The Taxman Cometh

Megan rightly bemoans the proliferation of deductions and credits and whatnots that push tax rates higher and make "doing your taxes" this huge pain in the ass rather than some very straightforward math: "All this useless activity is so that our politicians can look like They Care by giving tiny tax breaks to all of their favorite people--that is to say, the people who vote for them and give them money."

That's fair enough, but I'd add the point Kwame Anthony Appiah made in Sunday's Washington Post, namely that people are kind of dumb vulnerable to a lot of "framing effects" that make a lot of this stuff popular when, were equivalent policies described differently, they would become unpopular. Most clearly, when you redefine most deductions as penalties for the ineligible a lot of this stuff seems a little perverse -- should people who don't have kids in college pay a special penalty? A tax penalty for renters? Probably not.

Meanwhile, just note that you could eliminate all this, thus capturing 100 percent of the flat tax's virtues, without flattening the tax bracket structure and also that if you did flatten the bracket structure (thus capturing zero percent of the flat tax's virtues), then all the political pressures that create the loopholes would still exist.

Photo by Flick user glass window used under a Creative Commons license

Comments

Just get rid of the AMT. That's all I ask. Please.

Posted by TH | April 15, 2008 5:29 PM

Meanwhile, just note that you could eliminate all this, thus capturing 100 percent of the flat tax's virtues, without flattening the tax bracket structure

You obviously don't have any idea what the virtues of the flat tax would be.

Posted by right | April 15, 2008 5:32 PM

The problem, right, is that nobody really knows what the virtues of a flat tax might be.

Lots of people seem to think that it would be simpler to do their taxes, but really the part of doing your taxes that involves figuring out your taxable rate is pretty simple. It's the figuring what's taxable income that's hard, and what MY is talking about would certainly simplify that aspect.

But it will never happen, so we're really just wasting pixels, here, anyway.

Posted by Brautigan | April 15, 2008 5:42 PM

Let's keep in mind, shall we, that -- as Matt says, and as should be obvious -- the tax code did NOT become stupefyingly complex because of those Incompetent Bureaucrats who usually (and conveniently) get the blame for it. It has grown stupefyingly complex simply because Congress and the White House found out very long ago that -- just as with individual government handouts -- it pays off politically to hand out super-specialized tax exemptions (sometimes targeted at a single person!) to one's political supporters. I've seen two nationwide polls showing that (A) the American people agree by a landslide by the tax code is too complex, and (B) the American people are unwilling, by a comparable landslide, to give up ANY of their own deductions in order to simplify it. There you have it.

And -- even if we were somehow to clean off all that ivy and start a completely new system, such as the Flat Tax, the ivy would promptly and quickly regrow on the new system for exactly the same inevitable reason. (The difference would be that the underlying basic tax rates would now be lower on the rich, at the expense of the rest of us.) Stupefyingly complex tax codes are an inevitable byproduct of political democracy itself and an inevitable feature of human existence, like death or sticky ice-cube trays.

Posted by Bruce Moomaw | April 15, 2008 6:05 PM

...It's the figuring what's taxable income that's hard

Example: When I attended a presentation by the flat (or "Fair" or whatever it is called now) advocacy group about 10 years ago, their plan exempted real estate sales (unclear if this was residential, commercial, or both) from "income" which to me raised red flags for all sorts of potential tax avoidance shenanigans. Like you I believe "it will never happen" so haven't followed it in detail since, and don't know if they've cleaned up that aspect since.

Posted by Tom | April 15, 2008 6:06 PM

Re flat tax.

The way to implement a flat tax that would be fair is the following.

1. No deductions by anybody for anything.

2. Large exemptions. For instance, as an example, a flat tax of 20% with exemptions of $7500 per dependent would leave a family of 4 with an income of $30,000 paying no tax.

Posted by SLC | April 15, 2008 6:08 PM

Why cross out 'kind of dumb' in this post? Isn't that idea kind of essential to most young pundits' worldviews? If people weren't dumb they wouldn't need to be spoon-fed political opinions by 27-year-old bloggers.

Stick to your guns if you got 'em.

Posted by Wax Banks | April 15, 2008 6:09 PM

The problem, right, is that nobody really knows what the virtues of a flat tax might be.

Plenty of people know what the virtues of a flat tax bracket are. For example: this guy. Simplification through elimination of deductions is only one of six main benefits this author names.

