Taxes

Obama's Misguided Vision of Tax Reform

Reform should make the law simpler, not more complicated.

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In her most recent report to Congress, National Taxpayer Advocate Nina Olson notes that "tax expenditures"—the exclusions, exemptions, deductions, and credits that make the Internal Revenue Code such a bloated, bewildering behemoth—total more than $1 trillion a year. She explains that she tries to avoid calling these provisions "loopholes" because that word has a pejorative connotation: "Policymakers use the term 'loophole' to describe a tax expenditure that they do not agree with…and use terms like 'incentives' or 'sound government policy' to describe tax expenditures that they like."

President Obama illustrated that tendency in last week's State of the Union address, condemning "tax loopholes" for "the well-off and the well-connected" while advocating "incentives" for companies that hire Americans who have been out of work for a long time. Although Obama called for "bipartisan, comprehensive tax reform," his main goal seems to be raising taxes by limiting certain deductions.

Meanwhile, Obama has been pushing new tax breaks for people who behave as he thinks they should by (for example) hiring veterans, going to college, investing in "green energy," driving electric cars, or making their homes more energy efficient. This is not the sort of reform we need, since it only compounds what Olson calls "the most serious problem facing taxpayers": the mind-boggling complexity of the 4-million-word tax code.

The tax code is so complicated, Olson reports, that individuals and businesses spend more than 6 billion hours a year complying with its filing requirements, which is equivalent to 3 million full-time workers. That cost totaled about $168 billion in 2010, or 15 cents for every tax dollar collected.

The tax code is so complicated that people have trouble figuring out what rate they are paying. Whatever it is, they're pretty sure others are paying less.

Olson cites a 2012 survey in which only 16 percent of Schedule C filers considered the tax code fair and only 12 percent believed others were paying their fair share. Since "no one wants to feel like a 'tax chump,'" she observes, that sort of sentiment encourages noncompliance, which increases the burden on other taxpayers and enhances the sense that the game is rigged.

Even for those who are determined to obey the law, figuring out how to do so is no easy task, which is why nine out of 10 taxpayers either hire professional preparers or rely on tax software. But seeking such assistance is no guarantee against mistakes that can result in civil or criminal penalties. This kind of uncertainty undermines the rule of law, since even the most conscientious taxpayer cannot contemplate an audit with equanimity.

A constantly changing tax code also creates uncertainty about the future, which distorts economic decisions. Tax breaks themselves are often designed to distort economic decisions, although that is not the way their advocates put it.

Even when tax breaks work as intended, they are based on the dubious premise that politicians can allocate resources better than the market can. And they frequently have unintended side effects, such as the inflation caused by provisions favoring home ownership, higher education, and employer-provided health insurance.

Only by eschewing such meddling can legislators hope to achieve the comprehensive tax reform that the president claims to favor. They also have to stop pretending that only "the well-off and the well-connected" will be affected. The biggest tax expenditures include the exclusion of medical benefits from taxable income, the mortgage interest deduction, and the deduction for state and local taxes—hardly breaks that are enjoyed only by the wealthy.

But the same people who stand to lose treasured middle-class tax breaks will also benefit from lower rates. "If Congress were to eliminate all tax expenditures," Olson estimates, "it could cut individual income tax rates by about 44 percent and still generate about the same amount of revenue." By treating tax reform as an opportunity to raise taxes, Obama risks the enormous benefits such a deal promises.

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  1. You can’t take away politicians’ ability to alter the tax code year after year with credits and incentives! What will the promise voters at election time?

    1. “What will they promise voters at election time?”

      To get they hell out of our way? Of course that doesn’t mean they actually will, few if any actually would but at least they could promise that and then promptly break that promise.

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  2. “The tax code is so complicated that people have trouble figuring out what rate they are paying. Whatever it is, they’re pretty sure others are paying less.”

    Why would you think Obama considers that a problem in the tax code to be solved?

  3. I support a flat tax of zero dollars. Replace taxes with user fees.

    1. I’m not sure about having to pay a user fee to have the police investigate the murder of a family member or to arrest the offender.

      1. User Fee for specified govt services, including police “services” (that was hard to type) if you live in a certain area. Lots of cities contract with Sheriff’s depts to provide service, levy a fee.

