Trillions and Trillions of Dollars

There's rare unanimity in Washington right now. Everyone agrees that our tax system is a wreck. Too many loopholes, too many exemptions, too many carveouts, too much confusion. A friend recently quipped that, as a matter of enlightenment, every member of Congress should be required to do their taxes live on C-SPAN, aided only by a pencil and a calculator. No one leaves until you pass an audit.

Over the coming weeks, a congressional "supercommittee" will try to find more than $1 trillion in deficit savings over the next decade. Part of their job will be -- or should be -- a dramatic overhaul to the tax code. This can be done in a way that appeases nearly everybody. One side says we need lower tax rates. The other says we need more tax revenue. Both can be accomplished fairly easily by eliminating tax deductions and lowering tax rates.

There are literally trillions of dollars in those deductions, which include the ability to deduct mortgage interest, employer-provided health insurance, and contributions to retirement accounts. These deductions are frequently called "tax expenditures." Why? Because distinguishing between a tax deduction and a cash subsidy is difficult. If, instead of allowing mortgage interest to be deducted from taxes, the government wrote homeowners a check based on the amount of mortgage interest they paid, the impact on the economy and government coffers would be exactly the same.

In a report presented to the supercommittee this week, the Congressional Budget Office fleshed out a few numbers about tax deductions. One stat I found interesting: In 2008, total income in the U.S. was $8.4 trillion, yet taxable income was $5.7 trillion. That means over 30% of all income is shielded from tax thanks to various deductions. Just the top three tax deductions will reduce tax revenue by roughly $1.5 trillion between 2010 and 2014. Extrapolate that over the next decade -- as people like to do these days -- and it's many trillions of dollars.

Last year, the chairmen of President Obama's deficit-reduction committee proposed eliminating all tax deductions and drastically lowering tax rates. The rationale for this is simple. First, by widening the tax base, more revenue is raised, lowering deficits. Two, some tax deductions distort the market in incredibly inefficient ways.

On that last point, I've already discussed how the mortgage-interest tax deduction debauches the real estate market. Today I want to talk about downsides of two other top deductions: employer-provided health insurance, and retirement contributions.

The deductibility of employer-provided health insurance is the largest tax expenditure. It's expected to cost $115 billion this year, which, for perspective, is pretty close to what the government spends annually on interest payments for the national debt.

Here's the problem. Health insurance premiums grow faster than both inflation and the economy. By extension, so does the cost of the tax expenditure. In 2000, the deduction of employer-provided health insurance cost $64 billion. This year, it's $115 billion. That's an annual growth rate of about 6%. Meanwhile, the overall economy grew by about 3.5% a year over the past decade. Not only is the deduction expensive, but it gets more expensive (in real, inflation-adjusted terms) every year.

That isn't the least of it. The subsidy increases the price of health insurance, since workers have more money to spend on it. For those receiving health insurance from their employer (the majority of Americans), this isn't a big deal -- the subsidy and the price hike likely even each other out. But for those buying health insurance in the open market, it's awful, since that inflated insurance is purchased with after-tax dollars.

What might that latter group do when insurance becomes too expensive? Drop their coverage. And who picks up the tab for the uninsured when they get sick? By and large, those with insurance, via higher premiums. It's a nasty cycle. Reuters blogger Felix Salmon made a strong point here: "If you want to keep the system fully private, then fine, but don't ask the government for massive subsidies at the same time."

Then there's the deduction for money contributed to a 401(k) or IRA. This is, by most accounts, a reasonable deduction because it incentivizes people to save more for retirement. And that's great!

But the assumption that the deduction causes everyone to save more is misguided. The vast majority of homeowners would still own a home without a tax subsidy. The same is true for retirement savings. As others have shown, there's scant evidence that subsidizing retirement accounts actually leads to more pre-tax savings -- particularly among upper-income earners, where the majority of the tax benefits fall.

