Better tax system models?

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Adam Taggart's picture
Adam Taggart
Status: Peak Prosperity Co-founder (Offline)
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Posts: 1797
Better tax system models?

It's November, and, absurdly, I have *almost* put the 2011 tax season behind me.

Chris and I run a relatively simple partnership, but I have easily spent more than a hundred hours over the past year and a half with lawyers and accountants figuring out how best to structure our organization and account for everything cleanly and legally.

Then there are the hundreds of hours I've spent during that time building the monthly books, working with our bookkeeper to make sure they're accurate, and then working with the accountant to prepare estimated and final tax returns.

We've racked up many thousands of dollars in fees while doing this. And mind you, we're not trying to set up some crazy, convoluted, offshore or otherwise murky structure to evade taxes. Quite the opposite: We're trying to be as transparent and squeaky clean as possible (so that the chance of being audited doesn't keep us awake at night).

And despite this diligence, I'm still overwhelmed by the complexity of it all. We have managed to bump into more issues, bureaucracy, and unexpected fees than I ever imagined possible. And there are still loose ends that keep cropping up, months after our returns were submitted.

And we have smart, professional guides whom we're paying to help us. I don't know how the solo taxpayer can be expected to successfully submit an error-free return if they have anything other than the most simple of conditions.

In fact, there are so many judgment calls that must be made throughout the tax preparation process that one feels its practically impossible to be "exactly right." You get the sense that if the IRS wants more money from you, there are any number of ways they can find fault with whatever calculations you decide to use.

The feeling that keeps coming to my mind is this: There HAS to be a simpler way to do this. Where it takes much less time and cost to accurately pay one's taxes -- and ideally, where abuses and loopholes are much harder to perpetrate.

I'm not well-versed in the arguments against a flat tax, but I must say the concept appeals to me after the frustration I've been dealing with over the past year. And are there other models worth considering?

While part of the reason for writing this post is just to vent, I'm genuinely interested in hearing the thoughts of the PP.com community on this. Especially those of any CPAs/accountants/etc with informed perspective to share.

RJE's picture
RJE
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Posts: 1369
Adam, I never was more

Adam, I never was more stressed than income tax time, and I too had the best books I could ever imagine. That is a stressor I am thrilled to not deal with anymore (from a business point of view). I have been retired 4 years, maybe 5 (actually I work as hard at this as I did working and being a good Pops). Anyways, I cannot wait for 7 years to pass so the stress of past book keeping finally ends. So a new tax policy would surely be nice. Just think of the man hours wasted trying to figure out an extremely complex system that even the IRS cannot understand. Amazing to consider is that you can call the IRS about an issue, get their expert opinion, and still have done your taxes wrong. The IRS gave you bogus information and you are still responsible and libel for interest and penalties even though you received your information from the IRS!? Crazy.

I believe I read that H&R Block sent out the same tax return to 100 accountants and received 100 different results!! YES!, this is one complicated beast even if half true.

All sales should be taxed, every transaction. Capture the underground economy by taxing sales of every item, and in doing this the system becomes clearly fair. Maximum taxes collected across the broad economy. That sounds good to me. Have no loop holes, just pay as you go.

I understand that any tax would become way more complicated than wished for but "keep it simple stupid" is still a great and fair motto to attempt. It won't happen though because we would have to lay a lot of IRS people off, and we don't do that.

Happy Voting

BOB

rhare's picture
rhare
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Posts: 1267
Simple consumption sales tax

I too feel your pain and believe tax day is Oct. 15th.  Every year I get frustrated in April and just file an extension.  I feel I have pretty simple situation, and my tax return is 80 pages!  Thank god for Turbo Tax, but this year I sold an investment house and I had to hire an accountant since I couldn't even remotely figure out what to do even with turbo tax.  Last year I had the IRS send me a note saying I owed them an extra $8K.  After about a weeks worth of work digging though all the crap and multiple calls with them they finally decided that instead they owed me $13.  I suspect this was more than a man week of effort!