        Don’t pay the fee – don’t get your murder investigated. I understand there’s an issue with “what if it doesn’t happen in my city – do I have to pay a fee for service?” Dunno – maybe.

        But it’s not impossible.

        OTOH, this is why I stipulate SOME level of govt in Almanitopia – I’m good with some collective enforcement of contracts, probably a voluntary fire service (equipment paid for collectively), some other stuff.

        Anyway – yeah, I think it’d be do-able.

        LIKE YOUR MOM.

        Sorry about that last part – I couldn’t stop myself.

        1. “Well, kid, sorry you didn’t pay your fee or your parents didn’t pay the fee and they beat you to death. There’s nothing we can do about it to punish them.

          1. Arm yourself. Are you a man or a rabbit?

  4. My solution is to repeal the 16th Amendment.

  5. Silly question, but has anyone ever scene a decent argument as to why a flat tax is not “fair”?

    1. No. The concept of “fair” has been twisted to mean practically anything. It has become completely subjective.

      1. It wasnt before?

      2. I like to ask, “Why is it fair to tax one class of citizen a higher percentage than another? Is this not a pure form of discrimination?”

        1. I hear ya. But many people seem to think a “fair share” is a sliding scale that would result in everyone else keeping just slightly less of their income than they do.

        2. Because a flat tax is really a regressive tax because rich people are better at hiding income or get their income from non-income sources or spend a smaller proportion of income on necessities or, I dunno, it’s just not fair goddamnit!

          1. i.e., “Someone has MORE than ME! WAAAAAAAHHH!”

        3. I would imagine it depends on whether you look at it in terms of money or in terms of harm. I think most people would agree that taking a person’s last $10,000 dollars does more harm to them than taking $10,000 out of an income of a few million. Fewer, but still probably a majority, would argue that taking $100 from the guy with $10,000 does more harm than taking $10,000 from the guy with a million. If you look at taxes as a necessary evil the government inflicts on people, then, a somewhat progressive means of spreading the damage makes more sense.

          1. But taxes are not necessary, judging by the ridiculous crap on which they are wasted.

    2. the argument against it can never be made decently because that would require a basic knowledge of math. Liberalism means refusing to accept that X% of 100K is a higher number than the same % of 50K. Also means you can’t punish achievement.

    3. Here is the argument. Money has diminishing utility. An extra dollar to a millionaire means less than an extra dollar to someone making minimum wage. Therefore, taking a higher percentage of taxes from those with higher incomes hurts the higher income person less or the same as the lower income person because the higher income person has less utility for the marginal dollar.

      Not saying I agree with it. But that is the argument.

      1. I usually grant them this point and try to focus on how and where the money is spent/wasted.

      2. I agree with it, and it’s a good argument. It’s why I’ve always favored progressive taxation. But I cringe when people talk about the wealthy paying their “fair share”, as if they’re really consuming government services commensurate with the taxes they are paying. Vilifying the hand that feeds you might be good politics, but it’s not good sense.

        1. You’ve conceded them the whole argument though. It’s like that old Oscar Wilde bit: “We’ve already established you’re a whore, we’re now only negotiating the price”

          Once you agree that it is moral to soak the “rich”, you’ve lost any kind of ability to argue against confiscatory taxation.

          1. No. I think it’s more moral to soak the rich, as long as you’re being up front about what you’re doing, than pretending as though a dollar means the same to everybody. But there’s nothing moral about taxation.

            1. Why would I concede the point that supposedly the utility to a wealthy person of a dollar is less than the utility to a poor person?

              It’s not true. First, you have the essential utility to all people in an economy of a rich person’s capital, this would include the poor. It does not matter if the form of that capital (a boat, house, or loaned money). Second, you have to disregard the utility of exchange. Third, you have to believe that in the taking and redistribution you don’t lose both the utility of exchange or the utility of capital interest. Fourth, you can’t know the utility to either person based on ‘rich’ or ‘poor’. The poor person may spend it on damaging drugs that do themselves and their family great harm while the rich person may contribute to charity that provides him great personal rewards, emotional, power in the community, and increased business opportunity. The statement completely disregards the MANY costs of redistribution and completely disregards the possible utility the rich person’s dollar could provide in an exchange with a poor person (work/loan/etc.), so the poor person may have gotten greater utility had we exchanged for that dollar than had he been redistributed that dollar. WTF people.

