Taxes

Taxing Taxes

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In what's become something of a tax day journalistic tradition, USA Today sends a fictitious family's taxes to several different accountants and gets back four very different returns.

The problem of course is the 67,000-page tax code, and its various vague deductions aimed at manipulating behavior. Preparation of individual tax returns alone is estimated to be a $5 billion industry. That's $5 billion Americans are burning merely to comply wih the law. And that's not even touching what corporations pay.

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  1. That raises an interesting question: How much money is paid out to tax preparers, accountants, and tax lawyers to handle individual and corporate tax matters? On top of that, how much does the IRS cost to operate?

  2. I’m not a big fan of ayn Rand. however, she really nailed it when in Atlas Shrugged she had a government official say,

    “Did you really think that we want those laws to be observed? We want them broken. You’d better get it straight that it’s not a bunch of boy scouts you’re up against . . . We’re after power and we mean it. You fellows were pikers, but we know the real trick, and you’d better get wise to it. There’s no way to rule innocent men. The only power any government has is the power to crack down on criminals. Well, when there aren’t enough criminals, one makes them. One declares so many things to be a crime that it becomes impossible for men to live without breaking laws. Who wants a nation of law-abiding citizens? What’s there in that for anyone? But just pass the kind of laws that can neither be observed nor enforced nor objectively interpreted – and you create a nation of law-breakers – and then you cash in on guilt. Now that’s the system, Mr. Rearden, and once you understand it, you’ll be much easier to deal with.”

  3. This is not taxation on taxation. It’s an investment in reducing one’s ultimate rate of taxation.

  4. From flat taxers, I’ve heard anywhere from $100 billion to $200 billion as a possible savings if we went to a flat tax for individuals and corporations. I find those figures plausible, but I’ve never seen an actual breakdown.

    It would be nice to trash the tax code and institute a flat tax, but I fear that the vested interests in retaining the convolutions of the status quo are simply too powerful.

  5. Mutt – check this definition of taxing from a Google search:

    burdensome: not easily borne; wearing; “the burdensome task of preparing the income tax return”; “my duties weren’t onerous; I only had to greet the guests”; “a taxing schedule”

  6. Tax preparation software has changed the dynamics of the whole situation. Once you are willing to trust the results, they significantly reduce the preparation time (although potentially with sub-optimal results, given their likely inability to come up with loopholes like what Mr. Degen exploits).

    My taxes are reasonably complicated, with a smattering of stock transactions, and working from home as an independent consultant. Yet, with TaxCut (my software of choice), I don’t find the process particularly arduous (usually only 3-4 hours). Not that 3-4 hours is great, but still, it’s not insane.

  7. That’s $5 billion Americans are burning merely to comply the law. And that’s not even touching what corporations pay.

    Or what it costs to operate the IRS. What a disgrace.

  8. $10.7 billion.

    (page “drei” from hier ACHTUNG! PDF!!!!!!!!)

  9. The flat tax is going nowhere. I can just see Steve Forbes, and relatively rich congressmen, telling most people they will now pay a higher rate, while they enjoy a new lower rate. The Sales Tax with poverty level rebates is the freedom lovers tax of choice.

  10. VM,

    Okay, so we’re up to approximately $15.7 billion. And I think the cost of tax lawyers and accountants for business filers is much, much, much higher than $5 billion. There’s also the less tangible expense associated with all of the individuals and business employees who have to waste time with collecting documents, dealing with paperwork, etc.

    And there’s that whole business about what the Feds are spending my money on, not to mention the fun and games that the states like to play in revenue hunting and gathering.

  11. It’s an unholy mess.

  12. “Flat Tax” as in “everyone’s in the same tax bracket” wouldn’t simplify the tax code. What would simplify it is getting rid of almost all of the little potential deductions and reportage requirements.

    I’d accept deductions for having kids, and tax-free retirement and education accounts. And 2-3 income brackets. That’d reduce things to a double-sided 8.5×11 page, which is about as simple as could be asked for.

    Oh, and social security tax isn’t auto-removed from the payroll, but explicitly added to the income tax % you pay. So people know what they’re paying for it.

