Tax Reform

Nothing got into the tax code that wasn't lobbied for by one interest group, political party, or another.

Getting those things out of the tax code will be rather difficult.

I've never understood why people equate a simpler tax code with a lighter tax burden. The tax code is complicated because people want tax law to be fair, and fairness is complicated. Tax rates are high because politicians like having more money to spend.

And for all the complexity in the tax code... in the name of fairness... it's not really very fair at all.

Someone who makes $5 million per year pays a higher percentage of their income in taxes than someone who makes $50 million per year. Somehow that just doesn't seem right to me.

Why should we pay tax on taxed income. It is totally unfair to pay our taxes to state or feds based on gross income. Please, Mike.

The last major recession in this country and the meltdown of the savings and loans was caused by a fairly minor change in the tax code that changed the way commercial properties could be depreciated. If you eliminate the tax break on mortgage interest, be prepared for massive reductions in property wealth, huge numbers of personal bankruptcies and small business bankruptcies, plus a complete meltdown in the banking industry from losses on loans.

Ben, you said:
fairness is complicated.

How is take 10% of my income no matter what I make tno fiar? And yet its simple. If I make a buck, I pay 10 cents. If I make a 100 bucks, i pay 1 dollar. I made more, I pay more. I make less, I pay less. Its the same percentage. You can't get any more fair.. Now, on the flip side, I buy a house, I can deduct this.. I give to cahirity, lets deduct that.. I contribute to an ira.. there's some deductions. Now, what expenses can i deduct since they were for business. What about medical bills i can deduct?? hm.... Seems complicated (it is), and not fair. Fair means everyone can. But not everyone can since not everyone fits those criteria.

Mark, it sounds like you've been taken in by the old liberal fairy tale that the rich don't pay taxes. Unless you've got something more specific, that's too silly to bother arguing.

Randy and Stacey, you want different definitions of 'fair' than those that the current tax code uses. When I say that fairness is complicated, I mean that any vision of fairness requires a vast body of rules to reach the correct result.

If you want a conceptually consistent tax result for every economic transaction in the largest economy on Earth, then you're going to have an awfully big rulebook. Politics sets the underlying conceptual foundation for the Tax Code. But no matter what concepts the politicians want, the rule book to carry out those concepts will always be big and complicated in direct proportion to the size of the economy that it governs.

BB: I didn't say that the rich don't pay taxes.

Ben,
Yes, I do want something different from the current tax code. And no, the current tax code is not fair. Loopholes here, there, everywhere. Everybody paying different percentages. How can you see that as fair? You must be a taxman. No one in their right mind can see the current system, or any complicated system as fair. You didn't really answer me though. Much as I expected. If we all paid 10%, for instance, how is that not fair? Not that I want to pay 10%, mind you, but as an example. If we ALL pay the SAME percentage, then it's fair. It's the ONLY way to be truly fair. To have anything else would be akin to going in the grocery store and you pay more for the same food item than someone who doesn't make as much money as you. Its the same item. Why should you pay more or less for it based on your income. That is not fair. Doesn't matter what side you are on.

Stacey: One last try.

I'm holding a copy of the Internal Revenue Code, which is Title 26 of the US Code. With small type and thin paper, it's over four inches thick.

Within that enormous book, your complaint involves the two pages that make up subsections 1(a) through 1(e). Those are the four rate charts. To make the federal income tax flatter and, in your definition, fairer, all you would need to change is about 20 numbers on those two pages.

But the book would still be four inches thick, because (one more time now) the size of the tax code has nearly nothing to do with the specific tax policy it carries out.

Ben: Theresa Heinz-Kerry paid a few hundred thousand in taxes on taxable income of $5 million, and further managed to get her taxable income that low despite assets in the billions. Plus, despite the fact that there is some definition of "fair" that fits the current state of things, I think it's a big problem that I have to hire people every year to prepare all my tax forms to ensure that I pay the most "fair" amount of taxes I can legally get away with. The sheer complexity of the system is what leads to unfairness, because much of the difficulty is in deciding how the law applies to you individually. If perfectly applied it might be fair, but it's impossible for 99% of the people to apply it properly.

RK: Why should the federal government care about the taxes you pay to your state? Double taxation exists in just about every part of the tax code. I pay tax when I ear money, when I spend money, on property that I own, on corporate earnings and then dividends, and so forth. The state tax exception distorts the tax market and reduces the incentive for state governments to tax responsibly.