I think we need to get rid of income and corporate taxes completely and have sales tax only - not a flat tax (which is applied to income).  This has several benefits:

  1. Much simpler - business already has to account for sales tax on local, county, and state levels.  Adding a federal tax would not be difficult.   Note, this is not a VAT tax, we only want to tax the end consumer.
  2. This makes things much more transparent. You see exactly what you are paying in taxes every day.  None of the games that make it easy to hide how much tax you are truly paying (hence why no VAT).
  3. A sales tax discourages consumption, not savings or investing.  We want people to be encouraged to save and invest as much as possible.  Taxing consumption encourages the right behavior versus our current system which encourages consumption via deductions for things you buy.
  4. I also believe we need to get rid of all employer paid taxes like Social Security, Medicare, etc.  These should all be paid directly by the employee.  Again this is a transparency issue since many employees have no idea how much their employers pay in taxes on their behalf.
  5. I believe all the taxes paid should be itemized by taxing authority on each receipt. This is again a transparency issue so that you know who/what/how much you are paying.  Taxing authorities hate this type of transparency - remember a few years back when the phone companies decided to itemize some of the taxes on the bills, the feds had a fit.
  6. We also need to have a balanced budget amendment.  Borrowing from the future to hide the taxes necessary today is just another hidden tax.
  7. On top of all this we have to have a sound currency, since inflation is simply another hidden tax.

Quite the mess - I have little hope we will fix the system...

jasonw's picture
jasonw
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Posts: 764
Exponential Growth of the Tax Code?

Here is an interesting article and graphic I came across a while back that shows the voluminous growth of the tax code over the years.

http://dontmesswithtaxes.typepad.com/dont_mess_with_taxes/2008/04/the-out-of-cont.html

Tycer's picture
Tycer
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Posts: 554
The Fair Tax is the only one

The Fair Tax is the only one I know of that has had serious vetting and careful wording. I would support it fully. A dear family friend is the NC director for the Fair Tax and would be happy to write an op ed and answer questions about it. You know how to reach me if you want her contact info. 

Macs's picture
Macs
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Posts: 40
... and I thought OUR tax was bad

Yikes! An 80 page return is insane. I think us Brits should stop complaining about Her Majesty's Customs and Revenue and thank our lucky stars. I'm self-employed, and each year I complete my FOUR page return in half an afternoon, longer if I haven't filed all my receipts properly blush On the first page all I have to do is tick a box to say 'yup, that's me and I haven't moved home'.

If I had property (real estate) to sell I'd need the 'long form' return, but even that is only about 12 pages long. For really complicated cases you might need a supplementary page, but that's rare. Most people in jobs (ie not self-employed) never need to file a return in their life.

Shoot me down if I'm barking up the wrong tree, but I get the impression personal taxes in the US are a mass of exemptions, special rates, deductions and what have you (and we do have a few of those here, too) and it strikes me as being related (perhaps only in mindset) to the whole concept of 'pork' with your legislative process. So many times I hear of US laws being passed that are substantively on one issue, but with dozens of riders on unrelated issues giving kickbacks to various interests for support. Like healthcare legislation with anti-terror clauses etc. That strikes me as a bizarre way to draft legislation, and I don't undertsand the history of how it developed. What's so difficult in drafting a single law for a single issue? Is there some special love of loopholes that makes US legislation and taxes too complex for the average person to understand? Seems like you'd all benefit from a lot of streamlining.

@rhare - one final question - what's the distinction between sales tax and VAT? I've never looked into US sales taxes, so just assumed they were pretty equivalent to our VAT. (BTW, I agree with your arguments for the sales tax - we should tax things we don't want, and not the things we do - like jobs).

rhare's picture
rhare
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Government is like cockroaches - they prefer the shadows

Macs wrote:

but I get the impression personal taxes in the US are a mass of exemptions, special rates, deductions and what have you (and we do have a few of those here, too) and it strikes me as being related (perhaps only in mindset) to the whole concept of 'pork' with your legislative process.

It is.  It's why the tax code is huge.  Thousands of special interests get special exemptions and each one requires forms.   What really bad is when you start getting into the 100k or so range, you them have to do your taxes essentially twice to determine if you have to pay AMT (Alternative Minimum Tax).  It was one of those things that was instituted to "tax the rich" that is not indexed, so inflation has driven more and more people into dealing with it (sell a company or large chunk of stock and you get to have all kinds of tax fun).  Also, many of the credits (for example the EV car charger credit) also require you to do a lot of extra calculations to determine if you can claim it (means testing).  It's really a complete disaster with many many subjective choices to make. 