  13. I don’t see that much point to a flat tax with lots of deductions. Either make it crazy simple, or do something else. Maybe a national sales tax makes more sense, if it replaces the income tax.

    There’s also the valid point of ending payroll deductions and letting us write that big, fat check every year. Ouch!

  14. Reagan did a good thing in 1986. It took some real political courage to stand up for conservative principle over corporatist self-interest.

    We won’t see Bush doing anything like that.

  15. “The Fair Tax Book”

    read it. seriously

  16. Neal, aren’t you busy enough hacking your new book?

  17. 1: Total up your income
    2: How many people are in your family, including all legal dependants, yourself and your spouse?
    3: Multiply line 2 by $12000
    4: Subtract line 3 from line 1. If less than zero, enter zero.
    5: Multiply line 3 by 30%
    6: Send us the check. Thank you very much

    Automatically adjust the $12000 for inflation, and require a 2/3 majority of both the House and Senate to revise it otherwise.

    Fair and simple. Hard to manipulate politically, because you have to raise EVERYONE’S taxes. Democrats would hate it, even though it really would produce about the same net taxes for most people as the current system.

  18. Hard to manipulate politically, because you have to raise EVERYONE’S taxes.

    Step one: amend it to include a sur-tax on “luxury” incomes. Guaranteed to pass a Dem Congress.

    Step two: amend it to give a tax break for CO2 reduction schemes. Guaranteed to to pass a Dem Congress. Hell, Ron Bailey would support it.

    Now that you’ve kicked the door down for (a) social engineering via taxes and (b) graduated tax rates, you’re well on your way to where we are now.

  19. It’s been a few years since I studied it, but the Basic World Tax Code, a model code devised by tax professors for use in countries without tax systems (such as the former Soviet satellite states), is about 220 pages long total, plus about 125 pages of commentary.

  20. It’s not a law. the sixteenth amendment was never ratified. We are under no legal obligation to pay taxes. I thought you Libertarians knew that?

  21. (page “drei” from hier ACHTUNG! PDF!!!!!!!!)

    Thanks VM, I made sure the official scorer put you down for the assist since I was too lazy to put that one away.

    The Sales Tax with poverty level rebates is the freedom lovers tax of choice.

    This freedom lover would rather a tax based on the simple premise that if you use it, you pay for it. If you don’t have kids, you don’t pay for schools. If you don’t go to Yosemite you don’t pay for it. With the exception of national defense the Federal Government does not dole out many true public goods.

  22. I wonder why so many Americans are sheep on this issue since they have to pay too. I always laugh at the self-righteous liberals who favor taxation yet complain about war and the death penalty and corporate subsidies.

    Their number one argument? If you don’t like it leave.

  23. I would mention that the income tax was intended as a temporary measure to fund WW1, but I don’t want to give Grotius any more ammo in the thread below.

  24. I find it interesting that a 23-year-old can claim his 16-year-old sister as a dependent — without paying over 50% of her expenses — while I had to pay taxes on the thousands upon thousands of dollars sent to my ex-wife in the name of child support . . .and she got the tax deduction.

    OTOH, it was a small price to pay to get rid of someone who failed geography (she thinks that “fidelity” is that town where they have the Liberty Bell).

  25. Thomas Ware:

    It was ratified; the courts have been through that and disposed of the argument. They appear to be on solid legal ground. I’ll grant you that the amendment (and the notions underlying it) may be bad policy, but it’s good law.

  26. J Golden:

    Sounds like an issue with brotherly love.

  27. I can just see Steve Forbes, and relatively rich congressmen, telling most people they will now pay a higher rate, while they enjoy a new lower rate.

    For some wealthy people, a flat tax would be a tax increase (since the current top tax on dividends and capital gains is only 15%, and a flat tax rate would definitely be higher than that).

  28. 1: Total up your income
    2: How many people are in your family, including all legal dependants, yourself and your spouse?
    3: Multiply line 2 by $12000
    4: Subtract line 3 from line 1. If less than zero, enter zero.
    5: Multiply line 3 by 30%
    6: Send us the check. Thank you very much

    …even though it really would produce about the same net taxes for most people as the current system.

    Wow, thanks a lot, that plan would *double* what we currently pay. No thanks.

