Getting Mugged Would Be Cheaper

A new Tax Foundation study, released just in time for those of you who are getting a jump on your 1040s, puts the cost of complying with the federal income tax at $265 billion in 2005, or 22 cents for every dollar collected. The compliance cost, which was 14 cents per dollar in 1990, is down slightly from the 2004 figure of 24 cents.

This burden consists mainly of the value assigned to 6 billion hours of effort, based on average pay for professional tax preparers and average hourly compensation for the general population (for people who prepare their own tax forms). It does not include the costs associated with litigating tax disputes, operating the IRS and the U.S. Tax Court, or tax planning aimed at minimizing liability. Unsurprising bottom line: The tax code is too damned complicated, dedicated as it is to myriad goals aside from generating revenue.

Comments

[Dogboy]

What fool pays taxes?

[Herrick and His Balls]

So why do we have a corporate income tax in this country? Wouldn't a more sensible, albeit very far from ideal, system be one where we repealed the corporate tax and then just increased marginal income tax rates on high earners so that both companies and individuals don't have to go through all the tax paperwork?

[GILMORE]

Assuming for the moment that the answer isnt "No Taxes! Survival of the fittest! Kill the pig! Ai ai ai!"...

...What are the Reason editors respective suggestions for sensible tax policy? there might be a piece in the archives somewhere, but i'm curious if this has or hasnt been addressed.

Is the general (not 'law of tooth and nail' libertarian consensus a massively simplified system, no loopholes or exemptions, reduced rates, a few things completely freed (capital gains?), other things finally enforced (offshore havens), etc? Something like that?

JG

[James]

Herrick: there's no point in arguing common sense when it comes to taxes. I met a New Zealander once who told me their tax return is essentially a postcard. You simply confirm the information is correct (and it's not as if they don't already know how much money you made) and send it back in.

The problem, as Jacob Sullum pointed out, is the peculiarly American penchant for attempting social engineering through the tax code. Getting mugged would be cheaper, but all parties have this interest in asserting that there is such a thing as "fair taxes."

Let's face facts: the people want government to do stuff. The government needs money to do it. They will get the money somehow although, if Cheney is correct, it's theoretically possible to finance the ENTIRE Federal budget with debt. That having been said, the mechanism for taking the money is almost irrelevant. VAT, income tax, hell, a sales tax on stock would actually make more sense than a "capital gains tax." Bookies and brokers doesn't care if you win or lose; they gets his commission either way. Why should government be any different?

[joe]

As Dogboy's comment suggests, much of that $265 billion isn't the cost of complying with taxes, but of avoiding them. Do a Reagan in '86, lose the corporate loopholes while raising rates, and there will be a lot less money going towards "tax preparers."

Herrick, I understand that's how it works in the Scandinavian countries. Of course, there would have to be better oversight of corporate spending, or the high earners in upper management will just start declaring even more of their living expenses to be company expenses.

[Warren]

Herrick,
It would make a lot more sense if we repealed the personal income tax and increased the rates on corporations that already have an accounting department and keep detailed financial records for their own purposes.

That being said, anyone else favor the fair tax? I think it'd be much better than income tax. But only because you wouldn't have to file an intimate accounting of your past years activities with the Gubmn't. As is it would be way better but in five years congress would have it eff'd up with twenty thousand new pages, just like we got now.

My idea is a currency tax. Put the dollar back on the gold standard and then just print however much money you want to spend. The tax is paid be everyone who trades in continually diminished dollars. There are two super great aspects to my plan. One, nobody has to declare or file anything. Two, the tax is perfectly assessed on everybody, even drug dealers, gun runners, and other black market organized (and even disorganized) crime types. Two drawbacks; One congress will shit themselves printing up new bills (which won't actually involve paper and ink, the govmen't just changes the bits in the puters that say how much cash it has) which will lead directly to; Two, everyone starts using Euros.

[Eric the .5b]

That being said, anyone else favor the fair tax?

Remind me which one is "the fair tax"?

[Phil]

. . . much of that $265 billion isn't the cost of complying with taxes, but of avoiding them . . .

Do we have a value here for "much," or an upper and lower range, or . . . ?

[Warren]

Sorry Eric, thought everyone knew about it.

http://www.fairtax.org/

[lannychiu]

I think Milton Friedman made the most eloquent case for this, but basically a flat tax with basically no deductions (except for a single personal exemption) when combined with a repeal of the death tax and corporate income tax and capital gains tax, would probably be the most economically rational.