Lots of people seem to think that it would be simpler to do their taxes

Matt appears to be one of those people.

Posted by right | April 15, 2008 6:13 PM

"Lots of people seem to think that it would be simpler to do their taxes, but really the part of doing your taxes that involves figuring out your taxable rate is pretty simple."

If you've ever done taxes by hand (I did once) then once you have the taxable income part you look up in this big table from the IRS how much tax you owe.

Posted by JordanT | April 15, 2008 6:16 PM

People bitch about how complicated taxes are. Yeah, there are some strange exemptions that we should get rid of. But for 90% of the people out there, the tax code that involves them is just about creating fairness. It's complicated b/c it has to cover all the loopholes while still remaining fair. So if you have rental property, there are certain deductions you get. This is so it's equivalent to running a business and you can own rental property without having to create a business to do it. When you have investment income you have to be really careful about figuring out your cost basis for transactions so you pay taxes on your profit, not some intermediate financial number. The biggest problem I have with taxes is the home owners interest deduction. That is a regressive crock of shit. And if it wasn't there, more people could just sign long term leases like they ought to, take the standard deduction and avoid the vast majority of the work associated with taxes.

Posted by mpowell | April 15, 2008 6:21 PM

Who are these people who complain about how complicated taxes are? I can imagine if you have to calculate the capital gains on stocks purchased through reinvestment of dividends, that could be pretty scary. Maybe if you had self-employment income. And if you have a farm.

But I suspect that once you've crossed those thresholds, you get an accountant.

People don't care how complicated taxes are, I don't think-- if you made taxes twice as tax consuming but only taxed them half as much, I'm sure they'd be happy with that situation.

Posted by Tyro | April 15, 2008 6:28 PM

"twice as time consuming," I meant to say.

Posted by Tyro | April 15, 2008 6:30 PM

Tyro:

I actually know a lot of people who've gotten taken by surprised by the self employment taxes. Most of them are freelance writers earning, maybe, $10k/year. They go along, saving for income taxes, assuming they're fine. Then they discover on April 14th they owe an extra 15.3% of their income to compensate for uncollected social security and medicare taxes and they're up a creek. Add to that the quarterly reporting requirement and you have a lot of added tax complexity for a fairly low-income set of people who don't generally have accountants at their beck and call.

Posted by MoltenBoron | April 15, 2008 6:53 PM

Then they discover on April 14th they owe an extra 15.3%...

What state do you live in? Even in California and New York (and NYC levies an additional city tax on the self-employed, by the way) it's nowhere near that high.

Add to that the quarterly reporting requirement and you have a lot of added tax complexity

Actually, the IRS supplies one with pre-printed forms based on your previous year's income. Really. I suppose "complexity" might arise if one has difficulty filling out checks or sealing envelopes.

Posted by James Gary | April 15, 2008 7:03 PM

Is that really a "lot" of added tax complexity? Once you know rougly how much money you need to pay each quarter, it's only a moderate additional burden. Sure, we'd love for this to be handled automatically, but certainly at *some* point you need to figure out how much you owe. I would hesitate to argue that the burden of paperwork is too high for your friends to handle. Though self-employment taxes do suck... I certainly understand the temptation to subsume income and payroll taxes into the same "pool."

Posted by Tyro | April 15, 2008 7:04 PM

For those complaining about the tax system, I suggest springing for 50 bucks for Turbo Tax or one of its competitors. Cheap at the price.

Posted by SLC | April 15, 2008 7:12 PM

As long as you can tinker with who pays and who doesn't, there will be winners and losers.

One thing starting to happen is that wage earners like me are getting tired of having our income taxed at higher rates than others. Why do you think Republicans are all about small business and people who make money off investments? Warren Buffet illustrated this recently by comparing his rate with the rate of one of his wage earners.

Another problem is approx. 60% of people pay zero federal income tax. Zero...zip...nada. (Yes, they pay social security tax and gas tax and property tax etc.) So you have a situation where 40% of the people pay for the Iraq war. 40% of the people pay for meat and poultry inspection...the FDA. And not all of these people are "poor." My boss makes 6 figures. With a big mortgage, a wife, three kids and one adoption credit he payed $50 last year. So I guess you could say I payed his share of the Iraq war last year. Lucky me.

There's no easy answer. We are talking about St. John's crazy scheme the "gas tax holiday" over on Digby.

