Monday, February 7, 2011

How Many Congressmen Does it Take To...

File their own taxes?

Now that tax season is upon us, millions of Americans will begin to pay tax preparers or software companies billions of dollars to assist them in filing their income tax returns. No one in their right mind would disagree that the current tax code is absurdly complex. It is difficult, if not impossible, for the average American to be knowledgeable enough about the law to accurately file other than the simplest returns without assistance. Even professional tax preparers still make mistakes due to the complexity of the system.

However, if anyone should be well versed in tax law, it should be those responsible for writing it, namely, Congress. Without knowing the exact statistics, it is still a safe bet to assume that a vast majority of congressmen and senators do not file their taxes on their own. (Though many are still involved in the process enough to make sure that they don't pay everything that they are supposed to.)

It would be interesting to see a law enacted that requires members of Congress to file their own taxes without assistance from tax preparation professionals or software. Perhaps after they had spent some time floundering in the mess that they created, they might think twice about real tax reform.

Friday, December 3, 2010

Court of Fools: Episode 3

Episode 3: Felix Montes-Rodriguez v. People of the State of CO

Colorado Supreme Court
Year: 2010
Majority: Michael L. Bender
Joined by: Gregory J. Hobbs, Jr.
                Mary Mullarkey
                Alex J. Martinez
Dissent: Nathan B. Coats
Joined by: Nancy E. Rice
                Allison Eid

This case came about when Felix Montes-Rodriguez applied for a vehicle loan using his name and address, but a social security number belonging to someone else. He was originally convicted under Colorado's criminal impersonation statute and the case was appealed, eventually reaching the state's supreme court.

The conviction was overturned because the court held that Montes-Rodriguez did not "assume a false or fictitious identity or capacity". The court goes on to say, "we hold that one assumes a false or fictitious capacity in violation of the statute when he or she assumes a false legal qualification, power, fitness, or role," and that "the prosecution failed to present evidence that a social security number gives one the legal qualification, fitness, or power to receive a loan." Essentially their argument is that the SSN was required by the bank and not the law in order to receive the loan. This is utterly ridiculous. Not every qualification, power, fitness or role is issued by or required by the government. The bank might also require that you show proof of continuous employment. If you submit a resume belonging to someone else, is that not assuming a false role? Apparently not in Colorado since the government doesn't require employment verification for a loan.

This is an extremely bad decision in that it limits the ways in which identity theft and impersonation can be prosecuted. Now as long as someone uses their own name and address, they can steal whatever other information they need to get what they want.

~ Another Guy

Wednesday, December 1, 2010

The Case for a National Sales Tax: Part 4


While I do not particularly like the name, Fairtax does indeed have some elements that improve the "fairness" of the tax system. One of the best benefits is that everybody pays, at least anybody that buys stuff. Illegal immigrants, average working stiffs and the super rich all have to pay the sales tax. It doesn't matter how much money you have to blow on expert accountants, everyone will have the same understanding of the tax code. There won't be constant hunting for tax-advantaged investments or savings accounts, because making and saving money isn't taxed anymore, just spending that money.

Tax-advantages are probably one of the most "unfair" parts of the current tax system. Lobbyists petition congress to create special exemptions or alterations for specific industries or causes. Thus you get situations where some businesses must pay more in taxes because they don't have the lobbying assets that other businesses do. A national sales tax removes some of that influence. Obviously congress will still be influenced to spend money in the interest of special groups, but those bills are harder to pass than simply modifying a few sentences in thousands of pages of tax law. This may actually be one of the biggest hurdles to implementing such a plan, congress is never very willing to give up control of anything, let alone the collection of money that they love to spend.

This would also force more transparency from congress. Any adjustments to the tax rate would affect everyone, not just certain segments of the population. As can be seen in the current tax discussion, there is often a desire to raise taxes on the rich as they are a small minority and not always viewed in the best light. Everyone else is more likely to go along with it because their taxes remain unchanged. With a sales tax, everyone will feel it and everyone will know exactly how much everyone else pays. No more tables or brackets, if taxes go up 1%, everyone knows that they will now pay 1% more. Even those under the poverty threshold will still be cognizant of the situation because even though all of their taxes are refunded, they still have to pay them upfront. Hopefully this would lead to more scrutiny of government spending, as everyone would see a direct benefit if spending was lowered enough to reduce the tax rate that everyone would see at the register. Of course, at this point government spending is entirely divorced from tax revenue, so congress would probably just lower the tax rate and increase the rate of the money printer.

This concludes my posts on a national sales tax. There are obviously some things that would still need to be ironed out, but I hope I have at least made the point that this is something worth seriously looking into.