All income earned by US citizens would, go through the tax ringer (the income tax) once, and would then be free to be used by the earners however they chose.

A single VAT tax (with the repeals above, capital gains, death, corporate income) would also work well.

[Jacob Sullum]

John, I can't speak for everyone at Reason, but my own view is that the taxes necessary to run a properly limited government should be collected as efficiently as possible, with the aim being revenue generation as opposed to social engineering, income redistribution, rewarding favored interest groups, etc. I see merits in both a sales tax (probably combined with rebates for the poor) and a greatly simplified income tax; either would be vastly preferable to the current system. Aside from the tax code's inefficiency, there's a basic rule-of-law problem when legal requirements are so complex that it's virtually impossible to know if you're in compliance.

There's a collection of Reason articles on the subject here: http://reason.com/bitaxes.shtml.

[Warren]

The sales/VAT tax has it all over simplifying the income tax. Requiring every citizen to hand over (in violation of their 4th amendment rights) a report on their past years activities to the prying eyes of the state, is simply obscene.

[Eric the .5b]

Warren - I'd heard of it, but there are a few out there. I actually lean towards sales taxes, but a completely flat income tax would be good, to. I prefer sales taxes since they reduce the information gathered by the government.

[JB]

Sales taxes, however, are regressive. The lower your income, the higher the proportion of the money you spend on stuff. So it has the same problem vis a vis a flat tax that the current system does, if you see it that way.

The different tax brackets aren't a source of complexity, though. Higher taxes on higher incomes would affect the economy, but not by decreasing the inefficiency of tax collection.

Also, aren't tax incentives sometimes a more efficient, cheaper way of guiding behavior than laws and programs? The cost may not be worth the benefits, but it's not a wholly positive transition.

[thoreau]

I am skeptical of sales taxes. As much social engineering mischief as the income tax poses, a sales tax can pose the same mischief: Higher taxes for "bad" things, lower taxes for "good" things.

However, I recognize that any type of tax can be made simple or complicated. In the end, I would say that simpler is better, and lower is better.

At the federal level, I would put another wrinkle on it: I would say that the income tax should be replaced by a per capita assessment on the states, and taxes paid directly by the people should be sales taxes, preferably simple sales taxes. And at the state level? Whatever it is, just make it simple.

(Standard libertarian disclaimer: I am not defending the concept of taxation, just saying that as long as there are taxes they should be simple rather than complicated. That's all.)

[James Feldman]

See, I think that the estate tax is one of the only current elements of the tax code we should keep.

Otherwise, I think I'm in favor of a flat tax, mostly because a straight flat tax would force higher earners to actually pay. I'm in favor of a repeal of corporate income taxes contingent on the elimination of "personhood" for corporations.

[Shawn Smith]

When it comes to sales taxes, would anything be exempt? Stocks or bonds? Housing? Transportation? Commodities?

[NathanB]

Does anyone know of any estimates of the total deadweight loss caused by local, state, and federal governments in the US? The cumulative drag caused by the taxes on both sides of every transaction must be huge. Could we just assume that every dollar collected by government is wasted?

[Kwix]

thoreau,
At the federal level, I would put another wrinkle on it: I would say that the income tax should be replaced by a per capita assessment on the states, and taxes paid directly by the people should be sales taxes, preferably simple sales taxes. And at the state level? Whatever it is, just make it simple.

The only problem I can see with this is the "per capita" bit. How do you propose to conduct a census every year? Does the state require you to report your residency? What about migrant workers?

Other than that, I love the idea of paying a simple sales tax, flat rate, to my state and let the Fed figure out how much they want to take from the States.

What if it were just a percentage rate? Say, I pay 15% on everything I buy and the State keeps records of tax recieved. The Fed then takes 50% of the State's proceeds.

It would also give the State's a reason to fight for fiscal autonomy from the Fed. "No, we can handle our own laws better. You don't need that much money from us this year. Really, we don't need your DEA help. Seriously."

[Iguana]

There is merit to the fair tax idea but the biggest drawback I see is that it makes it harder for people to beat the government out of taxes.

Secondarily, I'll never believe that we'll get a sales tax that replaces the income tax. Whne it's said and done, we'll have both.