              All that aside, you also erode the incentives of capital savings for both rich and poor and create a dependency society that fucks with natural incentives.

    4. Silly question, but has anyone ever scene a decent argument as to why a flat tax is not “fair”?

      The flat tax isn’t fair, but not for the reasons commonly given by leftists. Even under a flat tax, there will still be a portion of taxpayers paying far more in than the worth of government services they receive.

      1. True enough even in a flat tax a person may not receive their pro-rata share of government services, they are not MORE protected by the military and don’t necessarily get more use out of a road or bridge. But their pro-rata share of services improves under a flat tax vs a progressive tax system, so under the view of a return on investment a flat tax is more fair than a progressive tax.

    5. “why a flat tax is not fair?”

      What is this fair you speak of. I have yet to see such a thing. Fair is when you want what someone else has.

  6. All of our suggestions are a waste of perfectly good innertubes.

    The tax code is an indecipherable monster for a reason. The same reason that the vehicle codes in all of the states are impossible to comply with. The same reason Nero wrote the laws in tiny print and posted them high upon the courthouse walls.

    1. The tax code exists in order to make lawbreakers of us all.

      1. And the burden of proof is on you!

    2. I don’t buy that. That’s attributing to malice what’s mostly stupidity. That’s just a pleasant side-effect for the people who get to enforce the stupidity with malice.

  7. We are DOOOOOOOOOOOOOOOOOOOOOOOOOOOOMED.

  8. the tax code is the single greatest source of power in DC. Every credit, break, or other so-called loophole is a means of coercive vote-buying. Eliminate all of them and institute a damn flat rate. Of course, that would be akin to Congress cutting off its own balls and those holding power never loosen their grip.

    1. ^^This^^ The tax code’s arcane nature is a bug not a feature. They have exactly zero incentive to institute any change whatsoever.

      1. Reverse bug/feature. I blame the squirrels.

        1. “Waiter – there’s a bug in my feature!”

        2. Just like a Flatulent Monkey to blame the squirrels.

      2. If only there existed a group outside of government that had access to some means of disseminating information on a large scale to voters and taxpayers. If such a thing existed, people who cared about seeing their mney spent wisely and not handed off to political cronies could be well informed. Of course then we would need some efficient method of expressing taxpayers’ wishes to the government. Sounds too hard.

        1. But there is such a way of disseminating that information to the voters. It’s called Myspace.

        2. If only there existed a group outside of government that had access to some means of disseminating information on a large scale to voters and taxpayers.

          If such a thing were to exist it would probably end up being used by most people to access various forms of pornography and watch videos of people getting being hit in the nuts. Eventually all forms of entertainment would coalesce into the “masturbation channel” and the “violence channel”. Idiocracy looms large.

        3. Of course we have many avenues of information dissemination and we have the right to vote. What we don’t have is a population that seems to care or understand. Watch the blank stares when you explain the virtue of interest.

    2. ^^this^^ seconded

    3. Eliminate business taxes and you make “loopholes” by any name meaningless. They would no longer serve as a means of escaping taxes. But, you say, the cost of government would fall on poor us and those nasty businesses would get away without paying their “fair share”. Where does a business get the money to pay anything, including taxes

  9. Obviously the rich aren’t paying their fair share. I mean, they’re rich! How could they pay their fair share and still be rich? Only when they aren’t rich anymore will they have paid their fair share.

  10. Listening to Obama complain about the sequester, I can’t help but wonder–if these “irresponsible” spending cuts are so obviously the wrong thing to do, why hasn’t he proposed some responsible spending cuts at some point over the last four years?

    It’s the same thing with the tax code.

    Obama doesn’t want to reform the tax code. He wants the government to get a bigger share of the fruit of people’s labor. He uses tax reform as an excuse to raise taxes just like he uses the deficit as an excuse to justify more spending.

    If Obama ever declares peace on Syria, Assad would be smart to jump into a bunker, quick.

    1. IF they are so “irresponsible” why did he propose sequester in the first place? It really is like George Bush in 2005 complaining about Congress forcing him to continue the irresponsible war in Iraq.

      1. The cuts were supposed to be so draconian that some compromise would be made to prevent them from occurring.

        1. So if I bluff, it is your fault for calling my bluff not my fault for bluffing. Got it.

          1. Intentions trump results! The cuts were never intended to take place! How dare you question his good intentions? You racist monster!