  29. I’d just like y’all to know that my eight year old son is going to pay $360 in income tax this year. My MIL set up an educational trust for him when he was born. Now it has about $20,000 in assets, which will pay what? one semester’s tuition in ten years? Anyway, our accountant says there’s no way to simply set that off against our withholding, so Andy has to file a separate return.

    Thanks for letting me rant.

  30. Defining “income”, or calculating “profit” is what inevitably becomes complex. A consumption tax really is preferable, but it likely only become feasable (avoiding the creation of gigantic black markets) when the tax rate is low enough to preclude much of what modern governments do. That would be applauded by me, but a candidate with my views has no chance of winning, alas.

    I will have to note a rare instance of agreement with joe. Reagan’s 1986 tax legislation was an astounding political feat, and too frequently ignored when talking about his Presidency. I’d pass that sucker, word for word, again in the proverbial Gotham minute.

  31. It doesn’t have to be this way:

    http://www.fairtax.org/

    -jcr

  32. The Sales Tax with poverty level rebates is the freedom lovers tax of choice.

    Organized crime agrees wholeheartedly.

  33. Shelby:

    ROFL! Especially since the guy she last cheated with before our divorce* was the closest thing I ever had to an older brother . . !

    OTOH, now I’m not married to a cheater, but she is (so is he). If I wanted revenge, I couldn’t have done any worse to her than she did to herself.

    *I had to qualify that — I dunno who she has cheated with since the divorce, and don’t really care.

  34. I’m all for a national sales tax with an exemption for food and clothing.

  35. Can someone please go over why it is not possible to claim that paying taxes is against one’s religion? And I see the snide, isn’t that so obvious???, “the government is a thug” remarks coming; I’m interested in the legal precedents or reasoning….

  36. Isn’t there a line at the bottom of the form essentially saying that everything you’ve submitted is true under penalty of perjury? The USA Today reporters might be headed down the Judy Miller path if so.

  37. Defining “income”, or calculating “profit” is what inevitably becomes complex.

    Exactly. It ain’t the code or the forms, so much as the trouble of gathering your income & expenses from all sources, and, in more complicated cases, determining what contributes to profits and to what degree.

    Like for instance a mfg. concern charged me various fees and then attributed certain costs to the actual stuff-making. Do I count the advance fees as part of my expenses during the year incurred, or do I add it to the cost of the inventory produced, or do I have a choice?

    True, if each marginal dollar of income were taxed the same starting from 0, then the above choice would be of little import, but that’d be a radical change. Lesser changes to simplify the tax code will have little effect on that kind of cogitation, and most people don’t have to be concerned with this thinking at all.

  38. crimethink: USA Today submits documents to accountants and asks them to prepare a return–they aren’t filing false returns.

  39. Defining “income”, or calculating “profit” is what inevitably becomes complex.
    Exactly. It ain’t the code or the forms, so much as the trouble of gathering your income & expenses from all sources, and, in more complicated cases, determining what contributes to profits and to what degree.

    Amen. I freelance, and have income from all kinds of different W-2s and 1099s, all with varying levels of deductions. Schedule C is my enemy. I envy those of you that have one job, and get one W-2. You are truly blessed by the Great Father in Washington.

    About the only tax reform plan that would really get me excited is the national sales tax, because all other simplifications would, I imagine, still require some type of schedule C for the self-employed. I would of course welcome any simplification on principle, but as far as my personal situation…

    I’ve always thought it bizarre that for a country that supposedly encourages the entrepenurial spirit, it rewards you for working for someone else, and punishes you for working for yourself.

  40. My old law school tax prof recommended, short of instituting a flat tax, that you eliminate the capital gains distinction and preferences. My memory is shot, but at the time (late 90’s) he estimated that about 50% of the tax code and 75-90% of IRS litigation dealt with determining capital assets and tax preferences.

  41. Dave B., it would be an impressive feat to overcome someone’s argument by quoting a dictionary definition of a word s/he did not use in the first place.

    Mind you, most of the complexity in the tax system originates in exclusions, credits, lower rates for certain types of income, and deductions (progressive taxation by income level is comparatively elegant and arithmetic, whatever its other faults). There’s a built-in disincentive to simplify all these categories.