Macs wrote:

@rhare - one final question - what's the distinction between sales tax and VAT? I've never looked into US sales taxes, so just assumed they were pretty equivalent to our VAT. (BTW, I agree with your arguments for the sales tax - we should tax things we don't want, and not the things we do - like jobs).

VAT is collected at every step in the production of a good or service.  So if you manufacture something and have to buy raw materials, your material supplier collects the tax and then when you sale you also have to collect a tax for "adding value" to the product.  Generally you get to deduct the tax you paid to your supplier from what you owe when you collect from the consumer.  Whereas with a sales tax, you generally give your supplier a note that says, you are going to resale (exempt), and you don't have to pay the tax at that point. 

So VAT adds complexity since every one has to pay the tax and everyone has to keep track and fill out paperwork along the supply chain.  Whereas will sales tax only the end seller has to do so.   The big difference however, is that the end user (the consumer) doesn't see exactly how much tax was collected on the product they just purchased.  It allows the government to hide it all along the supply chain and give large vertically integrated manufacturers an edge.  You can read about it here: The Value Added Tax Is Not The Answer

Governments don't like transparency, they are like cockroaches and like to hide in the shadows so you never know how much of that sandwich they have stolen. devil

ezlxq1949's picture
ezlxq1949
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Posts: 50
Taxing Taxes

Australia's tax system seems blissfully simple in comparison to what I've read here, although I can't vouch for the company situation.

We have no local, no county, no state income taxes. We have federal income tax only. Tax revenues are re-distributed to the states via an annual conference.

We have state-level stamp duties and other irritating levies but a lot of these disappeared when the GST (VAT) system was brought in. This system seems to work well. No local taxes anywhere. (By way of comment: here the price on the shelf is the price at the cash register. The GST is NOT added at the checkout.)

All returns are personal; there's no family option. My wife does ours. It's usually all over in an hour. Being a US citizen also, she does a 1040EZ but this takes only 15 minutes, mainly because there is nothing to report except her Australian income which is US-tax-exempt anyway. [In my paranoia I'm waiting for the IRS letter saying they've decided to revoke all exemptions, so would we please pay lots of back taxes instantly. :-) ]

The ATO (Australian Tax Office) is has recently been heavily criticised for behaving like a bully and a thug. Typical I suppose; governments lose their sense of humour almost immediately when it comes to money.

A simple tax system has not done anything to control the escalating plunder of our natural resources.

rhare's picture
rhare
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Cockroaches are the same everywhere...

ezlxq1949 wrote:

(By way of comment: here the price on the shelf is the price at the cash register. The GST is NOT added at the checkout.)

That's exactly how governments like it.  You can't tell how much of your purchase was actual product versus taxes.  That's why government prefer VAT type taxes.  We see the same thing here in the US on products like gasoline which have a lot of taxes in the price, but at the pump you don't see them so you just think the price of gas has gone up and you get angry at the gas station owner, the oil company, or them evil speculators instead of at the government.

For instance which of these receipts would make you question the amount of taxes you pay:

Gas:   10 gallons @ $3.00 = $30.00

------------------------------------------------------------------------

Gas:   10 gallons @ $2.50 = $25.00

Tax:    10 gallons @ $ .50 =  $ 5.00

Total:                               = $30.00

Sorry to those of you outside the US (or in CA,NJ,NY) where these gas prices look ridiculously low. cool

SingleSpeak's picture
SingleSpeak
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You just touched a nerve Adam.

So much time is spent tracking, planning, praying, and guessing about taxes that it makes me want to scream. I own a music school here in So Cal but I spend more time on Quicken than I do teaching. Every purchase I make, or mile I drive, or RX I buy, etc. is self-regulated by the resulting tax consequence it may or may not trigger. It makes a person's business much less focused on the business and more focused on "What is the government going to want me to do (or pay) next?".

I agree with rhare that no income tax would be the smart way to go, but even if there was a straight 10 or 15 percent income tax without all the crazy loopholes and subsidies, IMO it would be a major improvement. 

I realize that all the special interests and the CPA's that feed off the current system would go into major withdrawal symptoms, but simplification of the code is necessary to allow a more productive use of our time. Adam could spend time helping getting the Peak Prosperity message out, and I could finish my next CD. 