And just like the mortgage-interest deduction, those who could use a hand and be incentivized to save more receive the lowest benefit. Since the deduction is based on tax rates, which are largely progressive, low-income workers receive a smaller incentive than those with higher incomes -- someone in the 15% tax bracket receives $0.15 for every $1 saved in a retirement account, whereas someone in the 35% bracket receives $0.35 per dollar. This makes little sense from a policy standpoint, because those with higher incomes have a greater propensity to save as it is, and are likely to save just as much without a subsidy.

Some say we can get around this by replacing the deduction with a matching program. Instead of deducting retirement contributions from taxable income, everyone -- regardless of income or tax bracket -- would receive a set matching contribution from the government. One proposal suggests setting the match at 15%, so that everyone receives $0.15 per dollar contributed to a retirement plan. 15% is undoubtedly less than the average tax rate of most of those currently taking advantage of the deduction, so the proposal would lower deficits, but it would still incentivize lower-income workers to save more.

You'll hear a lot about deficits in the coming weeks and months. The question will be, what can we afford, and what can't we? It would be devastating if we pick apart the insignificants -- NPR, bridges to nowhere, earmarks, waste -- while ignoring the whales in the room. Tax expenditures are one of those whales. And this is a case of killing multiple birds with one stone: The supercommittee can simplify the tax code, raise revenue, lower tax rates, and stop meddling with the economy through subsidies. Let's get it done.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel doesn't own shares of any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On September 16, 2011, at 4:35 PM, TMFHousel wrote:

    ^ Not only is it not taxed as income, but most people don't even realize it's part of income:

    http://www.fool.com/investing/general/2011/06/14/why-its-wor...

  • Report this Comment On September 16, 2011, at 7:18 PM, petersimmons72 wrote:

    This isn't a 'cost' to taxes. It was never there in the first place. If you fully tax these dollars then you have two effects: 1) you move more people into uninsured realms as companies drop insurance and 2) you'll never come close to recouping the "cost" of this tax deduction.

    We have a spending problem in this country. Not a tax problem. Taxes need to be cut to boost growth. Any increase at all WILL drag down the economy.

    And only government and union employees get this stuff for free. Those of us who actually pay taxes have to fund most of our own health care costs.

  • Report this Comment On September 16, 2011, at 7:30 PM, akutach wrote:

    While the point of inequity of retirement benefits is correct, I think the analysis is a bit off.

    People paying 35% marginal rate are long past the phase out for deduction. However, those who compound throughout their life tax free in a RothIRA after paying taxes on just the deposits withdraw potentially huge sums of money tax free. And now the backdoor Roth contributions mean that even high earners can continue to contribute to their Roth to benefit in the future.

    Lower income individuals already could be collecting capital gains at no tax (I believe if earned income is less than $60k) so one benefit of the tax shelter is already covered.

    They also give up flexibility. Those who go for the relatively small tax break of an IRA or RothIRA with low likelihood of ever earning in the top tax brackets get their money tied up such that if should they need to touch that money they pay both taxes and early withdrawal penalty at a time when they most need it.

  • Report this Comment On September 16, 2011, at 7:49 PM, akutach wrote:

    petersimmons72,

    If my dividend tax rate matched my income rate (yes, greater than 15%), I wouldn't change my investing attitude toward dividends in any way. No effect on our economy.

    Better still, if I had to regard my health insurance as income and was given a choice of providers then I would definitely shop around instead of taking the best deal on the table from my company. If people did that (as John McCain compelled us to do in '08, and I'm not a Republican) then the savings from people paying attention to their healthcare expenditures would do more to draw down costs than any tax break can make up for. Also, just because their employees don't get the tax break doesn't mean an employer wouldn't have an incentive to join into group care to facilitate a better rate structure. Companies would have to give their employees the money to pay for insurance since they don't want employees just going sick all the time because they tried to save a few dollars on health insurance.

    Connect the dots for me: how does somebody earning enough to make a max contribution in a tax shelter all of a sudden throw a wrench in the economy because their last $5000 (IRA) or $16,500 (401k) got taxed at earnings or 15% rather than 0? Wasn't that money heading for Wall St. or bonds anyway? I'm that person and it wouldn't make a difference to my saving or spending habits.

