Tax Day

Tax Day – the day our income tax filings are due – is tomorrow.

Normally I grumble a lot around this time of year about how screwed up this system is. You have to scramble to get all your crap together so you can fill out some paperwork to send to the government about the taxes, which in most cases they’ve already taken from you, by a deadline that’s more than 1/4 of a year after the end of the year you are reporting on. That all by itself sounds dumb. Even dumber is the fact that there is a whole industry based on the preparation of this paperwork and doing it in such a way as to convince the government that it should give you back some portion of the money it’s already taken out of your paycheck. It’s a government system after all so a certain amount of dumb is to be expected.

Worse than the dumb part is the infuriating part. The government is ridiculously in debt. That means despite the fact they have their hands constantly in our pockets, our elected officials and their appointees can’t seem to get their spending under control. It also means according to a few reports over the last few years, that they’re not even ensuring they’re collecting all the taxes that they should be. When I say “should” I mean it in a sense of what’s logical or rational, not in the sense of what’s required by law. As we will see the two are not the same thing.

According to this 2008 NY Times blog post, two thirds of Amercian corporations pay no income tax and it’s apparently perfectly legal.

This blog post from the Chicago Sun Times covering a press release by Senator Bernie Sanders names ten very large companies that have paid little or no income tax over the last several years.

This Thnk Progress blog post from February covers similar information.

I’m not going to say these companies are doing anything illegal. The fact is that they can afford an army of accountants and lawyers whose only jobs are to ensure they pay as little in taxes as possible. No matter how many billions of dollars these companies have in sales, the first step for them in terms of reducing the amount of taxes they pay is to make sure their expenses are so high that their net income strikes the delicate balance of being low enough to reduce tax liabilities but not so low as to worry Wall Street investors. The next step is to find and take advantage of every deduction, tax credit and loophole they can find in the more than 71,000 pages (as of 2010) of the US Tax Code.

Of course the individual tax payers and small to medium sized businesses can’t afford to pay these armies of experts to do this stuff for us. The best we can usually do is pay a CPA, maybe a tax attorney or just H&R Block. The result is that the little guys bear the bulk of the tax burden. More than a little annoying, don’t you think?

On Capitol Hill they’ve been talking about tax reform for over a decade. They haven’t done anything of any real substance on this subject, but they’ve talked about it a lot. Typical.

What are the options/ideas/proposals for tax reform? Not surprisingly there are a few.

This US News article from 2008 lays out a Plan to Junk the Income Tax. Well, actually the title’s a little misleading. It doesn’t junk the income tax. It proposes a change to a combination of a Value Added Tax and Income Tax. The idea is that the VAT applies to everyone and the Income Tax would be paid only by those individuals making more than $100,000 per year and by companies. If you make less than $100,000 per year you would not pay Income Tax. I don’t see how this is a better system, maybe it would be a little less complicated than the current progressive income tax but probably not.

Another proposal I’ve heard, which I don’t have a link to, is the idea of imposing a flat income tax with no loopholes, deductions or credits of any kind. There’s a certain appeal to this for me. There would, as I understand it, be a poverty level threshold below which you wouldn’t pay income tax but above that every individual, couple and company pays the same percent – say 15% – in income tax. That seems pretty simple and fair in my book. The problem I have with it is it still leaves the door open for accounting slights of hand to reduce the taxable net income that companies would have to pay. The other problem I have with it is the most basic one – it’s an income tax. The government gets paid before I do. I don’t like that. It also does not close the one huge loophole in our current tax system – illicit income. No taxes are ever paid on any kind of “off the books” business. It doesn’t matter if we’re talking about drug dealing, prostitution, illegal immigrants or the guy who pays his son-in-law “under the table” for odd jobs. None of that is taxed currently. The only taxes those people pay are state and local sales taxes when they buy stuff at the store like you and me.

In November 2010, the National Committee on Fiscal Responsibility and Reform issued this report, which among other things outlines three possible reforms of the tax system. These possible reform plans are summarized pretty well in this article on about.com. My take on all three of these ideas is simply this – they all stink. There are two things they all have in common – (a) changing the tax brackets and reducing the number of brackets in some way and (b) reducing the number and amounts of deductions and credits available. It all sounds suspiciously like complex ways if hiding tax increases.

By far the best idea for reforming the nations tax system is the one advanced in HR 25, sponsored by a pretty long list of congress men and women, it was introduced into congress in January 2011 and referred to the House Ways and Means Committee. The bill is rather simple. You can read the full text here. What does it do? Completely gets rid of federal income tax in its entirety and calls for a repeal of the sixteenth amendment. Replaces the income tax with a flat national retail sales tax. There are few tax compliance responsibilities for retailers. None at all for individuals. This effectively gives us all a 10-30% raise immediately. Since taxes are only imposed on retail purchases, you are rewarded for being frugal and saving money. Those folks who make illicit income would no longer be excluded from the tax base. They’re already purchasing goods from stores, so now they’ll pay their share of Federal taxes like everyone else. What it doesn’t do is eliminate or reduce any state taxes. State income and sales taxes would still exist and would be in addition to Federal taxes. Those exist now, so unless the states enact similar reforms that part of the status quo would be maintained.

Here’s a rather amusing post comparing Income Tax and the Fair Tax – Attention Tax Lovers!

Of all the proposals for tax reform the Fair Tax is the one that would get my vote. Will the legislation make it out of committee? I don’t know. Will the Sixteenth Amendment get repealed? It will if there’s enough support from the populous to do so. Prohibition got repealed didn’t it?

What do you think? What kind of tax reform do you support? Leave a comment and let me know.

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