Rowyn (rowyn) wrote,

Why I Hate the US Tax code

Prester_Scott made a parenthetical reference in this entry: "Anyone having to pay less income tax is a good thing, all other things being equal."

This remark prompted a long diatribe from me against the tax code, and rather than spamming poor Scott's journal with it, I figured I'd just make an entry of it.

While. like Scott, I believe that gov't is too large and, accordingly, that taxes are too high, I don't think that any tax cut is a change for the better. On balance, I have an intense dislike for the whole tax exemption/reduction business. Tax deductions and exemptions warp behavior, usually in a bad way. For example, many people who rehab houses for a living will buy a house, move into it, fix it up and use it as their legal residence for two years, then sell it. Why? Because you don't pay capital gains taxes on the sale of your home. And you can deduct your interest payments. So, economically, it only makes sense for me to do this process to one house every two years. (Or whatever the legal qualification for 'living' in a house is -- I don't remember the exact period.)

Every credit card company in America has a PO Box in Delaware, for tax purposes (also, I think, because of the civil suit laws in that state, though I'm not positive.)

Many companies have assets legally held in a place like Bermuda, for the sole purpose of evading taxes. I know one man who maintained an apartment in New York state for over a year after he left, because of the tax benefits. People even get married or divorced for tax purposes. (Current tax law favors married couples where one partner earns substantially more than the other, and penalizes those who earn roughly the same salary).

The case Scott cited -- where tax exempt status discourages churches from speaking on matters that the IRS might consider political -- is one of the more obviously pernicious ones. But my point is that behavior which is nonsensical, circuitious, and wasteful is often transformed into rational by the obscurities of the tax code. This is why (in retrospect, anyway) I like the Reagan tax cut of the 1980s, because it cut the marginal tax rate at the same time as it eliminated bunches of tax exemptions and deductions. The net effect was to simplify the tax code.

Since then 'targeted tax cuts' and similar devices have enormously complicated the tax code. Complicated = bad. The more complicated the tax code is, the more it invites 'creative accounting' and unnatural gyrations on the part of people and corporations in order to qualify for assorted deductions. If you examine the finances of any given corporation, you will find that the 'income' they report on their financial statement, sent to stockholders and analysts, wildly differs from that sent to the IRS. Companies will report millions of dollars in income to their shareholders, and then turn around and tell the IRS they lost millions. And it's all perfectly legal and based around the same kind of accounting that you use when you take a deduction for your child, or your tithe, or your interest on your mortgage.

That is to say: warped.

Further, all these tax deductions invite government scrutiny into areas which are, frankly, none of the government's business. The US doesn't need to know how much of my money goes to charities, interest, churches, medical bills, or paying for my kids' tuition -- except that it will give me a tax break if I tell them. In effect, they are trying to bribe me to give up my privacy: 'Tell us all, and we'll take away less of your money.'

This is not how I want taxes to work.

My favorite proposal for handling taxes is one Telnar and I worked out on the phone one day. We start with a constitutional amendment that forbids Congress or any of the states, counties, cities, etc., from taxing anything except sales. In one fell swoop, we eliminate income taxes, property taxes, phone-line surcharges, and all those other little taxes the gov't works into our lives. They can now tinker with just one thing, and when they tinker with it, we'll all know.

The sales tax then imposed is flat, and applies to everything: food, rent, clothing, purchases made over the Internet, everything. (Incidentally, under current tax law, purchases made by catalog and through Internet companies are taxable. However, the selling company is not required to collect them unless they have a physical office located in your state. But YOU are still supposed to pay them. When you don't, that's tax evasion! Really). The main complexity here is defining what constitutes a sale. This is, indeed, a pain, but the only simpler form of taxation is too onerous to contemplate seriously (a flat sum taxed to every individual, which would come out to about $8,000 per person for the federal government alone. This isn't too bad for the average working person, but would be a bit hard on, say, the unemployed, not to mention on small children.)

So, we have a flat sales taxes. A flat sales tax isn't, trictly speaking, regressive, because the rich, who spend more on yachts and whatnot, still pay more in taxes than the poor. However, it tends to be more burdensome on those who are just trying to scrape by on food, shelter, and clothing, then on those who need to switch to a bigger bank in order to finance the purchase of their third mansion. As a compromise, we then offer a flat rebate of, say, $2,000.00 to everyone for being an American. We could just offer this rebate to the poor or whomever, but we won't, because that would require (a) defining 'poor' and then (b) finding out who meets that definition of poor. That's just too complicated and would lend itself to the very gyrations and distorted behavior we are trying to escape. So Ross Perot gets his $2,000 just like everyone else. On the bright side, however, struggling Mama and her 6 kids each get $2,000, too, so it ain't all bad for the poor. This requires a verification system for making sure that only living Americans get their refund check (apologies to all you resident aliens, legal and otherwise -- no one's saying the system is perfect). It still invites a certain level of fraud. However, because the amounts involved are relatively small, it's not going to look tempting to big corporations, who first off aren't eligible for the refund, not to mention that a multi-million dollar company isn't likely to fret over how to collect $2,000 rebate check anyway.

No, the main place for companies to get creative is in determining what constitues a sale. But I still feel confident that this would be easier to audit, and less intrusive, than the IRS's current byzantine code.
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