Its that time again: how should we structure society, and how do we determine these things?
On this episode: taxes!
Or, in particular: How should we fill out those pesky 1040 forms?
My position: We shouldn't.
Instead, the following:
1. After every calendar year, the IRS does your taxes based on their best information.
2. The IRS sends you this form. If you do nothing, you accept it.
3. If there's a problem, then let the IRS know. You've got, as per now, until mid-April, and can extend for 6 months without any particular reason.
Common Q&A
Q: Where's the money go?
A: Wherever you want it to! Though, if I were doing this from scratch? We'd have government accounts that we put our tax dollars into, assigned at the same time we get social security numbers. That is, everybody gets a bank account.
Q: Wait, you trust the IRS?
A: More than Turbotax! Besides, with the relief valve built in, the IRS has an incentive to do it correctly. And, if you don't trust that they've done it right, then do it yourself!
Q: Why don't we do this now?
A: H&R Block, Turbotax, and a few others petition congress each year to not allow this.
Q: So ... what would I need to do?
A: If the IRS gets it right? Absolutely nothing! The government made the tax system, why should you have to spend hours and anxiety and worry trying to figure it out?
I've got other ideas on this. I'll happily discuss those if requested, but this is mainly directed at the taxes.
Michel Kangro, who reminded me in another thread.
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That seems very sensible.
ReplyDeleteSuper sensible until lobby money pours in.
ReplyDeleteOrion Cooper And then what?
ReplyDeleteJason Morningstar I mean, right?
Jim Crocker You and me both, turns out.
ReplyDeleteI keep a spreadsheet open, to record things I may want to know later. And I do it in pen.
Honestly, making a 4e dnd character is harder.
As a programmer and former data warehouse guy, this idea makes me queasy. Tax law is so wide-ranging, the IRS would need to preemptively collect an enormous amount of data in order to precalculate everyone's return. They'd need low-latency feeds on births, deaths, marriages, businesses, etc from multiple entities within each of the state and territorial governments and probably many many other entities. Each of these feeds would be subject to rapid unplanned evolution (behind each government feed is a legislature that legislates without thought to implementation or splatter effects) and there would be an intolerable number of corner cases to track.
ReplyDeleteI'm also queasy about attempts to simplify the tax laws to accommodate this kind of thing; when I hear "simplify the taxes" my brain translates that to "make them less progressive."
massive caveats: I am not a tax specialist and know nothing about the IRS' data systems. They may already have all this stuff. Do any other countries do this? Canada doesn't.
In the UK, the majority of taxpayers don't fill in annual tax forms. Instead, most tax is withheld by companies who then send it to HMRC (e.g. the income tax on wages is calculated by the employer who withhold that from my pay; the sales tax is calculated by the shop who incorporate it within the price). So most people never see the money they pay in tax. Those who are self-employed, have multiple sources of income, earn above a certain amount all do have to self-assess on an annual basis, calculating the tax they owe, subtracting the income tax they've already paid and then sending the difference to (or sometimes receiving the difference from) HMRC.
ReplyDeleteJohn Aegard For the majority of taxpayers, the IRS already does this.
ReplyDeleteRichard Williams Tell me more about the UK?
ReplyDeleteSure, what would you like to know?
ReplyDeleteDifference, basically.
ReplyDeleteIn the US:
1) Employers withhold taxes, and send it to the government from paychecks. The amount is relatively hard to determine.
2) Each April, Americans bemoan how hard it is to do taxes.
3) The IRS collects all the information that we need to do our taxes.
It sounds like you are saying the UK does something very similar to what I have outlined, where they do a first pass?
I guess the biggest question is: If you are below the threshhold, can you dicker over the amount owed? And is this threshhold a relatively large one, or a relatively small one?
So, my experience has been that the tax paid from my wage has always been visible on my paycheck. At the end of the tax year (April 5th) employers also provide employees with a form called a P60 which is the aggregate of what wages they earned and what tax was paid on their behalf for the tax year. These are the figures that you plug into your self-assessment form (if you self-assess).
ReplyDeleteAnyone can self-assess if they want to, but the self-assessment form is relatively straightforward if you have a simple income and you're comfortable with paperwork (which, I acknowledge, is a big if). The threshold over which you have to self-assess is £100,000, which is pretty high.
That all said, most people don't self-assess and just accept that their employer has calculated it correctly. The actual calculation is that they tier your wage and you pay a progressively high % on each tier (there are 3 tiers, the lowest is 20%, the highest is 45% - though you also pay an additional levy called National Insurance on these tiers). Everyone also gets a personal allowance (on which no tax is paid) on the first £11,000 or so - though the personal allowance is reduced if you earn above a certain level.
Why you might want to self-assess, even if you don't have to, is if you only worked part of the tax year (because companies pro-rata the tax paid so that you have consistent take-home pay) or to claim other allowances (such as the married couple's allowance or the blind person's allowance).
Sounds pretty much the same, with the big, big caveat that most people don't have to file taxes!
ReplyDeleteIs the UK a big enough country to assuage some of your anxieties about this sort of thing, John Aegard ?
(work day just got nuts, gotta bow out, thx for discussion.)
ReplyDeleteok. Feel welcome to come back later, and let us know your thoughts.
ReplyDeleteJim Crocker So, how do we simplify the tax code (which isn't what this was originally about, but whatever) without also making it easy for the rich to pay less?
ReplyDeleteHey look, Elizabeth Warren and Bernie are on board:
ReplyDeletehttp://www.vox.com/2016/4/13/11417676/elizabeth-warren-tax-return-free-filing
And against it? Grover Norquist.