[Iguana]

Kwix, 15% won't come close to replacing the revenue generated by the current system. It will take at least double that and more.

Nathan, yes, every dollar collected by government is pretty much flushed.

[thoreau]

The only problem I can see with this is the "per capita" bit. How do you propose to conduct a census every year? Does the state require you to report your residency? What about migrant workers?

IIRC, that's the way it used to be in this country until the income tax started in 1913, and they did it with census data.

[MikeP]

Does anyone know of any estimates of the total deadweight loss caused by local, state, and federal governments in the US?

I've seen cited in various places (Milton) Friedman's Law: goods and services under government control cost twice what they would if supplied by the free market. This holds even for privately supplied services under government regulation.

Of course, that's for services people actually want. The government spends such a ridiculous amount on things people don't want -- things people would not pay for if they were voluntary -- and which are actually actively destructive. And then there's the out-of-control nature of the whole enterprise.

It's a tough calculation. But it would not be a bad first guess to say that simply gathering and burning 2 trillion dollars every year would be a fair price for eliminating government at all levels.

[cliff]

"...if Cheney is correct, it's theoretically possible to finance the ENTIRE Federal budget with debt.

I tried that with my own finances, the credit card companies were not impressed and they had the gall to bill me.

Isn't the Chinese holding a sizable chunk of our debt? If so, what if they call their marker due?

[Jacob Smith, Yakov Smirnov's a]

In Soviet America, tax flattens you

[kwais]

Either a Flat tax of 15 to 20% or the FairTax would be acceptable to me. What we have right now is not acceptable. Right now I work for the government so I can't really fight it. But there will come a day, I will figure out a way.

Or maybe Americans will vote sensibly people who will change the current tax system.

Word was that Bush wanted to change it. If he did he would be the best president ever. 100 Abu Ghraibs and an inability to correctly pronounce a single English sentence wouldn't change his "best ever" status.

[jb]

James Feldman: A flat tax wouldn't force higher earners to actually pay--getting rid of the exceptions and loopholes would.

[James]

I'd support a flat tax if they eliminated tax returns...simply impose a payroll tax on all employees. Only the employers would know who they employed and how much they made. They would only release a statistical sample, and only if audited.

I doubt many people have the kidney for that kind of reform. Here's a clue: the tax code goes far beyond "social engineering" and into the realm of "social control." No one can legally work without a Social Security number.

[John C. Randolph]

I strongly urge everyone to actually read the specific proposal:

http://www.fairtax.org/

-jcr

[Evan]

In case it hasn't already been spouted out, I think it's about time to drop ye olde Broken Window Fallacy on this beeeitch:

The more complicated tax compliance is, the more jobs are "created" in the tax preparation & litigation industry. I say, make the taxes of even a single taxpayer with no deductions or dependents so difficult that only a paid expert can do it. Think of all the jobs this would "create" with H&R Block! Sales of "TaxCut" and "TurboTax" software would soar.

[Warren]

So, no love for my currency tax, alas.

[Timothy]

Warren: Hyperinflation is generally frowned upon.

IIRC from my microecon days, an income tax distorts consumer preference less than an equal-yield sales tax because the income tax simply shifts the budget constraint in whereas a sales tax moves the endpoints around.

Of course, that's in an idealized econoworld where the income tax doesn't have the sorts of crazy exemptions, exceptions, and deductions that cause people to go changing their behavior to avoid taxes.

I think a sales tax is the most moral of taxes, as it functions sort of like a usage fee on currency. I'm okay with even a progressive income tax up to a point, provided there aren't any deductions and we eliminate welfare in favor of expanding the EITC. Something like the Jane Galt Tax Plan would be pretty good, methinks.

[joshua corning]

i have been doing my taxes by hand since i was 16...i have heard a rumer that the IRS already has done your taxes and can give you a copy that you just sign and return...that would be awsome

[JD]

joshua corning - Sure, like I'm going to trust the IRS to calculate my taxes for me? I think part of the reason for withholding and its associated near-omnipresent overcharging is that it makes you, the taxpayer, the one who's really interested in filing. If you don't file, chances are the IRS is just keeping your extra money anyway.

Warren - I just think it would have too many negative side effects. Playing hob with foreign exchange would be one of them. BTW, how do you foresee this working in tandem with a gold standard, since it's explicitly taking advantage of the fact that the government can't honor all of its notes? What's the point of a "gold standard" in that case?