  • Report this Comment On September 16, 2011, at 9:05 PM, wolfman225 wrote:

    <<.....distinguishing between a tax deduction and a cash subsidy is difficult>>

    I think it's fairly easy, actually. Tax deductions no longer apply once you have reached $ 0.00 net tax liability. If you receive a "refund" in excess of that amount, it's a cash subsidy. ie, all of the "refundable tax credits" that are available to even those who pay no income taxes. The most expensive of these is the Earned Income Tax Credit, which in many cases amounts to direct cash payments (redistribution) far in excess of taxes withheld.

    IMHO the single greatest tax reform measure the comission could take would be to write into the tax code a single sentence: "At no time will an income tax refund exceed the amount withheld during the tax year."

    Simple, clear and unambiguous. No "legalese" providing wiggle room for carveouts or exemptions.

  • Report this Comment On September 16, 2011, at 9:12 PM, Starfirenv wrote:

    I just want to barf. Yes, we have a budget problem. Is it the homeowners and medical insurance that are the problem? That pesky middle class needs to bleed more.

    I understand that having a Goldman VP and CEO of Paulson on the Fool Board has implications to any writer who wants to keep their job, but really!! Why not mention Corporate Welfare and bogus wars first (or at all).

    Why not start with Wall Street bonuses that sit in a loophole?

    Maybe Agricultural subsidies? Exxon Mobil made $19 billion in profits in 2009. Exxon not only paid no federal income taxes, it actually received a $156 million rebate from the IRS, according to its SEC filings.

    Or- Bank of America received a $1.9 billion tax refund from the IRS last year, although it made $4.4 billion in profits and received a bailout from the Federal Reserve and the Treasury Department of nearly $1 trillion.

    Or- Over the past five years, while General Electric made $26 billion in profits in the United States, it received a $4.1 billion refund from the IRS.

    Or- Chevron received a $19 million refund from the IRS last year after it made $10 billion in profits in 2009.

    Or- Boeing, which received a $30 billion contract from the Pentagon to build 179 airborne tankers, got a $124 million refund from the IRS last year.

    Or- Valero Energy, the 25th largest company in America with $68 billion in sales last year received a $157 million tax refund check from the IRS and, over the past three years, it received a $134 million tax break from the oil and gas manufacturing tax deduction.

    Or- Goldman Sachs in 2008 only paid 1.1 percent of its income in taxes even though it earned a profit of $2.3 billion and received an almost $800 billion from the Federal Reserve and U.S. Treasury Department.

    Or- Citigroup last year made more than $4 billion in profits but paid no federal income taxes. It received a $2.5 trillion bailout from the Federal Reserve and U.S. Treasury.

    Or- ConocoPhillips, the fifth largest oil company in the United States, made $16 billion in profits from 2007 through 2009, but received $451 million in tax breaks through the oil and gas manufacturing deduction.

    Or- Over the past five years, Carnival Cruise Lines made more than $11 billion in profits, but its federal income tax rate during those years was just 1.1 percent.

    Maybe mention the biggest and most disproportionate and regressive tax of all- inflation, intentionally created by that private, for profit corporation known as the Fed. Is inflation a "Tax"? According to Mr Bernank it is.

    This link is of Dr Ron Paul wresting from Big Ben that confirmation. Also, Ron Paul made that comment about fixing the tax code by requiring our Congress to sit down and not leave before figuring their own taxes, WITHOUT their accountant.

    This is a great clip-

    Bernanke: "Inflation is a tax"

    http://www.youtube.com/watch?v=D4yBrxmEOkY

    Seems the once "Ethical Oasis" has become the "House of Shills".

  • Report this Comment On September 16, 2011, at 9:16 PM, TMFHousel wrote:

    << Is it the homeowners and medical insurance that are the problem? That pesky middle class needs to bleed more.>>

    This is the problem. Most people think the majority of tax deductions fall on the middle class. They don't.

