basic information collected on each to identify the taxpayer is identical. And yet the forms are slightly different, with one formatting the information correctly and the other...not - even on this very, very simple first section. It's not due to any shortcoming in Adobe Acrobat, which is quite capable of handling modular documents built out of standard components (such as 'Taxpayer ID section,' or 'voluntary contribution section'). That's just idiotic, and it's a major contributor to Americans' annoyance with bureaucracy and generalized dislike of paying taxes. Billions and billions of dollars are lost to the economy and thus (indirectly) to the treasury every April by the time wasted on filling out poorly-designed forms which need an instruction book of over 100 pages. I like the IRS. They are nice people, in my experience. I made a mistake on my return last year and had to write them a check for $250, and when I spoke to them on the phone they were helpful and professional, and I felt fine about paying my taxes. I would have felt even better if their forms were properly designed such that the mistake could have been avoided in the first place.
This is one thing I'm very pissed with Obama about. When he ran for office he claimed he would make people's tax returns simple and understandable. I really wanted him to do that, not because I have difficulty doing my taxes but because I felt the Democratic party needed to make it easier for people to understand what they owe and where those taxes go, so that citizens would be more equal participants in the social contract. The back end of this has improved substantially thanks to things like data.gov, which I applaud. So why is giving information to the IRS such a tortuous process?
posted by anigbrowl at 12:11 PM on April 12, 2011
Simple: Make property tax federal (or at least at State level). Reduce the multiple levels of taxation.
Additional ideas: Make deductions inversely proportional to income, meaning poor people get 100% of a deduction, reduced by 10% for every $10,000 you earn.
posted by blue_beetle at 12:32 PM on April 12, 2011
Additional ideas: Make deductions inversely proportional to income, meaning poor people get 100% of a deduction, reduced by 10% for every $10,000 you earn.
posted by blue_beetle at 12:32 PM on April 12, 2011
So why is giving information to the IRS such a tortuous process?
Because H&R Block, Jackson-Hewitt, and the rest of the tax prep companies spend millions of dollars lobbying Congress and the states to keep it that way. They have a vested, perverse interest in keeping the tax code and filing as complicated as possible, and they continue to fight to maintain their parasitic position.
Additional ideas: Make deductions inversely proportional to income
Lots of deductions already phase out with increasing income. The student loan interest deduction, for example. But I would argue that's actually another example of needless complexity. Instead, we should eliminate all of the phase outs and income limits for deductions, then slightly increase the marginal tax rates at the upper end to compensate. Or better, eliminate all of the deductions and slightly decrease rates across the board.
posted by jedicus at 12:43 PM on April 12, 2011
Because H&R Block, Jackson-Hewitt, and the rest of the tax prep companies spend millions of dollars lobbying Congress and the states to keep it that way. They have a vested, perverse interest in keeping the tax code and filing as complicated as possible, and they continue to fight to maintain their parasitic position.
Additional ideas: Make deductions inversely proportional to income
Lots of deductions already phase out with increasing income. The student loan interest deduction, for example. But I would argue that's actually another example of needless complexity. Instead, we should eliminate all of the phase outs and income limits for deductions, then slightly increase the marginal tax rates at the upper end to compensate. Or better, eliminate all of the deductions and slightly decrease rates across the board.
posted by jedicus at 12:43 PM on April 12, 2011
Any complication in the tax system . . . is unfair to poor and middle class because they have to spend time and/or money thinking about it.
Should have previewed, but this is exactly the problem. I do not mind paying taxes at all. I do mind the complexity of doing so, as does Mrs. Browl. We were going to just go to a tax preparer this year, but when I considered that the local H&R Block were going to charge ~$200 for something that I knew would only take a few hours, it just seemed wasteful, so I said I would take care of it.
The thing is, although our taxes are not-too-high, they are high enough that we don't get many of the deductions for lower incomes...and that actually makes the tax return simpler to fill out. If we earned less, then we would be entitled to more deductions/credits (good), but we would have to make more complex calculations in order to work out what those entitlements are (bad). So it's worthwhile to use a tax preparation service if you earn a lot, and also if you earn less (in order to get all the deductions you're entitled to) - but for the people who earn less, the tax preparer's fee represents a much higher slice of the person's earning.
Because H&R Block, Jackson-Hewitt, and the rest of the tax prep companies spend millions of dollars lobbying Congress and the states to keep it that way.