SingleSpeak

 

Macs's picture
Macs
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Thanks for the link -

Thanks for the link - interesting, but I'm not sure I agree with all his points looking back from another 40 yrs on. Accounting is not diffcult, just an extra column in the ledger. Businesses I've worked at always treat the ex-VAT price as their 'real' cost of materials etc, so the cumulative increases don't occur as Rothbard says. Otherwise you become uncompetitive vs a company which doesn't do that. I will concede that vertical integration benefits, though not on that score exactly - the accounting costs, whilst small, can be minimised by VI (though do you know any large company without hordes of accountants? cheeky) He raises false invoicing, but fraud is fraud and will occur in any system, and I'm sure there'll be someone who can work out a fiddle on sales tax too. Re small businesses, there is a threshold for turnover (in the UK that's around £70k/$100k), below that you're VAT exempt (like me). Also he was incorrect to say all business invoices have to be submitted to the 'federal' govt. Accounts must be kept, and you can be inspected, but unless you're acting dodgy that doesn't occur more than once every seven years or so. I think 40 yrs of practice have honed things slightly since the article. Conversely, we don't have sales taxes (ie retail-only), so here that would add extra bureaucracy.

I appreciate the mess you face, tax really shouldn't be subjective. Once I fill in my form I know how much I owe (or how much they owe me...) and its easy to keep track as you go, too, so an escrow account isn't hard to do if necessary. I begin to see why you don't have much hope of getting the system fixed. It sounds beyond fixing, you need a full Keplerian revolution to banish all those epicycles to history.

LesPhelps's picture
LesPhelps
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I am not alone

My tax return does not require the amount of effort and expense you describe.  Never the less, when I spend a day or more doing my taxes in spring, using a purchased software package to reduce the frustration, I long for a flat tax!  I have degrees in Accounting and Finance and I can no longer force myself to wade through the convoluted calculations by hand.  They are way over the top!

The other reason I long for a flat tax is that everyone would share in the burden, rich and poor as well as the "middle class."  People at my income level pay three times as much tax, on a percentage basis, as the average person with income in the US.  I say person with income, because, as you know, many who earn don't pay anything.  I have read that people in my income bracket generate 70% or the revenue collected by the IRS every year.  

That's staggering!  We certainly don't consume 70% of the services, nor do we get 70% of the profit made possible by the wars many of us don't agree with.

Thinking about the election results I must add; people who don't pay any tax get the same number of votes that I do.  This implies that my income is not my own.  People who don't pay tax can have a profound impact on where my earnings wind up (i.e. their pocket).

Finally, I just retired.  I recently did a retirement budget. :-(  Well over half of my retirement spending will go to taxes and health care.  Where is the justice in that?

Wendy S. Delmater's picture
Wendy S. Delmater
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it's not the tax, it's the spending

If we cannot rein in spending, talking about taxes is almost meaningless.

Nevertheless a flat tax is the fairest one I've seen. A tax on consumption would tax a wealthy person when they make luxury purchases at the same rate as a poor person, but since the poor person consumes far less, they'd have an "effective" lower tax bill.

Let's look at how a flat tax would work. In my example Mary Moneybags buys a Gulfstram jet at $37,000,000 and Peggy Poorhouse buys a bicycle at $200. Using a 15% flat consumption tax Mary's tax on the Gulfstream purchase is $5,550,000. Peggy pays $30 in consumption tax on her bicycle. That may sound like a lot of tax for a simple bike, but this replaces income tax and a host of other taxes.

I am still not completely sold on a flat tax on basic food items, but the minute you make anything at all exempt the whole system is vulnerable to the same sort of manipulation our current tax code is subject to.

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joemanc
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Posts: 834
Tax Code = Jobs

I work for a law firm that specializes in Trusts and Estates and in preparing all of the tax returns required throughout the year, such as income and gift tax returns.

Anyways, a complex and convoluted tax code creates jobs, albeit, at the expense of productivity. I would not have a job if it weren't for the tax code. Think about all of the accountants and lawyers, and me, that would be out of work if we had no estate tax, deductions, etc. and instead folks could keep all of their assets at death and we had a flat tax? I think it was Charles Hughes Smith who said that these regulations add friction to the economy and that's exactly what the tax code does. Ultimately, the tax laws in Washington are written by attorneys, which is why they are so complex. So blame the attorney politicians in DC!