Thanks for posting, interesting read. One key issue here: your approach would only work if the government already knows a lot about me and my finances and then does those complex calculations for me. I'd rather have a system in which neither the government knew a lot nor there are complex calculations at all. No taxes except one or maybe two: income and value-added. Also, no exceptions and tax cuts, only different percentages for the income tax: first x$ aren't taxed, next y$ at 10%, and so forth.
ReplyDeleteGovernment only needs to know my total income. Calculations are easy. No bureaucracy, no hassle.
Michel Kangro That's a much, much longer term change.
ReplyDeleteThis works with what the IRS already knows now, with no required changes to the tax code. Besides, the calculations (for the 70% of people who don't itemize) really aren't that complicated.
William Nichols You are using the US perspective, right? I am unsure, since I don't know the details of any taxcode besides that of my own country, but here, I HAVE to do a tax declaration, because the financial institutions don't know (or don't want to remember) a lot of details about my finances. And because I get a lot of exceptions and do not earn a fortune, I get all my taxes back anyway that were deducted from my wage.
ReplyDeleteI'd say it'd be easier to simplify the tax code here in Germany than introducing mechanism like you are suggesting. Easier to actually DO, not easier to persuade the political class.
Anyway, I think, something like what you are suggesting is already possible in some parts of Germany. I didn't try it, but you can apply for something like prefilled forms for your tax declaration, where the Finanzamt (German IRS, I guess) fills out all the forms with whatever they believe to know and you just need to correct those forms and send them back.
Michel Kangro Yeah, I'm sometimes US centric without even realizing it.
ReplyDeleteWhen my employer tells me what they pay me and what they sent to the IRS, they also tell the IRS. When I got married, the IRS was notified. If you own a home, the IRS is notified of the mortgage payments.
etc, etc.
Now, should it be that way?
That is, should we have a surveillance society where our government needs to know the private details of our life in order to properly access our taxes?
That's a harder question, and my gut tends towards "No".
So, how should we structure these things? I've got my own few paragraphs I could write about this, but let me know your perspective. That's more valuable to me than typing up what i think again. :-)
William Nichols I'd go with no.
ReplyDeleteConcerning the data told to the IRS/Finanzamt, it's the same here in Germany. I'd opt for a system in which, for example, every transactions is taxed automatically. Cash withdrawals are taxed more to account for the fact that cash can be used in several transactions before it returns to a bank. If you'd tax every bank transfer with x% and every cash withdrawal with y%, y being x times the scientifically determined number of times cash is used in transactions before it returns to a bank, then tax evasion is almost impossible. Combine that with a basic income that covers the most basic needs and it becomes fair, too, since poor people pay only for what they need - covered by the basic income - and rich people pay for their houses, boats, companies and other luxuries, paying taxes everytime.
Everytime money circulated, it's taxed. It's not taxed if it just sits somewhere. x would need to be high enough to cover for all or almost all government spending.
The government wouldn't need to know about any financial transaction of their citizen. Since banks handle the tax, wealthy citizen and big companies couldn't use Ireland, Switzerland or Panama as tax heavens, unless they stop sending or receiving money from Germany or the US, depending on what we're talking about. IF cash transactions would become a problem, one could think about forcing businesses to add some kind of tax to cash transactions directly.
I wouldn't oppose certain other taxes, but their place wouldn't be to cover the expenses of the government, but to regulate stuff. I'd strongly vote for a high CO2 tax, for example, not because it means money for the government, but it's necessary to fight climate change.
Having the banks do the taxing is really interesting.
ReplyDeleteI'm not sure I dig the specifics, such as the higher tax rate on cash and taxing transaction. But, limiting the number of tax-reporting institutions to banks is really interesting.
A concern is cash that is in a bank is not just sitting there; banks keep between 1% and 10% of the money on hand, depending on factors. When banks lend out money (which is from money they have on hand from people with savings accounts), should they also tax it?
William Nichols The idea, and it isn't mine, is that every transaction is taxed.
ReplyDeleteSo, if I buy something, being it a chewing gum or a house, I have to pay a tax. Cash is only a special case because it can be used several times in transactions without the banks knowing and thus without being taxed, thus it needs a higher taxation when it is given out by the banks.
Regarding loans: Yes, since the money given out as loans is used to buy stuff and every transaction is taxed.
As said, it's not my idea, and I am sure some people thinking a lot about this can find weaknesses in it, but as far as I understand it, it is magically simple and thus not easy to circumvent, meaning tax evasion isn't a thing anymore. That alone makes it, in my opinion, far more social and fair then the current system, that vastly favors "big players" that have the money and the knowledge and the means to, for example, park their earnings abroad or do other stuff that eases their tax "burden".
Also, the taxes automatically occur in the country in which the business happens - or at least in which the transaction happens. So if, for example, a US company does business in the US, taxes are paid in the US. If it does business in Europe, taxes are paid in Europe. No more "all international business is taxed in Ireland, where the taxes are the most cheap."
I am no expert in economics, and I certainly can see that it's not easy to force through the different political systems involved. Also, I'd love to connect this idea to the one of an unconditional basic income (UBI). (I almost started writing about that here as well, but it's a different topic alltogether, so I better stop.)
Michel Kangro The cash thing still sticks: Why is the assumption made that cash transaction will not be taxed?
ReplyDeleteI'm not understanding that. If I spend cash at the bookstore, for example, they'll tax it. At some point, you've got to show the transaction history. And sure, you could disappear some from taxation this way, but it won't be a lot and it won't be rich people. Especially if you also make the maximum currency note a $20, as has been suggested of late to deter drug trafficking.
William Nichols Yeah, maybe the Cash isn't any problem at all.
ReplyDelete