Monday, April 10, 2006


The Taxman

In an op-ed piece for the New York Times, Austan Goolsbee suggests that the IRS send out pre-filled tax forms to qualifying taxpayers. The idea would be that these "Simple Returns" would have the information filled in that the IRS already knows (since, after all, much of what we have to fill in by ourselves has already been reported to the IRS). Having recently done my tax returns, I have to agree with this idea. A great many of us whose taxes are simple, but who nevertheless have to fill the numbers into the right places, go through tedious worksheets, and compute bizarre formulas would appreciate something that already has the data in and the computations done, and needs only our review and signature.

But why do we have tedious worksheets and bizarre formulas in the first place? We take deductions for this and that, but only if this exceeds 3.14159265% of our gross income, and if that exceeds 2.71828% of it. We get tax credits for various things, which require worksheets and secondary forms to claim. If we earn more than a certain amount we have to deal with limitations on decuctions, alternative minimum tax, and other such complexities. If we have capital loss, we factor that into the tax computation in a complex way, using another worksheet. Why?

We should have a flat tax. Pick two numbers: "x" is the minimum income that's taxed (below that, you don't earn enough to be obliged to pay income tax); "n" is the flat tax rate. Here's how it'd work:

  1. What is your total income?
  2. Is it under $x? If yes, stop here.
  3. Otherwise, send us n% of it.
Very simple. No deductions, no adjustments, no loopholes, no complexity. No way to get that vacation house in Maui deducted as a "business expense". True, no deductions for mortgage interest, medical expenses, or charitable contributions either. But, then, if the tax rate is chosen reasonably, some of what the deductions are for aren't important for most people anyway, and the wealthy can't shield their assets from taxes. Add a proper healthcare system (which might be a good subject for a separate discussion) and we don't need the medical deductions. And we shouldn't be overloading the tax code by using it to encourage or discourage specific behaviour, anyway.

The charitable contributions are the difficult bit here, since charities might easily be the "collateral damage" of a system like this. Would people still contribute to charities if they didn't get a tax break for it? Some would, surely, but some probably would not. I have no good answer for this, except for the vague statement that we must find other ways to encourage charitable contributions.

Our tax laws, and the forms and computations that go with them, are far too complicated and far too prone to abuse. Scrap them. Go with a loophole-free flat tax system.


Evan said...

+1 to this in general ...

The only problem I see is that people who are near the cutoff, but slightly above will end up making less than someone making $1 less than the cutoff. To remedy this, you can tax n% of (income - x).

scouter573 said...

Didn't President Ronald Reagan already simplify the tax code in about 1986?

I believe the problem is not so much the complexity or obscurity of the tax code - computers are quite good at calculations - but the fact that the code keeps changing. Something that is taxed this year is taxed differently next year. This is not to suggest that simple taxes are bad. Rather, in 2008, President Leiba will simplify the tax code, but every year thereafter all the folks in Congress will be bent to get little changes and more changes and more changes until we're back in the same place.

By the way, I don't mind having a progressive tax code. If you already have two brackets (payers and non-payers), one or two more is not a signficant complexification (is that a word)? The dirty secret of most flat-tax proposals is that they are not tax-neutral. Someone declares that flat taxes are good and that 17% is the right level. Unfortunately, that doesn't produce enough revenue to run the government at its current level of deficit, much less run it on a sane fiscal basis.

Barry Leiba said...

Yes, I think scouter573's right that the bigger problem is that we can't make up our minds. That's why I think we shouldn't use the tax code to manipulate behaviour.

in 2008, President Leiba

I wouldn't ever want to be president, even in the unlikely event that anyone should want to vote for me. (I'd rather be the guy who tells the president what to do....)