Tax Day Rage
Dave Schuler's a hard man to rile. But stay away from him on tax day.
Dave Schuler‘s an old school Democrat of the Scoop Jackson-Harry Truman variety and a believer in the social contract of yore. And yet:
Yesterday I completed the federal and state tax returns for my mother’s estate and for her trust. Considering the pittance that I earn I spend an enormous amount of time keeping records and filling out forms.
Hiring an accountant won’t do anything for me. I’ll still need to do all the record keeping and that’s the bulk of the work. It’s emotional rather than rational but there are times when I feel as though I’m a full time unpaid employee of the government.
My wife and I dump all our records on our accountant in mid-to-late March, and he almost invariably files an extension for us. With two salaried jobs, a small business, and a couple of houses to account for, it’s a virtual necessity. But Dave’s right: the hassle of record keeping and the mad rush to file once all the forms and whatnot have been gathered–more so than actually having to pay the taxes–is why people are so frustrated.
What’s particularly irksome is that the rules change every year. Quite often, normal deductions–including such things as the dependent write-off for our daughter–simply disappear because of the Alternative Minimum Tax. Some years, I’m advised to put money into an Individual IRA; other years it’s a Self-Employed Pension. There’s just no way of knowing until the CPA runs the numbers for us–months into the next year!
Granting that the taxes of small business owners are radically more complicated than those of the average salaryman, there’s just got to be a better way.
Heh. As I pointed out yesterday on Dodd’s post where he is taking the usual lefty pummeling, my tax returns measure 1/2 to 3/4 inch thick.
Save all the citations of deductions, AMT etc. Should anyone’s return be that difficult? Really?
Only if a major the goal of the tax code is to control and hand out political favors……
Yes, there is, it’s called the Fair Tax.
Not to be glib, but yes, a marginal flat tax on ALL income sources. By that I mean a Flat Tax on all income over a certain amount, likely some multiplier of the poverty line. Drop the rate to some very low amount, like 15% and remove all exemptions.
This simplifies tax collection, reduces opportunities for tax policy funny business, is “fairer”, and removes incentives for tax avoidance and evasion. And by making it apply only to income over a certain amount, you solve most of the problems of the regressive nature of a flat tax.
And there in lies the big problem. Simplify the formation and taxing of small businesses, even if you do not reduce the financial burden and you will spark the economy. But that is something they will not do.
Now the conspiracy reason would be that salarymen and hourly wage earners are more likely to support causes near and dear to the Democrats, i.e., unions, taxing the business creating class, government provided benefits, etc.
But the far more likely reason is Congressional giveaways, government social planning inducements and it’s hard to hide the taxing from the small business person the way withholding does for the salaried.
But, for the good citizen, taxes would be far less angering if the code was simple and there wasn’t an entire industry built up to ensure you never know if you’re getting ripped off or not by missing some esoteric deduction or credit.
Estates are kind of the worst case, esp. with trusts and retirement funds to unwind. They aren’t the general case.
I’ve pretty much always done my own taxes. There was a big year with stock options and such. I hired an accountant for that, and then just “repeated the pattern” the following year.
FWIW, I don’t think complexity comes from how much money you make, but it’s more how many (and what kinds) of transactions you do. I never should have kicked a couple bucks into a limited partnership. It had me doing an extra schedule for years until it finally wound down.
Overall, I think most people can or could do their taxes on-line. Gathering the material is 90% of the work.
(Most people, using low-end preparation services, are just paying someone else to run the on-line tools.)
(On line tools are much now. If you haven’t been using them, you’ve missed the evolution.)
Does anyone ever wonder what gives the government the fundamental right to know how much money you make in a year?
I’m fully aware of the laws and constitutional amendment that allows the federal government to impose income taxes, and the mechanics of that requires knowing how much an individual makes, but what I’m driving at is the more basic, freedom and privacy aspect of an intrusive government.
Why can’t we work toward a system that funds the government, but doesn’t intrude on the privacy of the individual?
Today’s method of tax collection are rather tame from a historic standpoint.
People’s capacity to whine is constant, though.
Actually, you only solve a small part of the regressivity problem. With two rates, 0% for the first X dollars, and then a flat rate for everything else, you make the system progressive for the lower half of the population. Once you get a bit above the median income though, you are within a few points of the maximum rate, and you asymptote toward that maximum as incomes go out to infinity. A BIll Gates will pay only a point or two more than a middle manager.
