Problems with the tax code

Friday, April 15, 2005
Today is the only day that millions of Americans actually are happy that either money was taken away from them or angry that it was given to them.

Of course I'm talking about taxes. Most of my readers realize that getting a tax return amounts to the government just taking money throughout the year form you, money that is rightfully yours, and giving it back, interest free, several months later. The opposite is true if you have to pay taxes, you got money interest free from the government for the year. I'm not going to say anything more about this.

I honestly believe something must be done to simplify the tax code. I don't know if I support Bush's plan, but something must me done. United States citizens pay over $135 Billion complying with the tax code. That is money not used for other more productive activities.

This subject really interest me. I'm reading a book called Perfectly Legal which talks about how the super rich can get away with paying no taxes, and most of it is perfectly legal. I don't agree with everything with the book, the book has its obvious biases, but it brings up some interesting point.

This is a very complex issue, one that doesn't have many solutions. My own take is this. You can't fix the current tax structure because

1. It is progressive - This actually causes a lot more problems then people think. The arguments against a flat tax is that it adversely affects the poor and families. There is some truth in this but there it isn't the whole story. Do people realize that deductions in a progressive tax code benefit the rich more? So the deduction you get for your mortgage interest is worth even more to someone who is rich.

2. There are too many exemptions - this overly complicates the code and creates huge loopholes. Doing away with this will cause its own problems. Families who have enjoyed credits for having children and deductions for medical care and mortgage payments would see these vanish and would probably cry bloody murder. However, the rich are even better at exploiting these exemptions. People just don't look outside there own situation. Ever dollar that someone else is able to avoid is another dollar someone else has to pay. Not only that that person spent some money paying someone to avoid that tax and the government probably paid someone to see if the deduction is actually valid.

3. They tax income. Do people realize how easy it is for the rich to hide income? Do people realize that the rich get a lot of their income from capital gains which is taxed at a much lower level? I find it laughable that many people praise the Google founders for only taking $1 in salary. People think they are doing a charitable thing. Do people realize this was probably done to avoid paying taxes? Money that the rest of the tax paying public will have to make up?

Taxing income, in my mind, is just a bad idea. Of course there is the argument that taxing anything else will adversely affect the poor. I swear to people that these are rich people feeding this to others that this is a bad idea. The argument goes that poor people spend a greater percentage of their income and thus will have a larger burden. However, taxation is a complex situation. Knowing who actually shares the burden can never be known because it depends how the burden is shifted. I won't get into a deep economic discussion here but believe me, you can not tell who is paying the tax even if there is seemingly no tax on an item. If you really must keep appearances up you can simply do what all the states do, don't tax necessities like food, clothing (in some states), etc. Items that poor people spend a majority of their money on. (I think not taxing necessities would be a bad idea for reasons I won't get into)

4. Government is too big. We need to just restrict government spending. Its getting out of hand. We tax because we expect government to provide a million different services, all of which cost money. Of course we as individuals don't see the big picture and figure our little program, whether it be lowering capital gains or saving the rain forest, isn't going to make a dent in the trillion dollar federal budget. Yeah, and buying that Starbuck's Espresso everyday isn't going to make a big difference either.

What is my solution? I'm not sure yet. I'm still thinking about it. I just know I don't like what we have. In summary, the more complex the tax code the more expensive it is to comply with, the more inefficient it is at collecting taxes, and the easier it is for the rich to avoid taxes.

OK, I've babbled long enough. The point is, I hate tax day. I hate giving my money to the government so that it can be wasted on some program I don't care about, will never use, or to pay for some $1000 hammer or something.


susan said...

Ever since I was in my teens I can remember my CPA dad saying that the only tax should be on property. You can't hide property and the more property you have the more taxes you would pay. Of course, those taxes would be pushed off to renters on rental property and customers on business property. I suppose there would be one tax for acerage and another for structures, maybe on square footage. If you don't pay your taxes you lose your property. This would still be hard on poor people and I don't know my dad's whole plan - and I don't think it is original I just remember hearing from him a lot. I hate tax day too. And rich people. :)

Amanda said...

I'm reading that book, too. There's a lot in there to make a person mad. But what do you think of this new bankruptcy bill the senate passed? I nearly threw a fit when I heard some republican senator talking about how allowing bankruptcy court to take people's homes would stop "Enron Executives" from shielding their assets in their homes. Because execs have never heard of living trusts. Yeah, right. Probably the same people who argue that flat taxes would hurt the poor and that taxing anything other than income would hurt the poor also talk about how "Enron Executives" (and, coincidentally, anyone else who goes bankrupt) shouldn't be able to "shield their assets" in primary homes. Or, for that matter, how legislators who want to ditch the estate tax keep bringing up that good honest Americans could "lose the family farm" to the "death tax" when such a thing has never, EVER happened.