It is no accident that the Federal Govt returns more to the Red states than they take out in taxes. It keeps people voting Republican.

Regards.

Posted by luko | April 15, 2008 7:31 PM

For most Americans, the tax system isn't that complex. Most people are best off simply using the standard deductions, not itemizing. There really aren't that many calculations if you're a standard W-4 employee. And a large and increasing number of people are using software such as Turbo Tax to simplify the process.

Where income tax really gets complicated is with the self-employed and small business owners. But a flat tax would do nothing to help. The question isn't what deductions can be taken, but rather the definition of what counts as income in the first place. You can't disallow the deduction of business expenses or people would go broke. (A sole proprietor who grosses $150,000 a year and spends $100,000 a year on supplies and overhead is making $50,000 a year, and if you tax them as if they were making $150K, then they probably couldn't stay above water.) But the question of what counts as a business expense is a complicated one - not because the government or the IRS is evil, but because business is complicated and we need a comprehensive set of rules so that deductions aren't solely at the whim of whoever does the audit.

Posted by Josh G. | April 15, 2008 7:42 PM

This inane post belongs in the file with the annual college basketball sucks rant. The reason we have all these deductions is NOT because politicians want to give handouts to their buddies. We have all these loopholes because liberal politicians want to influence behavior. I give it two weeks before Matt has a post claiming that answer to some problem, say for instance mandating the purchase of health insurance, can be overcome by giving those who can't afford it a tax credit.

Posted by Just Karl | April 15, 2008 9:16 PM

"But I suspect that once you've crossed those thresholds, you get an accountant."

My thoughts exactly. Sure, it might suck to pay someone to do it, but if Megan is not willing to put in the work for what appears to be a one-time frustration--moving from one state to another and thus having to deal with two state tax codes--then she should just bite the bullet and hire an accountant. If it really took her nine hours to answer all of the questions and she still thinks it's not a good idea to hire someone, then I am not sure what to tell her.

"I actually know a lot of people who've gotten taken by surprised by the self employment taxes."

If someone is surprised by this year after year, then they need to start paying more attention.

Posted by Brian | April 15, 2008 9:23 PM

Re: What state do you live in? Even in California and New York (and NYC levies an additional city tax on the self-employed, by the way) it's nowhere near that high.

Um, in every state of the union the Federal government levies FICA tax of 15.3 percent to support Social Security and Medicare. If you're someone's employee half that comes out of your paycheck directly, and the other half is paid by the employer. If you're working for yourself you pay the full 15.3% from your own income.

Posted by JonF | April 15, 2008 9:31 PM

The Flat Tax people are not for necessarily simplifying the tax code. They are for specifically a flat tax-rate. The reason being that once you and I are locked in with the rich in terms of the rate we pay, it makes it much more difficult for politicians to raise taxes (if the flat-tax (i.e. - 1 rate for all) mantra is to be adhered to.

Steve Forbes could care less about the deductions. He cares about the rate.

Posted by Brad | April 15, 2008 9:37 PM

if Megan is not willing to put in the work for what appears to be a one-time frustration--moving from one state to another and thus having to deal with two state tax codes--then she should just bite the bullet and hire an accountant.

I should tell her about the time I had to file in three states. Heck, through most of college, I was regularly filing in two states because I'd typically get a summer job elsewhere.

And I did all my taxes by hand until last year, when I had significant unemployment income, deductions, and filed in two states. (YMMV: I am good at math)

"Simplifying the tax code" is the essence of a "special interest"-- it's a special interest of the few Americans whose taxes are significantly complex. Everyone else does them by hand or pays $50 for the "basic" filing services of the sort offered by TurboTax or H&R Block. For the wide majority of us, filing could probably be done automatically, unless there was some income that wasn't already reported to the IRS.

Posted by Tyro | April 15, 2008 9:53 PM

What MoltenBoron and JonF said -- when I did a little freelancing I had to pay that 15.3% for self-employment tax on April 15.

Of course, all the tax "reform" proposals people float about flat taxes have to do with income tax, and the self-employment tax is for Social Security payroll tax, so that wouldn't affect it. And I didn't feel that this added complexity so much as it cost lots of money (though this might've been because I didn't have enough freelance money to make quarterly payments worthwhile).