    The real predicament is that a simpler tax code could tend to reward the obtuse and incompetent at some cost to those who work hard and manage money thoughtfully.

  42. Can someone please go over why it is not possible to claim that paying taxes is against one’s religion?

    You can claim its against your religion all you want, but it won’t get you off the hook, just like you don’t get a free pass to kill your daughter’s boyfriend because its required by your religion.

  43. I’d put my money on Doug Stives to be the one with the right answer. Look at that guy! He’s never made an inaccurate deduction in his life.

  44. crimethink,

    I would mention that the income tax was intended as a temporary measure to fund WW1, but I don’t want to give Grotius any more ammo in the thread below.

    You could mention it, but you’d be wrong of course.

    Again, how could the 16th Amendment – which was ratified in 1913 – be a measure instituted so as to pay for WWI, a war which the U.S. wasn’t even involved in until 1917? Furthermore, in what way is a constitutional amendment a “temporary measure?”

  45. Maybe I’m incredibly ignorant, but my taxes are never this convoluted. I live alone, I rent, and I’m not self-employed. Is that really where all this confusion is coming from? Or am I screwing myself out of a bunch of money somewhere?

    With the standard deduction at $5,150, I’m not sure how I could possibly justify the trouble of itemizing.

  46. Mutt, I noticed your email addy. Are you the “Mutt” from SFN?

  47. Maybe I’m incredibly ignorant, but my taxes are never this convoluted. I live alone, I rent, and I’m not self-employed. Is that really where all this confusion is coming from? Or am I screwing myself out of a bunch of money somewhere?

    Possibly. Do you know the ins and outs of 401Ks and IRAs? Which investments are tax (in)efficient and where to locate them?

  48. Max:

    Perhaps. I understand the general idea of it, anyway. I typically max out my 401(k). My income is high enough that I don’t qualify for an IRA deduction, so I usually go with a Roth IRA.

    If I’ve unwittingly become one of those rich bastards that bristles at the idea of being taxed at all, then feel free to ignore me. I just find it odd that I seem to be in this peculiar income zone where I make enough that the obvious deductions and credits are getting phased out, but itemizing and “loopholes” seem out of my reach.

  49. “Schedule C is my enemy. I envy those of you that have one job, and get one W-2.”

    Well, I wouldn’t take it that far! Sure, schedule C can require you to gather a lot of figures, which is my complaint (especially when they’re a bunch of nickel-&-dime that reminds you of how bad business has been), but it’s great when you can make money at one endeavor and take a loss from schedule C on another that you enjoy. IRS has certain guidelines to distinguish hobbies from business, but they are just that, guidelines, and there are ways to show you’re serious about trying to make money even if it’s a speculative enterprise that you wind up losing on. If you go to the page I’ve linked from here, you’ll see something I’ve been trying to make money on. The photos at the top are all of radical libertarians and children of radical libertarians, enjoying suds — but not the beer kind.

    Plus, being an invention, sometimes income from it comes as royalties, which can be put on schedule E, for which there’s no Social Security (self-employment) tax. No contribution either, but considering the rate of “return”….

    Even if schedule C shows your major source of income, many of your expenses can be things you’d’ve spent money on anyway but wouldn’t be deductible if you weren’t filing schedule C. Computer? Internet service? You don’t have to prorate the amount of time you spend reading & commenting here vs. trying to drum up business. And who’s to say I won’t get business by advertising my invention here, as I just did?

    When I visited my father in Fla., I spent some time visiting stores too to try to sell them my stuff. Makes the travel deductible, because no matter how long I spent there, I would’ve spent the same on the air fare. Etc.

  50. Grotius,

    Uh, that was a joke. Referring to you bringing up that months-old comment in an effort to discredit me on the thread below.

    What I posted was wrong, and you pointed out that fact. That’s how it’s supposed to work. If people would just attack my arguments on abortion, rather than bringing up my religion, odor, and level of sexual experience, I would be a very happy man.

  51. crimethink,

    I brought it up for the reason that I stated. It was a pretty good reason I’d say.

    If people would just attack my arguments on abortion…

    Arguing that your religious beliefs effect your views on the subject is a way to attack your arguments.

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