Michael: Less than half of her income was taxable. The rest was tax-free municipal bonds. Her actual overall tax rate was about 32% on her actual taxable income. If you don't like the fact that munis are exempt, well, take it up with Congress. But that's hardly an exotic tax loophole.

You also complain that you must hire someone to prepare your tax return. So do I, actually. I also hire people to fix my computer when it breaks down. Cars today can't be fixed without special equipment.

Why does the Bible have to be so darn complicated? Can't they just simplify it? I'd like all of theology condensed into a little two-page synopsis. I'd also like a simple one-page flow chart to guide me through all my difficult moral decisions. It's just no fair that I have to spend so much time thinking about religion, morality, philosophy, and politics. They're all needlessly complicated.

And I always thought that Chemistry was too complicated. They should cut the number of different chemicals way down. Maybe just cut off the right half of the Periodic Chart. And insist that all chemical reactions work the same way regardless of temperature.

Dealing with the government is also always complicated. Try defending yourself in court, or suing someone pro se. Try obtaining on your own all the government benefits you're entitled to. Try making a government regulatory authority punish someone who has wronged you.

The law was simpler, once upon a time. In criminal law, for example, they once decided guilt or innocent with trial by combat, or trial by ordeal. It was a little messy, of course, in that it favored the strong rather than the innocent. But it was wonderfully simple. And entertaining, too!

As Dilbert has often observed, anything you don't know how to do looks easy. So lots of people imagine that ordinary citizens ought to be able to do their own tax returns. This belief is invariably based on nothing at all. WHY should the average person be able to do his own tax return? What supports that assertion, other than raw intuition? Average people must hire experts for all sorts of technical tasks. Why do so many people believe that filling out tax returns is not one of those tasks?

My theory is that the act of filling out a tax return simply serves as a focus point for various political frustrations. You think that tax rates are too high, too progressive, or whatever. You hate that government is so big. Or maybe you just hate being reminded of how much of your hard-earned money the government gobbles up---and presumably wastes. Who among us has not looked at the total tax figure on our 1040s and thought of what we could have bought with that money had it not been taken away?

All those thoughts are very stressful, and the more time it takes to prepare the return, the longer that stress continues. So people complain that the returns take too long to prepare, or that they must hire someone to handle the stress for them. But I suspect that the real gripe is elsewhere.

Finally, what disturbs me most about conservatives making wild claims about the tax system is that those claims are fundamentally utopian. You want a tax system that has never existed and will never exist, just like bureaucracy without inefficiency or government without corruption. The tax law is complicated because the economy is complicated, and tax law is simply applied economics. You can no more ignore the complexity inherent in economics than you can ignore the right half of the Periodic Chart.

Ben,

Yet again you miss the point. I am saying that the 4 inches of tax code you keep talking about is what needs to go away. Period. Is it that hard for you to grasp such a concept? We don't need it. Everyone pays a flat percentage of what they earn, and that's it. No other taxes. No social security. No medicare. No property tax. Nada! Ideally, I'd like to get rid of the sales tax too. Wouldn't need it if corporations were treated the same. Ideally, I see individuals and companies as the same. They each pay a flat percentage of their earnings. It's so simple, and yet Ben, it is over your head. Much like it is over the head of those in political positions.

BB: I really respect you and your obvious intelligence, but I guess I just can't see how the man-made complexity of our tax system is as inevitable as the complexity of chemistry. Really, the purpose of a tax system is pretty simple: take money from citizens and give it to the government. Is there a book you can recommend that explains the whys and wherefors of our tax structure? That justifies the complexity and explains why it can't be reduced?

Stacey: You don't understand what's in those four inches of tax code, so how can you be so sure that you want to get rid of it?

I know what's in that book. I read it for a living. It doesn't say anything about social security, or medicare, or property taxes. It covers questions like: What counts as taxable income? What is deductible against income? In which year must taxpayers pay tax on income? How do C corporations work, and when do they realize gain? How do pension plans work? Which organizations count as charities? How are insurance companies taxed? How is mineral production taxed? How are S corporations taxed? How are partnerships taxed? When must taxpayers recognize capital gain? How do we calculate and adjust basis? What returns must people file, and when? How does the IRS go about collecting tax from people who don't pay? When do people go to jail for failing to pay their taxes?

