Tax Returns

This entry continues the series exploring improvements to the federal tax system.

Taxes themselves are not the problem. When the colonists revolted against the British Empire, they were not opposed to the idea of paying taxes. They were opposed to the idea of paying taxes without getting anything in return.

Americans have always been relatively smart with their money. This is because we live in a quasi-capitalist society that rewards hard work and entrepreneurship. I do not believe the frustrations many feel about taxes are simply because we do not want to pay taxes. I think Americans see the value in things like a strong military, public education, and infrastructure.

The real problem is that we are not getting a good return on our investment.

Despite the huge amounts of money flowing into the federal government, our education system is a mess, we have too many extraneous laws and government institutions, and we have a tax code that is overly-complicated and unfair.

Instead of squabbling over tax-bracket percentages, marriage penalties or deductions, and the moratorium on the estate tax, we need to shift the conversation to wholesale reform of the tax code.

I heard a great interview with a U.S. Postal Service worker on the radio the other day. He was explaining why the price of stamps is increasing again. "We have too many supervisors," he said. "There are too many people who are not doing anything and are getting paid."

Government institutions have the luxury of knowing that they have no competition. The USPS (United States Postal Service) will exist for as long as the laws of the nation support its existence, regardless of how poorly it is run. Inefficiency is actually rewarded, because in most government programs, your budget is based on how much you spend. This means that finishing the year under budget often means that your budget is cut. Conversely, a government organization that consistently fails to meet budget expectations will retain a high budget or even win a budget increase.

Does this sound like an efficient system? No wonder Americans do not feel like they are getting a good return on their investment in the federal government.

The solution is clear. If we lower tax rates to a reasonable level for all of our citizens, we will see long-term growth, and force government to cut its waste. Over the period of a decade, federal tax revenue will actually increase, allowing the government pay down our ridiculous national debt, which is now at about $8.85 trillion and continues to balloon.

As it currently stands, the tax system's loopholes allow two individuals with the same income to pay substantially different amounts in taxes. This is not fair, and I believe it is unconstitutional. Why? Because our freedom to spend our money as we choose is one of our basic rights as Americans. If John and Sally both make $100, and Sally has to pay $30 in taxes while John's creative accountant structures his finances so that he only has to pay $5 in taxes, this is unfair.

All human beings require the three basic needs: food, clothing, and shelter. We can assume that a portion of everyone's income goes to fulfilling these needs. The remainder of income is left to spend on choices--things like recreation, investments, charity, or upgrades to the basic needs. Because John and Sally live in the same country under the same laws, we will also assume that they receive the same freedoms and protections from these laws. Taking more from Sally in taxes, however, eliminates a higher percentage of her income, leaving her with a much more limited opportunity to make choices. This is, in essence, taking more of her freedom.

We need a simple tax system that takes 20% of active income from every citizen. No more deductions, penalties, or credits. Every American knows that $1 out of every $5 they earn is going to the federal government, and must budget accordingly.

Taking this a step further, the first $25,000 of income is not taxed. This means that when you receive your paycheck--if your salary is $25K or less--no taxes are withheld. The process of paying taxes only so that the government can return them to you is inefficient. Individuals making more than $25K could choose to amortize their payments over the course of the year or to begin paying 20% after they have earned their first $25K.

Think about how easy it would be to prepare a tax return. No deductions, no filing jointly, no dependents, no credits, no penalties--no loopholes. Everyone pays 20% of their active income over $25,000.

Imagine the one page, ten minute tax form that you could fill out during a coffee break. Instead of sending the government money at the end of the tax year or getting a refund, each citizen simply pays as they go. While it feels good to receive a refund at the end of the year, the fact is that all you are getting is money that was yours to begin with. This means that the government was holding your money all year. Banks have to pay interest to do that. Conversely, when individuals underpay, they are withholding money from the government. All of this breeds inefficiency and requires a larger IRS, opening the door for more mistakes, more loopholes, and more wasted money.

Let's stop squabbling over tax reform and demand an entirely new policy.