There is absolutely no reason why the radical simplification of your system needs to be tied to a having just two rates. You can have ALL of the simplification, but keep the four or five rates, or make a dozen rates, and you will still be able to fill out your return in five minutes on the back of a postcard.
The problem is how far you go in defining ALL. To get all sources of income fairly, you start having to get into imputed income, which rapidly gets very weird.
If I rented my house to someone else and lived in an apartment, I’d have to pay income tax on the rent recieved, but get no deduction for the rent I pay to live in the apartment. Since I do live in the house am I avoiding that tax by essentially paying rent to myself? If a household has a stay at home parent, should they be liable for the taxes on the value of the childcare services provided?
As for a flat tax rate on all income, and the various definitions of what’s “income”, I have one to add:
Is taking a loan out against your deferred compensation “income”? I mean, this is is supposedly how some money managers are compensated and it can be very dicey on how the upper income persons can “work” the law to define how they get paid….
As for @Stormy Dragon’s question re: stay at home parent, I don’t think that there work would be considered income. At least not from a layman’s point of view.
I proposed this very idea (simple tax rates on all income above a certain amount) to a crew of friends recently…The questions were: how would it affect dividend distribution to stock holders. Technically it’s the distribution of profits on which taxes have been paid to the owners…is that income to the persons/holders, or is that already done?
To put it another way, if we moved to a flat tax rate, but kept all the byzantine deductions and whatnot, taxes would still be quite complicated.
If we got rid of the deductions but kept the progressive rates, taxes would be vastly simpler.
So anybody who is using the complexity of the tax code to call for a flat tax is simply demagoguing the issue.
“FWIW, I don’t think complexity comes from how much money you make, but it’s more how many (and what kinds) of transactions you do. I never should have kicked a couple bucks into a limited partnership. It had me doing an extra schedule for years until it finally wound down.”
I think this is correct. Hence my comment: it must be about control and handing out favors.
As a Certified Financial Planner, I like to think that a tax code that gets increasingly complex each year is kind of like having Congress legislate more job security for me.
@TG — I’m not trying to demagogue the issue. Assuming no deductions and credits, the balance you have to draw with tax rates is between perceived fairness and progressivity. The problem I have with a flat tax as typically proposed is that 15% of your income if you make 20K per year is much harder to swallow than 15% of 200K. By exempting the first X$ of income before income taxes kick in resolves much of the sting for lower income workers, in a way that impacts all equally. And by radically simplifying the code, you remove almost all opportunity for gamesmanship.
Which brings me to the other objection, that is to defining what is income. This is fairly well understood in tax law. It’s a net accession to wealth, clearly realized, over which you have dominion and control. Period. Much of the gamesmanship is creating mechanisms for characterizing certain types of income as one class or another to take advantage of different rates, i.e. cap gains vs. dividends vs. salary.
@Stormy: As for the example of owning a rental property and paying rent on your primary residence. If you remove all deductions, there is no inherent TAX advantage to owning versus renting, and no reason NOT to tax rental income while not deducting rent payments. Nor would you expect to deduct mortgage payments if you owned the second home. That’s the point.
As for the in-kind services question, that is addressed in the definition of income as being a net accession in wealth. That requires an external source of income, rather than self-provided. In fact, for my famiily, that was the biggest part of the decision to have a stay-at-home parent, as the cost-benefit of a second income was wiped out by child care.
@Robert: — The deferred compensation question is problematic, but one of the structural advantages of a flat tax is that the incentive for gamesmanship goes way down. AND the ability for tax authorities to monitor that behavior goes way up.
As for dividend distributions, I’ve always thought the double taxation argument was fairly weak. Philosophically, a corporation is a legal person. Just as YOU are required to pay income tax on your income, so is the merchant from whom you buy something. So too with dividends. A corporation can choose to disperse it’s profit however it sees fit. If it reinvests that income by buying new computers from Dell, Dell would pay taxes on the profits from those sales. If it disperses that profit to it’s shareholders, those shareholders are seeing an increase in wealth. Investing is a profit-seeking activity. The only argument that holds water for taxing dividends and other capital gains differently is that you want to encourage investment. But the point of a flat tax is to stop using the tax code as a tool of policy.