  • Report this Comment On September 16, 2011, at 9:46 PM, Starfirenv wrote:

    I agree, but would phrase that to read "most people think the majority of tax deductions benefit the middle class. They don't".

    Deductions don't fall on you, they benefit you. The easies fix would be a flat tax with NO loopholes, say 10%, but we have to protect the accountants, attorneys, court system and legions of agents and examiners who would be out of work and of no use.

    Do you agree that inflation is the biggest tax of all? Oh, that's right, there is no inflation. Right?

    Also, you state that-

    " If, instead of allowing mortgage interest to be deducted from taxes, the government wrote homeowners a check based on the amount of mortgage interest they paid, the impact on the economy and government coffers would be exactly the same." Nope, that's not how it works. That interest is deducted from earned income to determine a tax bracket. Nowhere near a 1:1 as you state. Not even close.

    I did rec your article for this comment- "The supercommittee can simplify the tax code, raise revenue, lower tax rates, and stop meddling with the economy through subsidies. Let's get it done."

    I won't be holding my breath though. Best

  • Report this Comment On September 16, 2011, at 10:00 PM, TMFHousel wrote:

    ^ You can compare a deduction to a tax subsidy accurately. How much cash benefit do you get from a subsidy? Imagine that being replaced by a check, in an equal cash amount. That's the only point I'm making.

    Harvard prof. Greg Mankiw makes a similar case here:

    http://www.nytimes.com/2010/11/21/business/economy/21view.ht...

  • Report this Comment On September 16, 2011, at 10:25 PM, Starfirenv wrote:

    Mr Housel, it is obvious you have never owned a home or invested in realestate. Point to the Harvard guy, but subsidies were never part of the realestate tax-deduction exchange here. I would be happy to discuss that too if you like.

    Again, you are sorely mistaken that the deduction is the same as getting a check for interest paid and your conspicuous failure to mention the points raised above tell me that you are either dishonest or ignorant or a "good" company man. I suppose we do what we have to.

  • Report this Comment On September 16, 2011, at 10:47 PM, CCharing wrote:

    "The same is true for retirement savings. As others have shown, there's scant evidence that subsidizing retirement accounts actually leads to more pre-tax savings --"

    Yes. But what about actual retirement savings - which are after-tax?

  • Report this Comment On September 16, 2011, at 11:12 PM, TMFHousel wrote:

    <<But what about actual retirement savings - which are after-tax?>>

    Yes: If you give people money, they'll have more of it than they did before. But if the purpose of the subsidy is to encourage people to do something they wouldn't do otherwise, there's little evidence that the deduction influences savings practices among higher-income earners.

    Increasing account values may indeed be an admirable cause, but there are more efficient and equitable ways to do it, such as the matching proposal described in the article.

    <<Again, you are sorely mistaken that the deduction is the same as getting a check >>

    Why? You still haven't explained that part. We're talking about the difference between getting a tax deduction worth $100 vs. getting a check worth $100. If I'm only mistaken for semantic differences, I'm not interested in arguing. It's Friday, the sun is setting, and there's a bottle of merlot waiting.

    And yes, inflation is a silent tax.

  • Report this Comment On September 17, 2011, at 12:00 PM, whereaminow wrote:

    Ah, yes. The Establishment dichotomy in full effect.

    Let's skip the fun calculations of money to be saved that will never actually be saved and revenue neutral plans that are only neutral to the welfare-warfare state and specifically non-neutral to the rest of us.

    Here's the fun part, Morgan. After your scheming friends in DC's Economic La-La Land have closed all tax loopholes and drastically lowered the tax rate, how do I keep them from slowly but surely raising the tax rate up and up and up and up and up and up.................. until the point were I am paying even more in taxes than I was before the think tanks bounced their heads off their desks and came up with this nonsense...... but also, I no longer have any way (loophole) to decrease the burden?

    What do I do then?