~ Another Guy

Monday, November 22, 2010

The Case for a National Sales Tax: Part 3

Potential Economic Benefits

One of the biggest potential impacts that this system could have on American businesses is to make them more competitive in the global market. Removing payroll taxes alone would lower the overall cost of U.S. labor without shrinking workers' wages. And labor costs are routinely mentioned as one of the top reasons for manufacturing moving overseas. However, a system such as FairTax would remove not only payroll taxes, but all other corporate taxes as well. This means that a firm that manufactures widgets in the U.S. would be charged no direct taxes. Domestically, the widgets themselves would only be exposed to taxes at the time of retail sale. If the widgets were exported, there would be no U.S. taxes involved at all (barring some import/export tax) and the economic advantages of moving production overseas begin to look much less attractive. More domestic production would lead to an improved (or ideally eliminated) trade deficit, increased employment opportunities, etc.

It is also worth noting that removal of corporate taxes would most likely cut down on the games played by companies such as the "Double Irish Arrangement" and "Dutch Sandwich". Such structures allow many international firms to avoid much of the U.S.'s 35% corporate income tax. For example, Google manages to only pay 2.4%. Such maneuvers are by no means rare and ensure that firms who only operate domestically or do not have the resources to put into tax avoidance are the only ones paying the full rate. Removal of loopholes associated with complex tax policies would certainly improve financial transparency.

Next up: "Fairness" Benefits

Tuesday, November 16, 2010

The Case for a National Sales Tax: Part 2

The Benefits of a Simplified System

As a commenter pointed out on the last post, it doesn't matter how short a piece of legislation is, the average American (and probably more than a few members of congress) will never read it. That is just fine, we operate in a society filled with laws without ever reading much in the way of detailed legislation. However, according to a survey by the National Retail Foundation, almost 75% of US taxpayers intended to file last year's taxes using an accountant, tax preparation service or software. This would seem to indicate that the process of filing a tax return is either so complicated or cumbersome that a huge number of Americans are willing to pay someone else to make it easier. Don't get me wrong, I understand that many American's are lazy and some would probably pay someone else to go to the bathroom for them if they could. But, the fact that the current tax code is so complicated that a taxpayer preparing his own taxes might easily be missing out on deserved credits and deductions is absurd.

A national sales tax would remove the need to hunt for deductions or credits that change from year to year. In fact, individual taxpayers wouldn't even need to file a return each year. All you would have to do is let the government know that you exist so that you can be mailed your monthly "prebate". Removing the burden of tax returns from citizens also has another benefit: it is hard to dodge taxes. Even an illegal alien working "off the books" would need to purchase things and would so contribute taxes. Obviously there will always be tax cheats no matter what the system and many states deal with businesses circumventing sales taxes, but many simple mistakes that lead to incorrect returns each year can be avoided entirely.

Perhaps the greatest benefit of simplicity is something that seems to be a hot topic at the moment, smaller government. The IRS could be vastly shrunk as the number of tax filings would decrease dramatically. Furthermore, if the federal government paid the existing state agencies that collect local taxes to handle the federal sales tax, even further efficiencies could be achieved. A streamlined system would help to remove at least a thin layer of bureaucracy from an already bloated government. Spending less money on overhead means that less of the tax money collected goes into collecting taxes.

Next up: potential economic benefits

Monday, November 15, 2010

The Case for a National Sales Tax: Part 1

Given the current economic situation, a lot of attention is being paid to tax policy. One of the biggest debates at the moment is over tax breaks and who should get them. I would like to make the case for a complete overhaul of the U.S. tax system with the implementation of a national sales tax. I certainly did not originate this idea and am not certain about some of the finer details. Overall, however, I think that the ideas behind a sales tax are sound. In order to discuss the general principles of such a tax system, I will use one of the more prominent proposals, FairTax, as the base example. Before I get into the specifics, I want to begin by saying that I have issues with the way that FairTax is promoted. The name itself is loaded. While I intend to argue that a national sales tax is indeed more "fair" than the current system, the name "FairTax" has a slimy feel to it. It is also often spoken of in terms of a tax-inclusive rate in order to make it seem lower than the traditional tax-exclusive rate that many are used to with current state sales tax rates.* In any case, it is worth setting aside the political haze that clouds every idea Congress tosses around in order to actually evaluate proposal.

