Monday, April 15, 2013

The goal of the US tax system is to maximize cheating for the 1%

Neil Irwin has a great post up today about how easy it could be to do taxes:

For millions of Americans, the IRS already knows most, or even all, of what it needs to know to enable you to complete your income taxes. Your employer reports how much it paid you in wages to the taxman; your brokerage firm reports how much stock dividend income you received; your bank tells the IRS how much you paid in deductible home mortgage interest.

So wouldn’t it be great if you could log into and see a form with all that information already plugged into a 1040? You could then add or update any other relevant information (say, a charitable deduction that did not get reported), and hit “send.” For millions of people with relatively simple tax situations, filing annual income taxes would be no more punishing than paying a parking ticket online...There have been bipartisan proposals in Congress to create exactly such a program of “return-free filing,” including a 2011 bill proposed by Sens. Ron Wyden (D-Ore.) and Dan Coats (R-Ind.). It seems like the kind of sensible, modest thing the government can do to make peoples’ lives quite a bit simpler.

Indeed, colleges and universities report tuition to the IRS so students don't have to.  It's not hard to do--we could easily set up a system that would make tax compliance very, very easy.

But there are powerful interests that oppose making taxes easy to comply with:

What stands in the way, according to a persuasive investigation last month by ProPublica and NPR, is in no small part lobbying by “Big Tax,” the companies that sell tax preparation software and services. Intuit, the maker of TurboTax software, has spent $11.5 million lobbying in the past five years — more, ProPublica’s Liz Day notes, than Apple or Amazon.  They frame their opposition as “Stop IRS Takeover,” as their trade associations’ campaign  calls itself.

Conservatives [like Grover Norquist] want taxes to be as low as possible. April 15 is now likely the day when anti-tax sentiment is the highest; I generally don’t mind paying what I owe the government to keep itself running, but after spending the weekend dealing with the vagaries of the income tax system, was in high dudgeon about taxes myself.

So anything that makes doing taxes dramatically easier would take away the source of average voters’ discontent with taxes. That’s particularly true of the many middle and lower-income voters who pay little or no federal income tax (remember the 47 percent?), but in the current system still have the hassle of filing a tax return...In other words: If tax day were just like any other day, might the people who are actually the biggest beneficiaries of the current income tax code—middle and lower income families—might lose a big reason to be angry about taxes. Which, if you’re Grover Norquist, is not a terribly appealing possibility.

However, Irwin misses the biggest reason the tax code is so difficult to comply with: it makes it easier to cheat.

And an extraordinary amount of cheating goes on.  For every $1 the IRS spends, it recovers $7 in tax revenue from people cheating on their taxes.

“It is ironic and counterproductive that concerns about the deficit are leading to cuts in the I.R.S. budget, when those cuts are making the deficit larger,” Ms. Olson wrote in the report. “No business would fail to fund a unit that, on average, brought in $7 for every dollar spent. Shareholders would rebel and bring lawsuits, or at least oust the management or board of directors.” 

That's why a Republican proposal to cut $600 million from the IRS budget in the name of deficit reduction would have--conservatively--added $4 billion to the budget deficit each year.  Indeed, so much cheating goes on that an estimated 16% of revenue owed to the government is lost due to cheating.

As Joseph Stiglitz points out, the system is essentially designed to allow American plutocrats to cheat the system:

The richest 400 individual taxpayers, with an average income of more than $200 million, pay less than 20 percent of their income in taxes — far lower than mere millionaires, who pay about 25 percent of their income in taxes, and about the same as those earning a mere $200,000 to $500,000. And in 2009, 116 of the top 400 earners — almost a third — paid less than 15 percent of their income in taxes...In looking at such statistics, one has to be careful: they typically reflect taxes as a percentage of reported income. And the tax laws don’t require the reporting of all kinds of income. For the rich, hiding such assets has become an elite sport. Many avail themselves of the Cayman Islands or other offshore tax shelters to avoid taxes (and not, you can safely assume, because of the sunny weather). They don’t have to report income until it is brought back (“repatriated”) to the United States. So, too, capital gains have to be reported as income only when they are realized...

Yet another source of unfairness is the tax treatment on so-called carried interest. Some Wall Street financiers are able to pay taxes at lower capital gains tax rates on income that comes from managing assets for private equity funds or hedge funds. But why should managing financial assets be treated any differently from managing people, or making discoveries? Of course, those in finance say they are essential. But so are doctors, lawyers, teachers and everyone else who contributes to making our complex society work.


Can the observation that Ireland, Bermuda and Luxembourg are three of the five jurisdictions where the US corporate sector earned the most profits reflect anything other than rampant tax sheltering? Anyone who doubts this should ponder the fact that in 2007, US corporate profits in Bermuda totalled 646 per cent of Bermuda’s GDP.

While the fact that this sort of tax evasion is legal is another issue, it bears pointing out just how unfair the tax system is. 

In any case, we could easily have an electronic filing system where tax compliance is as easy as paying a parking ticket online.  And it would be far easier for the IRS to ensure compliance.  As Irwin described, the system basically already exists, it just needs to be implemented.  But the mountains of paperwork (6.1 billion hours per year worth of paperwork) shovelled at the IRS makes it more difficult to catch tax cheats.  It's simply more difficult to catch cheats when the cheats can hide among billions of other paper-submitted forms.  Much easier for the IRS to police electronic submissions, but the goal of the system is to keep cheaters from getting caught.

Eventually, taxes will have to be raised or government expenditures will need to be cut to make up for the enormous amount of cheating.  These burdens will fall on those who are not cheating, and that was probably the goal of the cheaters all along.

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