I’m sure you know thc, that other financial planners are out there lobbying for you.
Intuit famously payed to oppose the IRS hosting its own file-your-tax site.
I can explain “flat tax” in a couple easy sentences.
It is a way to change the subject. It is a Happy Unicorn Land tax, where there is always sunshine and daisies. We’d each pay less than we do now, but magically the government would receive more. How? Don’t think about it too much.
The flat tax isn’t about thinking, it’s about how it feels. And it feels good, doesn’t it?
When I was working toward a masters in taxation, I had to buy the current versions of the code and regulations every year. The code was two large volumes, the regs were six. Stacked on top of one another they were about two feet tall, very thin pages, very small print. When you read tax law the way it was written, you see how really warped our lawmakers really are. But my arms were in great shape!
That’s a support obligation, so there’s neither income nor gift tax consequences to tending to one’s kids. If a non-dependent relative that’s not a spouse stays w/ you rent-free, though, that would be a gift, although non-taxable to the extent its value doesn’t exceed $26k / yr. (same for child care: a gift for the excess of $26k)
It’s not that bad. Hey, *you* try to eliminate offshore deferral of passive income and we’ll see how elegant *your* prose is.
@john
http://yglesias.thinkprogress.org/2011/04/the-declining-effective-tax-rate-of-americas-400-highest-earning-individuals
Look, the top rate is 35%, but the highest earing individuals in the country are paying an effective rate of 16.6%. It’s not a fantasy to say that if you set a flat rate of 18% and remove deductions and other tax avoidance mechanisms that your tax rates would go down (-17%), but your income would go up (+1.4%) for these individuals.
A flat tax IS aspirational, but only because it’s an easy way for politicians to reward supporters, and tax lawyers need to eat.
If you throw out a good word like “aspirational,” how can I disagree?
Look, the top rate is 35%, but the highest earing individuals in the country are paying an effective rate of 16.6%. It’s not a fantasy to say that if you set a flat rate of 18% and remove deductions and other tax avoidance mechanisms that your tax rates would go down (-17%), but your income would go up (+1.4%) for these individuals.
Or, as Tano points out, you can eliminate those loopholes and maintain a progressive tax regime.
@john – I’m glad I didn’t go with pollyannaish, then.
@Trumwill, true, but the question is WHY go with a progressive tax regime if you solve the main problem a progressive tax regime is meant to remedy?
Well, do you have a fundamental right to use public roads, be connected to the sewer system and enjoy police and fire protection? No, but you do it every day.
Basically, you are just another douchebag looking for a free ride, whining all the way.
Anjin-san,
Unsurprisingly, you’ve totally missed the point. I’m confident that you would be the first in line to criticize the government if they decided to listen in on every phone call an read each email you engage in, but you equate the cavity search that the IRS can give you with using the roads.
Someone should write an amendment to the constitution that would make us secure in our persons, houses, papers and effects. I’ll bet people would vote for it.
I think it’s pretty well established that most people aren’t too concerned about the government invading privacy if they’re convinced that it’s other people’s privacy that is being violated.
Read Balko for some examples. Or consider:
http://www.aclumich.org/issues/privacy-and-technology/2011-04/1542
for an example of the sort of privacy intrusions by Police that don’t get much attention.
Or consider the controversy over NSA warrantless wiretaps and the way various Patriot Act provisions have been defended.
This isn’t a clearcut liberal vs conservative or Republican vs Democrat issue — many liberals concerned about privacy are none too happy about Obama’s positions and many conservatives don’t seem all that worried about expanding police powers or government surveillance.
With regards to the point you were making about the government knowing your income, I think that knowing your income is pretty low on the list of government privacy intrusions that one should worry about.
That you are unable to see the difference between “listen in on every phone call an read each email you engage in,” and an IRS audit, which most people never experience, is unsurprising. I guess they did not explain this to you in “The American Thinker”.
The people I know that have had problems with the IRS generally brought it on themselves by late filing, non filing or trying to cheat. At any rate, you are just another would be freeloader who wants the benefits of living in the richest, most powerful and most stable country in history without paying your share. In other words, a modern conservative.