    That my friend is the (albeit, fairly long winded) trillion dollar question.

    David in Qatar

  • Report this Comment On September 17, 2011, at 12:03 PM, TMFHousel wrote:

    <<how do I keep them from slowly but surely raising the tax rate up and up and up and up >>

    Vote.

    <<What do I do then?>>

    Move to Qatar, apparently.

  • Report this Comment On September 17, 2011, at 12:06 PM, whereaminow wrote:

    ^Vote.

    Haha, the fourth grade liberal answer I was looking for. Clearly voting solves all problems.

    --------->Move to Qatar, apparently. <--------

    Why don't they have to move? Seriously. The welfare-warfare state produces nothing but the gibberish you fawn over, while they simultaneous rob Americans and kill innocent foreigners.

    I'm curious. Why don't they have to move?

    David in Qatar

  • Report this Comment On September 17, 2011, at 12:43 PM, FutureMonkey wrote:

    Let it never be said that Morgan is afraid of questioning basic assumptions about our sacred cows.

    My take on tax deductions/incentives/disincentives is that policy makers operate from the belief that taxation is a tool to manipulate citizen and corporate behavior -- if we provide deduction/credit for X (retirement savings, home ownership, health insurance, children, charitable contributions) then we are encouraging a behavior we like. If we raise taxes on a Y (alcohol, cigerettes, gambling) then we discourage a behavior we don't like. Basically using tax code in a manner similar to tariffs to support or undermine international trade.

    I'd like to know specifically how effective such tax incentives/disincentives actually work on behavior. For example, has high tax on cigerettes actually reduced smoking more than education about the health risks and negative portrayal of smoking in media and advertisement. I would hypothesize that education and knowledge is a more powerful motivator of human behavior than tax policy.

    My preference would be for a simple, single page individual income tax form, elimination of deductions, credits, and marital status complications coupled with reduction of tax rates. We'd still need tax preparers and attorney's to handle businesses and complicated tax situations - estate, international, etc.

    Of course this would need to be coupled with agreement to stop using tax policy as a means to manipulate behavior of individuals or corporations in the future or we will simply drift back to our current situation in a decade or two.

    FM

  • Report this Comment On September 17, 2011, at 2:34 PM, Starfirenv wrote:

    OK, since you asked me to explain it, here's how it works, from the IRS website-

    Using very round #'s, try to follow me here, let's say you make 60k/yr and you paid ~$830/mo (averaged, as the nature of ammortization changes monthly) in interest (or $10,000). Your tax base becomes ~$50k. So, now your tax as a single person is $8,688. Without that deduction, your tax would be $11,188. So, you have paid $10,000 to get a break of $2500. How is that the same as getting a check for all interest paid from the government? In this scenario, you pay $4 to get $1 tax deduction. (Re: " If, instead of allowing mortgage interest to be deducted from taxes, the government wrote homeowners a check based on the amount of mortgage interest they paid, the impact on the economy and government coffers would be exactly the same.") Not even close.

    Perhaps the real question is why was this enacted in the first place and should it have been? I would guess as an enticement (subsidy)for the bank/mort industry to lead borrowers down the path to 30 yrs of mort debt.

    If JPM-Chase, BofA, WF et al actually paid tax on just 25% of what they make on this interest (see above) this wouldn't be an issue. Should this deduction have been enacted in the first place? I would say no but would guess the lobbyists who pushed it thru may think otherwise.

    IRS reference 2011 here-

    http://www.irs.gov/pub/irs-pdf/i1040tt.pdf

    Do you have a link to reference this statement?

    "The vast majority of homeowners would still own a home without a tax subsidy."

    I would think that in this economy, there would be many millions more foreclosures than the many millions we currently have.

    Not to "argue" but to clarify as I found your article (whether intentional or not) misleading and confusing. Best to you. Have a great weekend.