          2. Arguably, it’s Obama who thinks the Republicans were bluffing, which he “called” by not proposing a serious compromise.

            This is where the Republicans get to prove they weren’t bluffing.
            He thought there was no need to get serious about the debt because the cuts wouldn’t really happen.

            Well, we’ll see about that.

            1. They won’t happen because the reps are the Stupid Party.

              And Obama will claim victory.

    2. But no one in power is ever responsible for anything. Here is Ben Nelson talking about a few of the particularly egregious provisions of Obamacare:

      “I want somebody to be accountable for this, and if it was a mistake, for somebody to own up to it.”

      That would be you Ben. If you or any one of your Dem colleagues in the Senate had joined the Republicans, Obamacare would not have passed. But Ben thinks someone needs to be held accountable, preferably Republicans who didn’t vote for the thing.

    3. -if these “irresponsible” spending cuts are so obviously the wrong thing to do, why hasn’t he proposed some responsible spending cuts at some point over the last four years?

      Exactly. They keep talking about how the cuts were meant to be so horrible they would force Congress to compromise on a real deficit reduction plan. Well, I don’t see Obama proposing a real deficit reduction plan. He just wants to cancel the cuts anyway.

  11. Good article, but I doubt most of the population will bother to discover the non-distinction between a tax expenditure, loop hole, and incentives. I don’t see us even winning the war on defining words for what they mean.

    1. Yeah were way behind the leftest in that regards. Semantic arguments are their specialty. Once I started seeing it I couldn’t help but see it everywhere.

      1. I don’t like semantic arguments because they’re dishonest but the fact is they work. I would even say they’re one of the most effective methods currently used to sway public opinion.

        1. Abosultely. They are wide spread and effective. The first time I saw the term, “Gun Show Loophole” I was in horror/awe of the socialist’s evil genius. Loopholes are bad, gun show’s sound dangerous. Blend them and they sound much better than say, “Individual Gun Sale Restrictions”

  12. Obama is an idiot.

    hth

  13. OTOH, this is why I stipulate SOME level of govt in Almanitopia – I’m good with some collective enforcement of contracts, probably a voluntary fire service (equipment paid for collectively), some other stuff.

    Splitter!

    Turncoat!

    Splitter!

  14. For a guy who spends a lot of time talking about making sure “everyone is playing by the same rules”, he certianly likes to tweak the rules a lot in favor of people he likes.

  15. The tax code is so complicated, Olson reports, that individuals and businesses spend more than 6 billion hours a year complying with its filing requirements, which is equivalent to 3 million full-time workers. That cost totaled about $168 billion in 2010, or 15 cents for every tax dollar collected.

    The tax code is so complicated that people have trouble figuring out what rate they are paying. Whatever it is, they’re pretty sure others are paying less.

    Not that anybody cares, but the best way to fix this is to make the cost of compliance less than the return for noncompliance. But you’d have to have the reasoning power of a potato battery to figure that out, which eliminates our “Ruling Class”.

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  17. Olson cites a 2012 survey in which only 16 percent of Schedule C filers considered the tax code fair and only 12 percent believed others were paying their fair share.

    Feature, not bug. How are you going to stoke resentment and paranoia towards some ill defined “other” if people actually believe the tax code is fair and that everyone is already paying their “fair share”? That’s no way to engage in class warfare.

  18. “tax loopholes” for “the well-off and the well-connected” while advocating “incentives”

    The tea party is a “special interest” while greenpeace is a “watchdog”.
    I’m tired of lefty hypocrisy.

    1. You say hypocrisy, I say 1984 style language control genius.

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  21. Most stories center on what the complexities of the code do to businesses. Well, who do YOU think pays those business taxes? Their customers are their only source of revenue with which to pay taxes. Yes, that’s right, you and me. So if we eliminated all business taxes you and I would see the true cost of government. Along the way, all businesses would be on an equal footing as “loopholes” by any name would be meaningless. Think anybody in DC has the guts to suggest this?

  22. Well I would like to say that people often gets confused about tax and it’s clauses/codes. What is solution to it is get tax preparer or we can say tax advisor for themselves rather than playing with tax filings.

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