Taxes And Tax Plans

Today being April 15 – Tax Day- makes this a pretty good time to discuss my position on taxes, as promised.

The bottom line is that I don’t mind paying taxes and paying my fair share - for necessary expenditures. But the current tax regime is absolutely atrocious. I have helped to prepare, in some way, five different tax returns this year and I have detested the experience every single time.

Our current tax code is third-worldesque in its design. We can create a bomb that will blow up a particular toilet, but we can’t design a tax change without a loophole, a dodge, and a scam. We created the Saturn V rocket and the Space Shuttle, but our tax code is so complex it can’t be comprehended by any one person- not even a rocket scientist. And our enforcement of the code is arbitrary and inconsistent at best. Jesse Jackson and Rainbow/PUSH get away with incredible and public violations of the tax code – with no consequences. But normal, law-abiding people who make every effort to comply with the laws live in fear of an IRS audit. Why? Because the power of the auditor and collections agent is almost unchecked. If the auditor/collector chooses to be kind, it can be a reasonable experience; if they choose to take a hard-line stance there is no recourse against all but the most punitive decisions.

So what are the alternative choices? No tax really isn’t an option. The government still needs substantial amounts of money to provide basic services and functions. I’d really like to not have to pay taxes, but it’s just not realistic. The other two most popular options I see are the flat tax and a national sales tax.

The flat tax is the easier of the two to examine. In it’s basic form it proposes taking a flat amount - be it 10%, 15%, 20%, whatever the number – from everyone’s income. Essentially, we would fill out a postcard at the end of the year showing our income for the year and we would remit a check for the proper percentage. Sounds pretty simple and sweet, huh? Definitely much, much better than filling out the 1040 and paying payroll taxes and then still owing money when it’s all said and done.

But the flat tax falls flat in a couple of respects. First, the ultra-rich would be able to put a small portion of their investments in taxable income producing vehicles, while putting the rest in investments that grow without actually producing taxable income. So they would be able to avoid paying their fair share. The flat tax, being flat across the board, also has the effect of putting more pressure on the poor, who can’t really afford even $1000 in taxes, while relieving pressure on the middle and upper classes. In theory it plays into our desire for equality, but in practice it would really run counter to our national compassion and desire to help the less fortunate. And creating loopholes and deductions would defeat the basic premise of the flat tax. It’s a good idea on the surface, but I don’t think that it is really workable.

So that brings us to the idea of a national sales tax. I’ve done quite a bit a research and reading on the NST, the best site I’ve found for it is www.fairtax.org, and the idea seems to have some pretty good merit. First, being consumption based, it taxes most heavily those with the means to spend large amounts of money. Second, it becomes easy to establish a threshold amount of spending which will be tax free (through proposed rebates). Third, it allows for a smooth inflow of funds into the Treasury despite the elimination of withholding tax (something that the flat tax would fail at, barring a novel approach like making the tax day six months after your birthday or some weird idea like that).

So what’s the downside? As I see it, there are a few. First the 23% tax rate I’ve seen proposed some places is just way too high, in my opinion. Apparently the 23% rate is needed to make the proposal revenue neutral with the rebate checks that would be sent out every month; without the checks the tax rate would only need to be around 14% to be revenue neutral. Which brings me to the second problem, the rebate checks. I like getting a check from the government in the mail and getting one every month would be great, but I also have a work ethic and a desire to better my life. For those who are content with living on the dole, this is just additional income and a lifestyle enhancement for them. Sure, things will cost a bit more when they spend their money, but since they are living on government handouts for food and necessities anyways this would just give them another check to spend on luxury items (relatively speaking) instead of basic living expenses. The potential is there with the rebate checks to expand the willfully unemployed welfare class substantially, especially if the rebate check amount is directly tied to a person’s number of dependents – as has been proposed in a few cases.

So what’s the answer? I don’t know. I do know that the current tax non-system has got to be changed – from the ground up. We’re a first-world nation with a third-rate third-world tax system. There are millions and millions (if not billions) of dollars spent each year on tax avoidance (legal) and tax evasion (illegal). Any system that can reduce the incentive to manage or evade the taxman will be better than what we currently have.

The flat tax appeals in its simplicity. Unfortunately, I’ve never seen anything that addresses the practical problems of the plan – avoiding punitive taxation on the poor while avoiding the destruction of the basic premise of the flat tax- one rate for everyone. The flat tax plans needs to be fleshed out a bit more before I can support it.

The NST idea seems to have been better thought through, but still has some potential problem issues. The basic idea is sound, but how do you avoid creating loopholes (which again defeats the idea) or encouraging the growth of the welfare dependent underclass of America? I’m throwing my support tentatively behind the idea of the NST, but I think that it still has several questions that need to be answered.

All I know is that I don’t want to see another 1040 for a long, long time right now. I hate Tax Day.