Here's the index to the tax code: http://www.fourmilab.ch/uscode/26usc/www/contents.html
Look through there and tell me what you want to cut. I would love to cut subtitle A, Chapter 1, subchapter A, parts IV and VI. And maybe subchapter B, part IV. Those are the big chunks of pork. And there are some little chunks scattered in other places. But most of the rest of it isn't political. It's just the details that are necessary to make the system work.

Michael: This innate complexity is ubiquitous in law, and I'm not sure how to explain it short of law school. Tax law probably isn't the easiest place to start, because it's law plus economics and accounting. The basic concepts in tax law are difficult for most people to grasp, so the initial learning curve is pretty steep.

The easiest way to truly understand the problem would probably be to take some other area of law that's more inherently interesting, like contracts, torts, or criminal law. (Constitutional law doesn't count, because it's not really law. It's politics.)

In whatever area you pick, read opinions or stories that describe difficult cases in detail. Many lawyers and law professors have blogs. Maybe follow some of those in one area for a couple of weeks. If you're really specifically into tax, Prof. James Maule has a nice blog called Mauled Again. http://mauledagain.blogspot.com/ That might give you a sense of what tax law is really about.

After some study in whatever area you pick, you should start to understand that human interactions are inherently infinite in variety, while the laws we use to regulate them are imprecise, finite and discrete. No matter how many rules you make, real-world human interaction will always create situations that don't fit within them.

With more study, you'll come to understand that an underlying problem is that words aren't nearly as precise as non-lawyers imagine them to be. Every word has a fuzzy boundary around it, and there will always be cases that stretch the boundaries of the words we use in making the rules. Every time we write a rule with words, we think we know what the words mean until some new and bizarre case shows us the questions we forgot to ask.

I've tried explaining this to others on the net, never with much success, and here's the simplest example I've thought of:

Consider this law: Thou shalt not kill.

It's wonderfully simple. But what does it mean? Can we swat flies? Cut wheat? Somehow I don't think that's what God was driving at.

So let's amend: Thous shalt not kill humans.

That's better. But does this abolish the death penalty? Can soldiers kill in war?

Better amend again: Thou shalt not kill humans without government sanction.

What about self-defense? Can we kill people who are about to kill us? Can we claim self-defense if we kill to avoid a beating that probably wasn't going to be fatal? Can we kill to protect our property? Can we kill to protect others from being killed, beaten, or robbed?

And what if we claim self-defense, but someone says that we were mistaken? We thought we were about to be killed, but we were mistaken, or drunk, or schizophrenic. Or maybe any reasonable person would have thought they were about to be killed, but in fact there was no threat. Does self-defense still work there?

And what about accidental killing? Suppose that the defendant drove his car over a little old lady? In what ways to the following circumstances mitigate his guilt? 1) The car had a mechanical malfunction, so he couldn't brake or steer. 2) He was drunk. 3) He was talking on his cell phone at the time. 4) He was practicing driving with his feet at the time. 5) He didn't intend to kill the little old lady. He meant to kill the little old man next to her, and missed. 6) He was a professional hit man on his way to kill someone else.

And those questions just scratch the surface. We haven't even gotten into questions of lengths of sentencing, trial procedures, or rules of evidence. And we haven't covered truly tough cases, like abortion or euthanasia.

We started with such a beatiful, simple law, and now those darn lawyers have muddied it up with a whole lot of difficult questions. Different legal systems answer those questions in different ways, but here's the important part: The questions must be answered, because every one of those situations will happen regularly in every society. And those answers will involve thousands and thousands of words.

Michael, those questions are analogous to the elements in chemistry. They exist naturally. No government can write a murder law without answering those questions.

Now one step deeper: When I've explained this on other forums, the sticking point has been that people imagine that laws are completely arbitrary, that governments can write whatever laws they want. And that's true in a superficial sense, but not in any practical sense. Governments can write whatever laws they want, but they cannot dictate the consequences of those laws. And an arbitrary or badly written law can have severe repercussions for the government itself. A government literally can't survive for long unless its citizens have a clear idea of how the government will act. Peace depends on people knowing how the government will respond to their actions. Prosperity depends on governmental action being systematized towards a rational goal.

You can treat your spouse any way you like, but only certain approaches will produce a happy marriage. You can raise your children any way you like, but only certain approaches will produce good children. You can run your business any way you like, but only certain ways are profitable. And you can write whatever laws you like, but only certain laws produce healthy societies.

It's an inherently complicated business to figure out the best way to maintain a marriage, raise a child, run a business, or write a law. In fact, all those tasks are probably infinitely complicated, and the best humans can do is think very very hard to produce intricate approximations of the ideal, expressed in imprecise words.