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ezlxq1949
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Fuel prices

Those prices DO look low! Yesterday I paid $A 1.549 / litre for diesel, which is what it has been on average for a few months now. (Petrol is about 10 cents cheaper.) This converts to $US 6.06 per gallon.

People grumble but by and large these prices have receded into the background. On the other hand, it is becoming evident that the Australian motor vehicle industry is crumbling.

ezlxq1949's picture
ezlxq1949
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Fuel Prices again

Sorry rhare, I forgot to mention that my sales docket for yesterday's diesel puchase itemises things thus:

Diesel Qty 38.31 L @ 154.9 c/L  TOTAL $59.35

GST included in the transaction  $5.40

We still grumble about the level of taxation on transport fuels, but nothing changes. Do I wish for cheaper diesel? No, because that wouldn't encourage thrift. And the Australian motor vehicle industry will continue to crumble anyway. 

Arthur Robey's picture
Arthur Robey
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Tax Re-itteration.

Given that I believe that some projects need collectivism ( the military springs to mind) the Government needs to raise revenue.

Why not just print it? This is a flat tax on everybodies purchasing power as their dollar is devalued.

The newly minted note is spent on whatever the population votes for (no change there) and there is no paperwork, no angst, no loopholes, no smoke and mirrors.

Aye, and there's the rub. No loopholes. Seeing that the USA is now a Fascist state Capital will never allow a tax system with no loopholes.

To keep inflation under control notes (or digits) are withdrawn at a steady rate.

All very simple really, in a Democracy.

Fascism is when Capital becomes the Government. The USA is now Fascist because companies are free to pervert the will of the people with lucre.

rhare's picture
rhare
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Posts: 1267
Transparency is the issue.

ezlxq1949 wrote:

Those prices DO look low! Yesterday I paid $A 1.549 / litre for diesel, which is what it has been on average for a few months now. (Petrol is about 10 cents cheaper.)

There were actually a tiny bit low, I actually paid $3.26 last week at Costco.  I didn't look what I actually paid, but just guessed around $3, since the point was about the fact taxes are hidden, not the actual price of gas. wink  But I really feel sorry for you and your gas/diesel prices (although diesel is quite a bit higher here as well) - it's nice to have the reserve currency...

ezlxq1949 wrote:

We still grumble about the level of taxation on transport fuels, but nothing changes. Do I wish for cheaper diesel?

No matter what you believe the price of diesel/gas should be, I still feel that we need transparency in taxing.  Anytime a tax is imposed it should be visible to the consumer/taxpayer.  It's nice that the GST is itemized on your receipts.  Is it mandated?  Are there other taxes in the fuel cost?

rhare's picture
rhare
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Taxation via inflation is not fair (flat)...

Arthur Robey wrote:

Why not just print it? This is a flat tax on everybodies purchasing power as their dollar is devalued.

The newly minted note is spent on whatever the population votes for (no change there) and there is no paperwork, no angst, no loopholes, no smoke and mirrors.

I'm assuming you're joking, but just in case:

The problem is that taxing this way is not evenly distributed.  Those closest to the source of the printing (government and large corporations) see less of an impact because they get the money first.  Also, printing as a form of taxation punishes savers and rewards spenders.  Then on top of that is the transparency issue.  Taxation via inflation is the most hidden tax of all.

Adam Taggart's picture
Adam Taggart
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Posts: 1797
Jindall proposes replacing all income tax with sales tax

Whoa! Did a politician just propose a bold, sensible tax policy?

Via BusinessInsider:

Louisiana Gov. Bobby Jindal is proposing the complete elimination of income and corporate taxes in the state, and says he wants to replace the revenue by increasing sales taxes.

The Times-Picayune reported that Jindal is in the process of fleshing out the tax reform proposal, the goal of which, according to a statement from the Governor’s office and given to the paper, “is to eliminate all personal income tax and all corporate income tax in a revenue neutral manner. We want to keep the sales tax as low and flat as possible.”

“Eliminating personal income taxes will put more money back into the pockets of Louisiana families and will change a complex tax code into a more simple system that will make Louisiana more attractive to companies who want to invest here and create jobs,” Jindal says in the statement.

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