Posted by Matt Weiner | April 15, 2008 9:57 PM

Karl "The reason we have all these deductions is NOT because politicians want to give handouts to their buddies. We have all these loopholes because liberal politicians want to influence behavior. I give it two weeks before Matt has a post claiming that answer to some problem, say for instance mandating the purchase of health insurance, can be overcome by giving those who can't afford it a tax credit."

Sure we do but it's not just "liberals." We give credits for children and other dependents. Non working spouses. Adoption credits. Home mortgage interest deductions. Farmers and fishermen get special breaks. Over 65? Point being I don't hear any conservative calls for eliminating the child tax credit or the marriage bonus.

We as a society have decided to influence all kinds of behavior...like getting married, buying a house, and having kids. These are societal values not necessarily "liberal" or "conservative" values.

Like Matt said, if you want to see the other side of it try looking at them as penalties. There's tons of "tax penalties" in being a single (or unmaried) person. Moreso if you rent instead of pay a mortgage. Add to that working for wages rather than incorporating yourself and you have a situation where the few pay for the many.

Regards.

Posted by luko | April 15, 2008 10:34 PM

I have no statistical evidence to support this impression, but I think I've seen fewer "tax-bitch" type stories this April than at any time in the past couple of decades. I'm suggesting that people have realized there are more important issues this time around - and that doesn't bode well for the fucking Repiglican menace.

I hope November makes each and every "movement conservative" throw up in its piglike maw.

Posted by MoeLarryAndJesus | April 16, 2008 12:02 AM

The Flat Tax people are not for necessarily simplifying the tax code. They are for specifically a flat tax-rate.

While this is true, more important to the Forbes of of the world is that their flat tax in fact exempts almost all their income from any taxation. They only count wages. So called capital gains and investment income even amounting to tens or hundreds of millions a year would be completely tax exempt -- and that's the real screw job of the flat tax.

Tax all income -- wage, investment, real estate,etc and you would have a fair flat tax but say that to flat tax advocates and listen to them howl!

Posted by Don | April 16, 2008 12:53 AM

I read the name Megan, and feel stupider. Why do you bother with her? Is she your girlfriend or something?

Posted by merl | April 16, 2008 2:44 AM

And here are those two polls showing that Americans -- at the same time that they bitch and moan about the complexity of the tax code -- aren't willing to actually give up any deductions to simplify it. (Courtesy of http://www.pollingreport.com/budget.htm .)

Assoc. Press poll, 3-30-99: "Do you think the federal tax system is too complicated?" "Yes" by 66-28.

"Would YOU be willing to give up some deductions to make the tax system simpler?" "No" by 56-34.

The Assoc. Press poll re-asked that second question on 3-26-02, and got "No" by 53-36.

In the 1999 poll, the AP poll also found people preferring a flat tax to a progressive tax by 51-39 -- but an NBC poll on 4-5-05 showed them preferring the progressive tax by 55-39.

As for "Just Karl's" straight-faced insistence that "we have all these deductions NOT because politicians want to give handouts to their buddies [but] because liberal politicians want to influence behavior": really. At least one tax deduction turned out to have been designed explicitly to lower Dan Rostenkowski's taxes, and ONLY his -- without ever naming him.

Posted by Bruce Moomaw | April 16, 2008 3:20 AM

Re: While this is true, more important to the Forbes of of the world is that their flat tax in fact exempts almost all their income from any taxation. They only count wages.

I've never heard of a flat tax that does this. Meagan McCardle's proposal very definitely does not and she'd even tax capital gains at the same rate as wage income.

Posted by JonF | April 16, 2008 6:16 AM

The renter penalties are particularly insidious. They drive up prices so that you eventually pay the same for the house, regardless of whether you had the deduction or not. So instead of sending the money to the government, and having it come back to us indirectly, we send the money to the financial sector, making them richer.

I know it is never going to happen, but it would be nice if the mortgage deduction were eliminated.

Posted by Walker | April 16, 2008 8:12 AM

flat tax rhetoric IMO is driven by fairness issues; complexity is merely a contributor. The fairness issue comes about because everyone see others' opportunities to cheat on taxes, e.g. the business man taking expenses on personal item, the writer "writing off" vacations as research, the parent that pays the nanny under the table, the sole proprietor that always seems to have lots of cash from unreported transactions hanging around the house.

Complexity provides the cover many need to cheat. Flat taxing, as code for simplification, purportedly takes away that cover. The cost of so-called "tax expenditures" is simply astonishing and it does have an impact on behavior.

