There’s One for You, 19 for Me

I hate to interrupt your frantic search for bits of paper and mashing on the calculator, but you did know “Tax Day” is Thursday, right? Those of you outside the United States should feel free to scroll down and read something else. If you are hopelessly buried under tax paperwork, you might take a moment to read this.

If, on the other hand, you aren’t one of those people who will be standing in line tomorrow at the Post Office to assure your tax return has the correct postmark date, here are some ideas about what to do with your tax refund. And finally, here’s a bit of excellent reading on taxes, politics, and the 2004 elections.

Politicians say a lot about taxes, particularly in an election year. Everything they say is supposed to make you agree with them enough to vote for them. But listen on the defensive, okay? We don’t need “tax reform,” because that implies taxes are corrupt. We don’t need “tax relief,” because that implies taxes are onerous. What we need is Tax Simplification. That implies the truth: that taxes are too complicated.

Taxes, as they stand now, are complicated enough that at this time of year you may find tax kiosks in the grocery store — convenient, and a friendly reminder that Joe Average shouldn’t do his taxes alone. Some tax deductions and credits are sufficiently complicated that many eligible people do not claim them. The new rules on taxation of stock dividends are so complicated that some brokerage houses had to send corrected tax statements to customers. And of course, may we all have mercy upon someone whose stock options at work put them in that taxation twilight zone called AMT (Alternative Minimum Tax).

Although some people argue that the clearest path to Tax Simplification is a flat tax, I think there is a more politically tenable path. The goal of Tax Simplification is not to put accountants out of work. The goal of Tax Simplification is to make it easier for average people to file and pay their taxes. Ideally, half of all taxpayers should be able to do their taxes on a one page form, using tools no more complicated than a pencil, a calculator, and maybe a bit of scratch paper.

The results of this are more than giving you more time in April. By simplifying taxes, compliance will improve: more people will file taxes earlier, they will be more accurate, audits will be focused only on returns that need it, fewer tax scams will exist. Taxes will seem more fair because the method for calculating them will be plain and simple. Government expenses go down: the tax code will be shorter and cheaper to print; enforcement will be easier because the rules will be clearer, non-contradictory, and uniformly applied; fewer cases will end up in tax court. IRS agents can spend less time on personal tax returns, and more time finding corporate tax fraud — or better yet, more time getting into the financial affairs of criminals and terrorists.

The first step of my plan would be to make the standard deduction equal to the poverty line for a family of four, adjusted accordingly each year. Exemptions would work more or less as they do now. The result of this is that people who live in poverty would not be taxed. Nor would anyone ever be “taxed into poverty” again. This insures that people living on the edge can use every bit of their meager earnings to provide food, shelter, and necessities for their families. Their tax return will have fewer than a half dozen lines filled out, and will take less than 15 minutes to complete, including putting a stamp on the envelope.

Because the new standard deduction would be relatively high, most Americans would not have to itemize deductions. This reduces their paperwork and record-keeping substantially. It will also save average people money, because they will not spend money just to get a deduction. With little rework of the old 1040, anybody whose income is strictly from paychecks and interest on the savings –e.g., most people — can be looking at one page of tax paperwork. People with complicated tax situations, such as owning a small business or having capital gains, will still have to fill out additional forms. View it as the cost of making money.

This system would also make most tax credits obsolete, because most tax credits are focused on relatively low-income families. Take them out of the tax code. Likewise, most deductions should be re-examined. Perhaps we should consider a cap on the mortgage interest deduction equal to the prevailing interest rate plus one percent on the maximum conventional house loan. Thus, home ownership is still promoted, but the ownership of McMansions is not subsidized and the housing bubble is not pumped up. Or cap itemized deductions at three times the standard deduction.

Better yet, eliminate all itemized deductions except for a short list of things over and above the generous standard deduction. Put the lines for these special items right on the 1040: IRA contributions; health insurance expenses; no more than 3 or 4 top priorities to be named at a later date. These items should be things we can all agree are important and of benefit to all.

Once the overall deduction scheme is streamlined, two important things happen. First, the wealthiest among us pay their fair share of taxes. Second, there will be no more need for the AMT. It can be eliminated.

In the meantime, you can download that tax form you are missing from these guys.