Boy, here’s one I really agree with. The U. S. federal income tax system needs a major overhaul. Sheldon H. Jacobson writes at The Hill:
President Biden committed $80 billion over the next decade to support the Internal Revenue Service (IRS) and provide help for IRS agents to get their job done. Republicans are crying foul, suggesting that every American will be targeted for unnecessary and unwelcomed harassment, especially small business owners. Like any partisan response, the truth typically falls somewhere in the middle.
Perhaps instead of throwing money at a tax code and taxation system that is designed, as some argue, to leave “billions on the table,†the time is ripe to revamp the tax code, which has almost 10,000 sections and has been amended over 4,000 times just over the past decade.
There are so many problems with our present federal income tax system it’s hard to know where to start. The code is so voluminous and convoluted no one can know for sure how much they owe. So many people are breaking the law, most inadvertently, that enforcement is inevitably capricious and arbitrary. The computer tax prep industry shouldn’t exist at all—there should be a freely available online system provided by the federal government which is the only acceptable way of filing.
My preference would be to abolish the present federal income tax, replacing it with something like the “Fair Tax”, a sort of value-added tax prebated to ensure progressivity. We’re so wed to the income tax I can’t imagine something that sensible being adopted.
I use one of the major tax programs to file our returns. Since we’re both retired and on pensions, the income stream is simple, but we file in two states and the feds. Oddly, for the last few years the computer tax program (and me) have submitted returns with errors in them. I am simply too stupid to figure out the right entries into the forms despite all the prompts from the tax program.
I wish the feds and states would just take a flat rat of the gross without any adjustments or deductions or exclusions or whatever.
Remember, the IRS job isn’t to make life easy for taxpayers; its job is to raise as much revenue as the law dictates.
And here’s where the incentives misalign. Wealthy taxpayers (lets say fabled 1% who pay 39% of income tax) have high incentive and means to find every loophole to reduce taxes, so any government provided tax preparation software isn’t of any use to them. It doesn’t help that the 1% usually have very complicated tax returns involving definitions of income.
On the other hand, the bottom 75% percentile pay only 13% of income tax. Making their tax filling easier may ironically be counter-productive from a revenue standpoint because these taxpayers are eligible for deductions/credits and free government provided software would make it easier for them to lower their tax bills.
So from the IRS standpoint; what’s the incentive to write government provided tax preparation software?
The government provides online free fillable forms — a bit tedious to fill the 1040 line by line on a computer, but it does all the math so its quite usable for me.
Because I am always on extension, my 2021 final taxes will only become fileable in the next month.
As always, when the accountants return a paper copy to me, it will approach 1 1/2 inches thick. Schedules, schedules, schedules. And to your point, always subject to myriad opinions, assumptions and sub-computations. I’m in a complicated business, but its not THAT complicated. And its really not about “loopholes,” whatever those are. Its the ridiculous complexity of the Code.
IRS Free File exists for those making under $73,000, somewhere around the 55th percentile I think. Doing it all online for people with a lot of income sources and if depreciation is an issue requires a fair bit of documentation. Most people wont be that good at doing that. I think you still end up getting accountants and tax lawyers, sometimes, involved. I completely support making it simpler and easier but we should acknowledge that mom tof what is int he code that makes it complex was put in there to benefit the wealthy, to find ways for them to show income is not really income or to allow them evade or defer taxes.
The most compelling part to me to some sort of flat tax would be to eliminate the tax accounting/lawyering/evasion industry. So much money. All non-productive. Corporations will spend huge amounts of money to avoid taxes. Really hit home early in my career. We had formed a new corporation. Our guy in charge of finances was having personal issues were not aware of. Made some big mistakes and it looked to have major consequences. We were recommended a tax lawyer to help us. $750/hour, almost 30 years ago.
Steve
I remember my Mom personally was in charge of figuring out our family’s tax return. She would always signal that time of year by setting up a card table with her old adding machine sitting along side a stack of receipts to be calculated for deductions. What is most memorable, though, was the “don’t bother me environment†surrounding her until the dreaded return was filed.
For us, tax time is a hybrid affair where we organize and calculate expenses vs profits, handing over the raw data to our accountant who creates a stack of documentation, similar to Drew’s, for filing. Weâ€re not drawn to loopholes, nor to fudging our income. Our one audit resulted in the IRS official scrambling to find an error he could tax. Finally, he settled on a flower bouquet deduction, given to an escrow officer, as his government “win.â€
Basically, though, no one likes taxes, nor the IRS behind this money collecting operation. The fact that an army of officials are to be added to this arm-wringing bureaucracy is not a comforting thought. Nor, will such a personnel enlargement do much but give greater heft to an enforcement entity already known for it’s bloated intimidating structure. It’s all about increasing government’s grasp to keep people more in line, which oddly only seems to help the elites, takes more from the middle class, creating greater inequity gaps between the classes with each government growth spurt.
Just to correct a comment.
IRS free fillable forms is free and has no income restrictions. But it is barebones; you have to fill lines like a paper form but it will handle any additions and subtractions for you.
Taxpayers with an AGI under $73000 can use “guided tax preparation†(i.e the basic version of H&R Block, Turbo Tax) for free.
Agreed much of the paperwork / complexity of the code is not in the actual forms itself; but defining what is income and what were the associated costs of that income.
It isn’t necessary to have a flat tax to have simple tax filing. In many countries, the government fills out the form, and the taxpayer just signs it electronically, unless they disagree. Nearly all of Denmark’s taxpayers and the majority of Sweden’s taxpayers sign the government-filled form. It’s simple, involves much less stress, and generally more accurate for most taxpayers.
Well, whether the effects are good or bad, it’s growth of the Federal workforce, a dependable Democrat voting bloc, and probably second nature for Biden.
Certainly people fear it will be used politically, and fear is a tactic that this administration has found useful.
Sweden and Denmark are tiny, homogeneous (until very recently) countries with high social cohesion in which the people trust the government and vice versa.
Dave Schuler: Sweden and Denmark are tiny, homogeneous (until very recently) countries with high social cohesion in which the people trust the government and vice versa.
We understand that the U.S. can’t be expected to match the capabilities of more advanced countries, but the fact is that, for most taxpayers, the IRS already has most of the information it needs in the form of W2s and 1099s. Some taxpayers would still have to file, but not most.
Are you proposing that the U. S. become tiny, homogenous, and at least culturally Lutheran? How do you plan to accomplish that?
The reason that our tax code is complex it not to benefit the rich as steve contents. That’s merely a side effect. The reason is to further empower Congress. If they couldn’t give breaks to the rich, the rich would be much less likely to contribute to their campaigns.
One thing we could borrow from the Scandi’s is the ability to lookup how much income another taxpayer reported and how much tax paid. Much like can be done with property taxes even in benighted Alabama.
There is also no reason why the socially conscious could reveal their income and taxes paid as an example for us all.
“, and at least culturally Lutheran? How do you plan to accomplish that?”
Force everyone to listen to Lake Wobegon re-runs.
Dave- I think they would still rig the tax code to help the wealthy as they would be helping friends and family and (eventually) themselves but I would agree that a big part is getting the wealthy to donate.
Steve
In addition to the fundamentally different society in Sweden or Denmark, our tax system is also fundamentally different, which makes it difficult to impossible for the government to know in advance what many people will owe. That why when some new program or benefit comes out (like the child tax credit and other new things related to Covid), the IRS determines eligibility based on a previous year’s tax returns, not an analysis of your current situation.