Posted by mike c | April 16, 2008 8:58 AM

Much of the tax avoidance activity is moving money to people and organizations that pay at a lower rate. Therefore your proposal, which I support BTW, would not yield 100% of the benefit of a flat tax. E.g. our accountant is recommending that my business partner and I put our children on the payroll.

Posted by Floccina | April 16, 2008 9:32 AM

What state do you live in? Even in California and New York (and NYC levies an additional city tax on the self-employed, by the way) it's nowhere near that high.

Any state whatsoever. That would be the Federal self-employment tax.

Posted by Brock | April 16, 2008 10:02 AM

The reason we have all these deductions is NOT because politicians want to give handouts to their buddies. We have all these loopholes because liberal politicians want to influence behavior. I give it two weeks before Matt has a post claiming that answer to some problem, say for instance mandating the purchase of health insurance, can be overcome by giving those who can't afford it a tax credit.
Posted by Just Karl

Tomay-to, tomah-to. Some tax breaks are motivated by one, some are motivated by the other, and in some cases they're the same, or indistinguishable in any practical sense. "Give handouts to their buddies" sounds like tax breaks for specific businesses or industries, but it's very nearly as meaningful when talking about a broad constituency defined by a certain behavior... and giving a tax break to them could in turn influence others to adopt that behavior. Sometimes, what we call "pandering" is completely different from what's called "representing voters," and sometimes it isn't.

None of that changes the basic point — nobody likes the cumbersome complexity of tax law, but by far the biggest reason it's so complicated is all the different rules for different kinds of income and different people. Any attempt to simplify the tax regulations aimed mainly at tax rates instead of deductions and so on is misguided at best.

Posted by Cyrus | April 16, 2008 10:56 AM

The "renter penalty" is an unfortunate example, for there is no such thing. The owner of rental property gets two deductions (depreciation and interest) to the homeowner's one (interest), with the direct result that the renter pays lower rent. Trying to play tax games without putting things in an economic context is deceptive and unhelpful. The tax code is complex; so is the modern economy. Want to simplify the tax code? Do unabashed national economic and industrial planning, and quit trying to avoid such "socialism" by tweaking tax incentives--a complicated and inefficient way to approach the same ends.

Posted by les | April 16, 2008 11:23 AM

Flat taxing, as code for simplification, purportedly takes away that cover. [Emphasis added]

Indeed. "Embrace a flat income tax with no deductions that treats all income the same" is no real simplification over "Embrace a progressive tax with no deductions that treats all income the same" because you could look your tax up in a table either way. The primary point of the flat tax is to further reduce taxes for the rich (and if there are large exemptions at the lower end, it's not a flat tax, but a very crude progessive system anyway). When Steve Forbes holds up a postcard and brags about how that would be an income tax form, he never points out that its size has nothing to do with the flat rate, nor that we could reduce the current 1040 to a postcard by eliminating adjustments and treating investment income the same as wages. The 1040EZ could practically be shrunken to postcard size already.

Posted by mds | April 16, 2008 12:55 PM

the parent that pays the nanny under the table

You know, as a parent who pays his nanny above the table (in WA State) it's incredibly complicated (and I have an accountant who does my taxes annually who helped me with this). You have to pay two separate state taxes (unemployment and worker's comp), withhold the employee's income tax, SS & medicare tax + pay another 6.2% in SS and medicate (employer's share). Then you have to file all this with your taxes at the end of the year (Schedule A).

Basically, having one employee is like having 100, in terms of complexity - which is probably a significant part of why 80-90% of people pay their household help under the table.

I have no problem being legit, I just wish it were easier to accomplish.

I personally think reducing/eliminating a lot of the deductions and exemptions for higher-income people (including myself), eliminating distinctions that favor investment gains, etc. would go a long way to shoring up our national bank accounts. The rich (again, me included) and corporations need to pay more, it's as simple as that. However we get that happening is fine by me.

Posted by jcricket | April 16, 2008 12:57 PM

"For most Americans, the tax system isn't that complex. Most people are best off simply using the standard deductions, not itemizing."

Most Americans own homes. Most homeowners have mortgages. In many cases the mortgage interest deduction alone will be higher than the standard deduction. It makes sense to itemize your return if only to determine whether your itemized deductions will be higher than the standard deduction.

Posted by Fred | April 16, 2008 7:13 PM