  • Report this Comment On September 17, 2011, at 2:41 PM, TMFHousel wrote:

    it's not a check for all interest paid. it's a check based on the interest paid in an equal cash amount to the tax deduction.

    typing on my phone-- can't get a source for statement now, but several have done studies showing this. more later.

  • Report this Comment On September 17, 2011, at 2:44 PM, TMFHousel wrote:

    to clarify, the cash savings from the tax deduction.

  • Report this Comment On September 17, 2011, at 2:51 PM, TMFHousel wrote:

    in your scenario, it would be a $1 check for every $4 in interest paid.

  • Report this Comment On September 17, 2011, at 4:00 PM, Starfirenv wrote:

    Yes, not quite the assertion you made- " a check based on the amount of mortgage interest they paid,..." Like I said, this is misleading and confusing and not even close to true. Now you get it.

    Any honest thoughts on the tax exempt "Wall Street bonuses" or the short list above? Short because there are MANY more. I think not if you want to keep getting paid by TMF. Surprise me. Best

  • Report this Comment On September 17, 2011, at 4:05 PM, TMFHousel wrote:

    a check based on the amount is not the same as a check for the entire amount. as mentioned above, we're arguing over semantics. Not interested. I'm going to enjoy my weekend now. You do the same.

  • Report this Comment On September 17, 2011, at 5:33 PM, AvianFlu wrote:

    "decrease tax expenditures" is just newspeak for "raise taxes".

    I would have loved being in the meeting where they brainstormed up this new way to disguise yet another money grab from the citizenry.

    Dealing in illegal drugs is a remarkably lucrative tax-free enterprise. If the feds want more money maybe they should collect income tax from drug dealers. How would a value added tax apply to THAT business?

  • Report this Comment On September 17, 2011, at 9:09 PM, whereaminow wrote:

    ---->Just the top three tax deductions will reduce tax revenue by roughly $1.5 trillion between 2010 and 2014. <-----

    Funny. That's the exactly the amount of money sitting in excess reserves doing nothing. Why not just take that and save all of us the trouble?

    David in Qatar

  • Report this Comment On September 17, 2011, at 9:46 PM, NOTvuffett wrote:

    What is so wrong about using tax breaks to reward positive behavior?

  • Report this Comment On September 19, 2011, at 4:04 AM, wolfman225 wrote:

    <<What is so wrong about using tax breaks to reward positive behavior? >>

    It's all in who gets to decide what behavior/which businesses & industries should/should not be "rewarded". As long as people accept the notion that the financial and personal behavior of the general population can/should/needs to be influenced via the tax code we will never be free of the political machinations that forever keep the process of taxation the tangled web it is.

  • Report this Comment On September 19, 2011, at 2:15 PM, imnotsleeping2 wrote:

    Its important to note that pre tax 401k / IRA (non roth) are tax DEFERRED plans, not money that will never be taxed. The Gov't does not collect money on it today, they they will in the future as employees pull money out in retirement.

    So this money will ultimately be taxed some rate, regardless of it is taxed in the current tax year or in the future sometime.

    Taxing 401k / IRA at today's rate already exists and an employee can choose such (post tax 401k / Roth IRA).

  • Report this Comment On September 19, 2011, at 2:39 PM, aggie9711 wrote:

    Really Morgan, when is the government not taking money I earned a subsidy? Is the other 75% that I get to "keep" a subsidy as well? And I would argue your point on the mortgage deduction vs writing a check as a wash if balderdash. You forget that it would require a gargantuan bureaucracy to process the payment requests,send out checks, track down fraud, etc, etc, and the inevitable creep that would happen (bigger subsidies to low income earners, etc).

  • Report this Comment On September 19, 2011, at 5:02 PM, TMFHousel wrote:

    <Really Morgan, when is the government not taking money I earned a subsidy? >>

    When you get to keep it for owning a home, and renters don't. Or when you get to keep it for getting insurance from your employer, and others don't. Or when you get to keep it for savings for retirement, and others don't.

  • Report this Comment On September 19, 2011, at 5:05 PM, ledm wrote:

    What I find interesting is that no one considers that income tax should not exist anyway.