FairTax is a proposal to eliminate all federal taxes such as individual income, corporate income, capital gains, alternative minimum, payroll (social security, unemployment, medicare, etc.), estate and gift taxes. They would all be replaced with a nationwide tax on the retail sale of all new goods and services. There would be no tax on purchase amounts up to the government defined poverty line. That is to say that someone earning at or less than the poverty line would not be subject to the sales tax at all. This would be implemented by every household (even those making more than the set poverty level) receiving a monthly "prebate" check. Rather than filing a tax return at the end of the year, each household would be reimbursed for the total tax that would be collected on a year's worth of purchases at the poverty level. This amount would be divided by 12 and disbursed each month. So in effect, each household would only be taxed on what they spent above the poverty threshold.

That's basically it. The proposal has some details on what constitutes a new good, etc. But for the most part it is very simple and straightforward. In fact, to the right is a picture of outgoing Representative John Linder R-GA holding the 133 page FairTax Act alongside the current tax law. In my next posts I will discuss the benefits of the a national sales tax over the current tax system.

* Tax-inclusive means that the rate is calculated based upon total spent, so if you spent $0.77 on an item and paid $0.23 in tax, you would calculate the tax rate by: 0.23 / (0.77 + 0.23) for a rate of 23%. Nobody calculates rates like that in the real world. If you see an item in the store, you calculate the sales tax based upon the price of the item only, not including the tax. In the above example, if you paid $0.23 in tax on an item that cost $0.77 almost everyone would calculate the tax rate as 0.23/0.77 for a rate of about 30%. Playing games like this is not going to win any friends.

Wednesday, November 3, 2010

Election Reaction: Calls for Compromise

After any election that changes the balance of power there is the inevitable call from both sides to compromise and work together to "get things done". There are a number of problems with this mentality that this election should have highlighted to the powers that be:

1. "Getting things done" means different things to different groups. To liberals, it means using government to fix perceived problems. To conservatives (especially in this election cycle) it means reigning in government which they perceive as the problem. There is something to be said for not getting things done if what is being done is unpalatable. The idea that these two philosophies can be easily reconciled is laughable.

2. Compromise doesn't just mean meeting in the middle. If someone were to say to you, "I would like to punch you in the gut ten times," you would tell them to get lost (or something more colorful). If the person came back and said, " OK, how about I only punch you in the gut five times," your answer wouldn't change. You find getting punched unacceptable. It doesn't matter how many times, or where you would get hit, you won't budge. This is how many people (especially in the current polarized situation) feel about politics. A conservative doesn't want the government involved in health care at all, so a liberal offering to remove the "public option" to sweeten the deal is not compromise.

3. Compromise is about fine tuning details to appeal to multiple groups, not adjusting ideology. At the end of the day, liberals and conservatives are going to agree on very little in terms of broad sweeping policies. The Democrats unilaterally enacted the health care overhaul despite polling showing that the people didn't want it. The people have spoken and removed the Democrats from power as a fairly clear signal that they did not approve of what had been done. If the Democrats had unilaterally pushed something through that Americans accepted in principle, but had some quirks to be worked out, there would not have been 60 House seats changing hands. Voters don't mind a little haggling over details, but they don't want to compromise on their principles.

4. Compromise is just another way of saying "maintain the establishment". Much like children, politicians don't like change. As power switches between parties, very little changes. The two "compromise" with each other and merge toward the middle. During the next election, voters decide that they don't like what is happening, so they vote to put the other party in power. Yet again the parties merely meet in the middle and nothing really changes. They fail to understand that voters don't like the middle. If they did, power wouldn't change hands so frequently. You can't please everyone and when you try you end up with an approval rating of less than 25%. The Tea Party is a prime example of the dissatisfaction with the status quo. Why have a vote if you're just going to do something that nobody likes? What's the point of having a majority if the majority doesn't rule?

5. What constitutes compromise is decided by the party in power. Congress still has not passed a budget. This is perhaps one of the few things where meaningful compromise is achievable. For example, both parties agree that the DOT needs money to operate. How much money is certainly up for debate as there is disagreement as to just what that money is needed for, but the at the end of the day the government has to be funded and a consensus reached (or pushed through unilaterally). Instead, Congress has wasted time on stimulus spending, health care reform and other projects favored by the liberals. The liberals were in power, they got to set the bar for what would be compromised on. There is nothing inherently wrong with this, it is just important to realize that "compromise" is not some warm fuzzy activity where everyone is on the same page and coming from the same place.

6. True compromise is nearly impossible in a two party system. The two parties represent (in theory) polar opposites. There is rarely going to be an issue on which polar opposites can agree. If there were different degrees of conservative and liberal there could be compromises reached that might appeal to segments of each group. However, the desire to maintain "party unity" in order to maintain power generally keeps members of Congress on their respective sides of the aisle except when they come together on something that benefits the establishment without regard for what their party supposedly stands for.