I was kind of thinking that, but thought it perhaps too cynical! All the same, how does that prevent the IRS from (say) editing its own PDF forms properly? Even if the tax code is complex, the IRS seems to be multiplying avoidable inefficiencies (eg the inconsistent form design). I'm willing to be corrected, but surely Congress doesn't mandate 'thou shalt make the forms as inconsistent and awkward as possible, and eschew the use of any functionality that might assist the taxpayer'?
posted by anigbrowl at 12:50 PM on April 12, 2011
Should have previewed, but this is exactly the problem. I do not mind paying taxes at all. I do mind the complexity of doing so, as does Mrs. Browl. We were going to just go to a tax preparer this year, but when I considered that the local H&R Block were going to charge ~$200 for something that I knew would only take a few hours, it just seemed wasteful, so I said I would take care of it.
The thing is, although our taxes are not-too-high, they are high enough that we don't get many of the deductions for lower incomes...and that actually makes the tax return simpler to fill out. If we earned less, then we would be entitled to more deductions/credits (good), but we would have to make more complex calculations in order to work out what those entitlements are (bad). So it's worthwhile to use a tax preparation service if you earn a lot, and also if you earn less (in order to get all the deductions you're entitled to) - but for the people who earn less, the tax preparer's fee represents a much higher slice of the person's earning.
Because H&R Block, Jackson-Hewitt, and the rest of the tax prep companies spend millions of dollars lobbying Congress and the states to keep it that way.
I was kind of thinking that, but thought it perhaps too cynical! All the same, how does that prevent the IRS from (say) editing its own PDF forms properly? Even if the tax code is complex, the IRS seems to be multiplying avoidable inefficiencies (eg the inconsistent form design). I'm willing to be corrected, but surely Congress doesn't mandate 'thou shalt make the forms as inconsistent and awkward as possible, and eschew the use of any functionality that might assist the taxpayer'?
posted by anigbrowl at 12:50 PM on April 12, 2011
I'm willing to be corrected, but surely Congress doesn't mandate 'thou shalt make the forms as inconsistent and awkward as possible, and eschew the use of any functionality that might assist the taxpayer'?
No, but Congress can fail to give the IRS the budget and discretion to implement reforms.
The also-heavily-lobbied executive branch can expressly direct the IRS to maintain the unfortunate status quo. The examples I have handy aren't about tax forms, but for example Bush II fired 157 (out of 345) gift & estate tax auditors and directed the IRS to scale back corporate tax audits. It would be very easy for an administration to hamper tax filing reform efforts through workforce changes and outright policy.
posted by jedicus at 1:05 PM on April 12, 2011 [1 favorite]
No, but Congress can fail to give the IRS the budget and discretion to implement reforms.
The also-heavily-lobbied executive branch can expressly direct the IRS to maintain the unfortunate status quo. The examples I have handy aren't about tax forms, but for example Bush II fired 157 (out of 345) gift & estate tax auditors and directed the IRS to scale back corporate tax audits. It would be very easy for an administration to hamper tax filing reform efforts through workforce changes and outright policy.
posted by jedicus at 1:05 PM on April 12, 2011 [1 favorite]
Maybe the US tax system is too friggin' complicated or maybe it just needs to be that way to cope with the nuances of contemporary life. But here's an alternative: the Estonian tax code is I think about 70 pages long in toto.
posted by londongeezer at 4:01 PM on April 12, 2011
posted by londongeezer at 4:01 PM on April 12, 2011
As to the second point: the public goods and services provided by government (e.g. defense, health care, infrastructure, financial regulations, the court system, police) are worth far more to someone who has a lot than to someone who has very little. As you have more to lose, the value of these protections go up. Therefore it is reasonable to expect the wealthy to pay a larger proportional share of the cost because they derive more proportional utility from the public goods and services.
While this theory is correct from one perspective, it is dead wrong from the other.
If you look at the big picture; the macro-level flow of dollars, the big ticket items are things like medicare, medicaid, unemployment insurance, social security. The rich don't really need those things, they can get along just fine without them. But the "rich" do foot a greater proportion of those bills than the poor. Does having a stable society benefit the rich? Yes. But it benefits the poor so much more, since it often literally means the difference between life and death, or at least the difference between "poor" and abject poverty. Maybe the ROI on Mr. Moneybags' investments is higher because of those institutions, but being able to eat, pay the rent and get some kind of healthcare when you haven't got the money is worth a lot more.
The problem isn't the tax code, the problem is in perception. The poor think that the rich are stealing from them, the rich think that if it just wasn't for NPR and "welfare queens" everything would be awesome, and the middle class thinks that both sides are screwing them. Politics loves simple answers, but figuring out how to fund a government serving 300 million people is not simple and it never will be.
posted by gjc at 8:19 AM on April 13, 2011
While this theory is correct from one perspective, it is dead wrong from the other.