People are complicated, so the rules that govern people will always be complicated. There's no escaping it.

I know what's in that book. I read it for a living. I knew it. So, what this is really about is that we are attacking your means of earning a living. Still doesn't change my mind.

I know what's in that book. I read it for a living. It doesn't say anything about social security, or medicare, or property taxes. It covers questions like: What counts as taxable income? What is deductible against income? In which year must taxpayers pay tax on income? How do C corporations work, and when do they realize gain? How do pension plans work? Which organizations count as charities? How are insurance companies taxed? How is mineral production taxed? How are S corporations taxed? How are partnerships taxed? When must taxpayers recognize capital gain? How do we calculate and adjust basis? What returns must people file, and when? How does the IRS go about collecting tax from people who don't pay? When do people go to jail for failing to pay their taxes?

Again, you are proving my point. Why do we need these questions. By asking them you have went and made things unfair. I will stand by my previous statement. It is only fair when things are equal. Once you start making exceptions to the rule, it becomes unfair. You have yet to answer my question. How is a flat rate of income not fair? It's not fair in your mind because it removes your livelihood. If we hadn't got started with all the loop-holes, and questions of how is this type of income different from this income, we wouldn't need your livelihood.

See, just asking what type of income is taxable makes the point that it is not fair. Fair means everyone is taxed exactly the same. The only way to do that is to tax an equal rate, with no exceptions. It's really not that hard, Ben.

And one more....
Consider this law: Thou shalt not kill.

It actually reads, "You shall not murder."

There you go again, making things more complicated than they really are. Typical lawyer.

Stacey, you perfectly exemplify the know-nothing approach to tax law with which so many conservatives embarrass themselves. You're assigning beliefs to me that I do not hold. You obviously know nothing about tax law, yet you're sure that your briefly considered intuitions are vastly superior to the thoughts of those who have spent years in this area.

I've explained the reasons behind the law's unavoidable complexity, and you merely reassert the perfection of your intuitions. That's enough time wasted enough time on you.

Ben,

Not being one to let the other side have the last word, I have to respond. I am still amzed how you won't answer such a simple question. How is taxing everyone at the same rate not fair? It's such a simple question, and yet you dodge it like the plague.

I don't feel I'm wasting time discussing with you. I really want an answer on why a flat rate across the board isn't fair, yet a convaluded, complicated system is?

I mean really, I do want to know. My approach is not a know-nothing approach. It is a fair approach. It'll never bea reality because of folks like yourself who want to keep things complicated so that your livliehood doesn't suffer.

The way I see it is there shouldn't be deductions, or differences. That's the liberal approach to things. Liberals strive to make everybody different, yet claim they are doing so in order for things to be fair. That's why we have junk like affirmative action. That's why on many federal forms it asks for your ethnicity, yet do so claiming equal opportunity. Why does it matter?

Using my method, the rich don't get off scott free because of this deduction or that deduction, or this loop-hole or that loop-hole. The poor guy doesn't pay more than his fair share, and middle class are treated equal as well. Using a flat tax, there would be more tax revenue, because everybody would pay, and everybody would pay an equal percentage.

For example, if I make 45,000 per year, and the flat tax were 5%, I would pay $2250 in taxes. No more. No less. If from my remaining income I wanted to give 10% to charity, then fine. I get the good feeling of knowing that I helped someone out. I don't get a tax break for that. That's not the point of giving to charity. But you see, to many it is, and that's where the system is messed up. They give so they can deduct it. So, in that case, the government gets less money from tax revenue. So to make up for it, we have other taxes created. Starts getting more complicated, and less fair.

I know you're not going to reply to this, but I would love to hear how a flat rate is not fair, and how a flat rate would not result in more tax revenue at a lighter load to the individual? Come on, Ben. Fire away!

Stacey,

While I agree that your model "sounds" simple, if we do away with all forms of taxation other than a simple flat income tax, what about all the people that currently do not work. Do they get off with no tax? Currently they still pay income tax and certain others but do I now have to pay more tax to make up for the lost revenue of sales tax for the unemployeed? If that is the case maybe I should go back to waiting tables, claiming 8% of my tips and pocketing the rest.

Eric, the libertarian party has an interesting idea for just using sales tax, albeit at a much higher rate. Sounds reasonable to me.

http://www.fairtax.org/