Friday, April 15, 2005

Income Tax Day

Today is April 15, the deadline to file your individual income tax return (or your extension). I have a few thoughts.

One impractical idea of mine is to eliminate automatic withholding and to substitute monthly tax payments. This is impractical as the level of noncompliance would bring the government to its knees. I suggest it anyway because it would make people aware of how much they pay for government. Most people focus on take-home pay and their annual refund, but they do not seem to notice how much they are paying. A higher attention level to the cost of government would help in controlling the size of government.

Another impractical idea is to move election day to April 16. Incumbents would never let that happen, but it would cause people to enter the voting booth with strong memories of the cost of government and the complexity of our income tax system. Reform of both would more likely follow.

A more practical thought concerns the complexity of our income tax system. Over half of all taxpayers hire someone else to prepare their tax returns. That should tell us something. I know a few professional tax preparers, and some of them will tell me of taxpayers who can not complete the simple tax returns, such as Form 1040-EZ. The number of unfiled schedules, which still must be completed, is absurd. The time and effort that goes into tax preparation would be more productively spent on other endeavors. A simpler, less complicated tax system would benefit us all.

As always, there is a reason for the way things are. Politicians who push tax simplification do not attract campaign contributions while politicians who push special tax preferences receive contributions from the intended beneficiaries. Politicians who propose eliminating itemized deductions receive flack from realtors, charities, mortgage debtors, etc. even though most taxpayers do not itemize.

There are several kinds of retirement plans sanctioned by the Internal Revenue Code. Each has its own rules. Do we need more than one or two at most?

And carvebacks. There should be a special place in Hell for the inventor of carvebacks. First, you think you are entitled to some deduction. Then, you fill out the worksheet to discover that you are not eligible for the deduction or that you can deduct only part of the full amount. Carvebacks are crazy and unfair, but they do reduce the loss of tax revenue. So, the politician gets credit from the lobbying group for supporting the deduction and at the same time minimizes the number of people who qualify and the amount the less-favored qualifiers can deduct. It becomes a political game to set the qualifications (broad enough to satisfy the lobbying group) and the carveback rules (narrow enough not to alienate the lobbying group but sufficient to meet the budget objective).

Fairness is laudable, but it is the enemy of simplicity. Trade-offs are necessary, but do not leave simplicity out of the equation.

A final thought. The purpose of the income tax laws should be to measure the amount of income and to lay a tax on it. PERIOD. All else is superflouous and introduces ever-increasing complexity.

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