    Income tax was "created" during the Civil War to pay for the war. Once the war was over, income tax went away. Income tax reared its ugly head again during World War II to pay for that war and all the Government programs created during that time. Once the war was over, the Governmenr just conveniently forgot to take it away again. AMERICANS SHOULD NOT BE PENALIZED FOR MAKING MONEY! That is what capitalism is all about. Now, having said that, in order to replace this income tax, there should be a large sales tax on "non necessary items". I mean a 40-50% sales tax on these items. I am not just talking about luxury items like yachts and Bentleys. I mean if you go shopping and want to buy a new TV, you pay a huge tax on it. Yes there are arguments that individuals will not buy these items if they have such a large tax on them but I disagree. A "luxury tax" attempt was made a few decades ago and the rich complained and threatened to boycot all commerce. The govt bent to their pressure and the tax went away. If they had just stuck to their guns, commerce would have picked up. We as a society cant go without our "things". There may be a month or so of protest but Americans will cave in. Besides they won't be getting taxed on what they make so they will have more money to put in to the economy. Also they can choose what they spend and decide what they are willing to pay taxes on or not. This is the only truly fair way to reform taxes.

  • Report this Comment On September 19, 2011, at 5:11 PM, TMFHousel wrote:

    <<And I would argue your point on the mortgage deduction vs writing a check as a wash if balderdash. You forget that it would require a gargantuan bureaucracy to process the payment requests,send out checks, track down fraud, etc, etc).>>

    Running the IRS under current rules isn't exactly cheap. The more complicated the tax code, the costlier it is to implement.

  • Report this Comment On September 20, 2011, at 2:00 PM, LeonardChallenge wrote:

    Half the people in this country don't pay federal income tax. Spreading the tax base to reach more people by making it simpler is better in my opinion that saying the tax system should be "more fair".

  • Report this Comment On September 21, 2011, at 10:47 AM, DargFool wrote:

    Everyone has an opinion (supported or not) with data. It is clear that agreement about every issue is unlikely.

    Perhaps a reasonable alternative would be to decide on a limited number of changes to make for a limited duration experiment (say 3 major changes for 2 years). Decide on some metrics to be used to measure "success" of the changes.

    Ex: Tax paid per 1000 gross income.

    Total tax revenue, gross domestic product.

    Use existing data to calculate the metrics for prior years, make the changes for 2 years, and measure each year. After 2 years, the options are cancel the changes, extend the experiment another x years, or make the changes permanent.

    Lather, Rinse, Repeat until the desired metrics reach the target level.

  • Report this Comment On September 23, 2011, at 2:58 PM, critter88 wrote:

    The discussions here, including numerous misunderstandings, just show how difficult it will be for the Super Committee to reach agreement. Governments of modern society generally require 25% to 30% of GDP to function (e.g. National defense, police, teachers). It can be raised through income tax, property tax, sales tax, fees, fines, ecetera. Countries that have experienced strong job growth, attract investment capital, low tax evasion, efficient delivery of government services, along with high savings rate share some common characteristics. They have low income tax rates but a broad base, meaning almost no deductions (to allow capital to flow to it's highest and best use, so no picking winners and losers), national value added tax (with exemptions for food and core necessities), and user based fees (toll roads). Unfortunately, liberals don't like this model due to it not being progressive.

  • Report this Comment On September 23, 2011, at 9:25 PM, lwbaum wrote:

    Interesting discussion!

    I think it would be great if everyone in Congress calculates taxes solo. That might make them think twice before proposing new tax complications. The IRS already estimates the time required to fill in the tax forms, but those numbers don't seem to have much effect at preventing tax complication. I live in Hong Kong, where the income tax form is very simple. Unfortunately, dividend, interest, and capital gain is not taxed, which I think is very unfair. For example, billionaires who pay themselves no salary from their companies can pay no tax, while ordinary workers have to pay tax. But this inequity could be rectified without complicating the tax return much at all.

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