If you look at the big picture; the macro-level flow of dollars, the big ticket items are things like medicare, medicaid, unemployment insurance, social security. The rich don't really need those things, they can get along just fine without them. But the "rich" do foot a greater proportion of those bills than the poor. Does having a stable society benefit the rich? Yes. But it benefits the poor so much more, since it often literally means the difference between life and death, or at least the difference between "poor" and abject poverty. Maybe the ROI on Mr. Moneybags' investments is higher because of those institutions, but being able to eat, pay the rent and get some kind of healthcare when you haven't got the money is worth a lot more.
The problem isn't the tax code, the problem is in perception. The poor think that the rich are stealing from them, the rich think that if it just wasn't for NPR and "welfare queens" everything would be awesome, and the middle class thinks that both sides are screwing them. Politics loves simple answers, but figuring out how to fund a government serving 300 million people is not simple and it never will be.
posted by gjc at 8:19 AM on April 13, 2011
Taxes cause people two kinds of hesitancy: a) fear to try something because the tax law is unclear, b) fear to go above a certain level of income because deductions go away. The fear (a) can be removed by either spending productive time (read the Paperwork Reduction Act notices to estimate how much time is wasted), or by hiring accountants which effectively raises the tax rate by adding to the cost of taxes.
b) manifests itself in two ways and both are bad. It gives people an incentive to do less than they could. There's a donut between the phasing out of the Earned Income Tax Credit and the poverty line where, to some people, working more isn't worth it. This is a real disincentive with teeth that I have witnessed multiple times during my years as a tax preparer. The second manifestation is in the form of tax cheats. I don't need to explain this or how prevalent it is.
This is irrelevant for rational people, as you really can't get taxed more than you make. And we can't be creating tax codes based on irrationality. If someone is going to eschew working an extra 10 hours a week just so they don't lose $500 in EITC, they are stupid. Just as a rich person eschewing a raise or an investment because the rate changes from 32 to 35% is stupid.
At least as far as the tax code goes.
posted by gjc at 8:32 AM on April 13, 2011
b) manifests itself in two ways and both are bad. It gives people an incentive to do less than they could. There's a donut between the phasing out of the Earned Income Tax Credit and the poverty line where, to some people, working more isn't worth it. This is a real disincentive with teeth that I have witnessed multiple times during my years as a tax preparer. The second manifestation is in the form of tax cheats. I don't need to explain this or how prevalent it is.
This is irrelevant for rational people, as you really can't get taxed more than you make. And we can't be creating tax codes based on irrationality. If someone is going to eschew working an extra 10 hours a week just so they don't lose $500 in EITC, they are stupid. Just as a rich person eschewing a raise or an investment because the rate changes from 32 to 35% is stupid.
At least as far as the tax code goes.
posted by gjc at 8:32 AM on April 13, 2011
gjc: there are actually many regions of income with greater than 100% marginal tax rate. The options are often take a $100 worth of extra hours and lose a subsidy worth $200 or stay where I am. That kind of poverty trap is stupid but definitely exists.
posted by a robot made out of meat at 8:37 AM on April 13, 2011
posted by a robot made out of meat at 8:37 AM on April 13, 2011
Response by poster:
gjc: there are actually many regions of income with greater than 100% marginal tax rate. The options are often take a $100 worth of extra hours and lose a subsidy worth $200 or stay where I am. That kind of poverty trap is stupid but definitely exists.
totally agree. The only hope for people entering that decision is that they are looking towards a time where they will work past that range and move up the $-ladder to a place where they will be better. One can hope.
posted by zombieApoc at 5:28 AM on April 14, 2011
gjc: there are actually many regions of income with greater than 100% marginal tax rate. The options are often take a $100 worth of extra hours and lose a subsidy worth $200 or stay where I am. That kind of poverty trap is stupid but definitely exists.
totally agree. The only hope for people entering that decision is that they are looking towards a time where they will work past that range and move up the $-ladder to a place where they will be better. One can hope.
posted by zombieApoc at 5:28 AM on April 14, 2011
I took a Tax Policy course in law school and "Taxing Ourselves" was one of the assigned books. I found it to be a pretty cogent analysis of the various tax alternatives and it was also pretty easy to read.
posted by soonertbone at 3:46 PM on April 18, 2011
posted by soonertbone at 3:46 PM on April 18, 2011
This thread is closed to new comments.
posted by Tomorrowful at 7:52 AM on April 12, 2011 [2 favorites]