As April 15 approaches and I get my 1040s ready to file, one thought comes to mind: I want a tax break. In fact, I want a tax cut. But the tax cut I want isn’t to pay less tax. The tax cut I want is a cut in the amount of time I have to spend each year figuring out my taxes. It’s one thing to pay taxes. If I have to, I have to. What I don’t like is how complicated the whole process of calculating my taxes has become and how much time it takes me to do it.
Every February and March, I get the same feeling as I plow through instructions and forms and receipts. I want to scream: "Take my money but don’t take my time." But nothing changes. Actually, that’s not true. Things do change. Every year the whole process of figuring out my taxes gets more complicated and takes more time.
Several years ago it was reported that half of H & R Block customers earned between $20,000 and $60,000 a year. Wow. I have somebody do my taxes, but we have a couple of complicated issues and we make more than $60,000 a year. The idea that a person making $20,000 to $60,000 a year has to pay somebody else to do their taxes is appalling. If you are making $20,000 to $60,000 a year, you do not have a lot of spare money, and to have to pay some of it to H & R Block to do your taxes is wrong.
But I understand why people do it. The tax system is incredibly complicated, and it’s not just complicated for people earning a lot of money. It’s complicated for people who aren’t earning much, too.
But why is it so complicated, and why does it have to be so hard to calculate your tax bill? There are a number of reasons, but I am going to focus on two of the big ones.
First, in my opinion, the purpose of the tax system ought to be to collect the money the government needs to do its job and pay its bills – and do it in the easiest, cheapest and least intrusive way possible. But lots of people in Congress see the tax system as a giant machine to give out benefits and rewards to favored people and groups. An extra tax deduction for teachers spending their own money for school supplies. Benefits for home builders. Deductions for the cost of college. Encouraging charitable contributions. For Congress, often the easiest way to help some group or give a subsidy to some activity is to use the tax system, especially since, when Congress does it through the tax system, the cost isn’t all that obvious. The problem is that all of these special programs and benefits and subsidies complicate the tax system so much that the average person can’t figure his or her own taxes.
The second reason the system is so complicated is fairness – or, should I say, attempts to achieve fairness. Somebody is always complaining about how unfair the tax system. Why do I have to pay this tax when this other person doesn’t? Why is there a "marriage penalty"? Why should single people pay so much? Why should homeowners get a tax deduction when renters don’t? Why can’t I deduct my state sales tax if he can deduct his state income tax? In trying to achieve fairness, Congress is like a dog chasing his tail. And like the dog that never catches its tail, Congress never achieves fairness.
The problem is that in trying to achieve fairness, Congress winds up creating more complexity. Congress gives the poor or the middle class a tax credit here or a deduction there, which they can only get by filling out some additional tax form. And since it’s not fair for the "rich" to get the benefit, the deduction or credit has to be phased out as a person’s income increases. And just about every one of those phase outs is done on a different rate, starting at a different level, which means a separate calculation for each one.*
The tax process becomes so complicated that those who try to fill out their own tax returns miss deductions and credits they are supposed to get. And if they hire somebody to do their taxes, they wind up paying a big part of the benefits they were supposed to get to some person to figure out their taxes. And that assumes the "expert" gets it right, which they often don’t.
Meanwhile, the rich, the people who aren’t supposed to get all those deductions and credits, hire expensive tax lawyers and accountants to look for every loophole they can find. And the really rich hire lobbyists to get special loopholes added to the tax code through earmarks or amendments to conference committee reports.
Ultimately, Congress never gets to "fair." All their attempts at fairness just result in complexity and confusion.
So what is my suggestion? It’s this: If you can’t get "fair," you can get simple. Simple won’t give you the kind of fairness that some people want, but simple, if done right, can give you the fairness of clarity and understandability. Paying taxes won’t be a matter of who has the smartest lawyer or trickiest tax accountant. It won’t be who can spend thousands or tens of thousands of dollars to save millions of dollars of taxes, by either finding a loophole or creating a new one.
Here’s my idea: First, tax all income the same. Second, get rid of all deductions (including the ones I claim, such as mortgage interest and charitable contributions). The purpose of these two points is to get the tax base as wide as possible, because the bigger the tax base, the lower the tax rate or rates can be. Also, this makes the whole process of calculating your taxes much easier. Third, you can have either one tax rate or two, but which you choose will determine what you do with point four. Fourth, if you have one tax rate, then each person will get a really big personal exemption. And it also means that for a good way up the income charts, people with more income will be paying a much higher percentage of their income in tax. If you want two tax rates, then the personal exemption is going to have to be lower. But that is okay, too.
Some people will claim this idea is not "fair". It’s not fair to take away their deductions. The rich won’t be paying enough.** But the fact of the matter is that we have been trying for "fairness" for years and we still haven’t gotten there – because we can’t.
But what we can get to is simple and easy and understandable. And everybody will get a tax break; everybody will get a refund of the most important thing they can have: their time. That is the tax cut I want.
------------
* Nina E. Olson, "We Still Need a Simpler Tax Code," The Wall Street Journal, April 10, 2009.
** While it may be true that higher tax rates will cause the rich to pay somewhat more in taxes, the additional amount isn’t nearly as big as the proponents of higher taxes think. The reason is simple. If tax rates go up, the rich change their behavior. See, for example, Alan Reynolds, "The Rich Can’t Pay for ObamaCare," The Wall Street Journal, March 30, 2010, and "Taxes and Income," The Wall Street Journal, December 17, 2007. In other words, higher taxes are sort of a Laffer curve in reverse.
Comments