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I was so shocked to find a leftist who advocates simplification of the federal tax code that I just had to read it. Unfortunately, we will discover that the author doesn't want the tax system simplified.
The author is a Pulitzer prize winner. As such, we should expect thorough analysis, sophisticated reasoning, and devastating logic. So, read on:
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Filling out federal income tax returns for individuals and businesses takes so much time that it’s the equivalent of creating three million full-time jobs, according to IRS Taxpayer Advocate Nina Olson. (So the author identifies the problem. Complying with the huge and complex tax code, which as we know was created by Congress, is an industry unto itself. Large sums of money are spent each year jumping through the hoops of our onerous, invasive, and burdensome tax system. Let's see where the author goes with this.)
In China the highest-paid workers are required to file an income tax return every month. I filled out one of their returns in less than a minute. (Oh my. Is he really trumpeting the processes of a communist government? China is noteworthy because it requires a MONTHLY reporting system? Does the author wonder why a government would require people to file papers every month? Apparently not. He tosses us this little orphaned factoid without context, analysis, or commentary of any kind.)
That enormous gulf (Wha? There's an enormous gulf between our tax system and that of the Chinese, and we need to be more like them? Because of one little feature of their tax reporting process? Really?)
raises an obvious question: Can we make it simple to comply with income tax laws? (This is NOT the question. The premise from the title of the article is not simplifying compliance, the question is, how do we simplify the TAX SYSTEM?) And do we as a nation really need to put in as much time on our taxes as all of the full-time employees do at Wal-Mart, Home Depot, Sears and Target for an entire year?
Actually, we don’t. But reforming our tax code faces a huge obstacle – resistance from the industry that makes tax software and prepares tax returns. (I am losing confidence in the author's ability to comprehend the factors involved here. Does he really think the ONLY reason we have a ridiculous, arbitrary, and oppressive tax code is because of the tax preparation industry? Really? Are we to assume that legislators have no interest in manipulating society by penalizing undesirable activities and rewarding others? Congress doesn't use the tax code to micromanage peoples' financial choices? The tax code doesn't empower government to effect its objectives and force people to abandon their own interests in favor of government's? Oh my.)
It exists only because of make-work requirements imposed by Congress and the 46 state legislatures with income taxes. And the industry is determined to protect its interests. But, we have two basic options to simplify our tax system. (Only two? No other choices?)
The Californian model
The first is already available to a limited number of Californians. It’s called ReadyReturn and it is wildly popular with those who have used it since 2007.
With ReadyReturn, state government computers prepare tax returns that are then offered to individuals for their approval. Those who agree with the tax calculations just sign and they’re done. Anyone who disagrees is free to fill out his or her own tax return, but almost no one does because the ReadyReturn shows the exact tax imposed, not a dollar more or less.
How is that possible?
Only those taxpayers who are single and whose sole income is from wages can use ReadyReturn, as of now. The California Franchise Tax Board, like the IRS, knows exactly how much such taxpayers earned because employers are required to tell the government exactly how much they paid each worker.
As long as a taxpayer does not itemize deductions, all the government needs to know to calculate the income tax due on wages is marital status. (Less than a third of taxpayers itemize deductions on their federal income tax returns.)
ReadyReturn could easily be expanded to include capital income that is verified the same way wages are. Thus single workers who get interest, dividends or capital gains and some types of royalties could easily be added to the system. So could married couples.
If Congress authorized a federal ReadyReturn and made minor some tweaks, we could end tax preparation for about 100 million of the 145 million tax returns that individuals and couples file each year. (Ok, did you get this? No changes to the tax code. No repeal of stupid provisions or onerous taxes. No reduction in the bureaucracy. No, the author wants the GOVERNMENT to prepare tax returns. Absolutely astounding!)
The only people who would have to file their own returns would be those who itemize deductions or costs, such as mortgage interest, or who are sole proprietors of a business. If Congress went further it could even eliminate many of the 45 million returns involving itemizing or sole proprietorships.
People who have used ReadyReturn rave about it. In surveys its approval rating stands at about 98 percent. Many users describe it as the best government program ever.
Dennis Ventry, the University of California at Davis law professor who has championed ReadyReturn, notes that the Franchise Tax Board estimated that the system would cost the state about $145,000 annually. It turned out they were wrong. Instead California nets about $80,000 annually as a result of implementing ReadyReturn.
The system saves time and money by eliminating an expense for taxpayers and by reducing government costs. Plus it relieves people of the frustration involved in preparing taxes. So why hasn’t ReadyReturn expanded to other states and the federal government? (You see, if the difficulty of complying with the tax code is removed, then the injustice of the present system is further separated from the awareness of the taxpayer. Then it won't matter that the taxpayer has to surrender his private information and hard earned dollars to support an unwieldy, unfair, and burdensome tax system. It won't matter that the government is manipulating his private financial decisions.
If filing his own return is taken from his hands and the government does it for him, then there is no connection between him and the pain of compliance. There will be no call to reform the tax system, since it won't matter. Indeed, the tax system could be further amended to be even more complex and oppressive and the taxpayer wouldn't even notice.)
Blocking the path to reform is the lucrative business of tax preparation, especially opposition from Intuit, which makes TurboTax and other tax-preparation tools. Intuit once lavished $1 million in support of a single California legislature (sic) who vowed to kill ReadyReturn. The money was spent to support then Assemblyman Tony Strickland, a leader of the Club for Growth, a Republican organization that seeks the ouster of Republicans who speak in favor of any tax increase or are considered inadequately vigilant in seeking lower taxes. (This is idiotic. I'm sorry to use such terms, but that's what it is. With the millions if not billions of dollars that change hands every election season buying every sort of vote on every conceivable subject, the author is concerned with only one such transaction, a state assemblyman. And this man cannot be standing on principle that the California tax system is grossly invasive and burdensome, no, he has been bought by special interests. And that is the only possible reason to oppose "ReadyReturn," apparently.)
Strickland’s position illustrates how those who campaign on a platform of lower tax rates are not necessarily in favor of saving taxpayers money or reducing jobs that exist only because of government paperwork requirements. (Illustrates? How? Is the author going to explain this? Of course he won't. He's got an agenda, and inconvenient questions shall be ignored.)
Intuit says that ReadyReturn violates taxpayer privacy. But by law the government already receives verification of all wages paid, as well as of all dividends, interest, capital gains and some royalties as well as some profits from partnerships. (So in other words, since government is already invading privacy, well, it should keep on doing so...)
Instead of ReadyReturn, Intuit favors a system of free income tax filing for low-income and older people. Professor Ventry calls this alternative “inferior in every way” to ReadyReturn. It is also a way to market TurboTax to people who use it for free now, but who may buy the software in the future if they prosper into complicated personal finances and make enough money to itemize deductions. (Notice how the author has made the issue about Intuit, thereby taking the focus off of government?)
Simplify the corporate tax code
The second option would be simplifying the corporate tax code. But there is little enthusiasm among big businesses to do so. (Um, yeah. What about enthusiasm in Congress, where the actual laws are made? Can we focus on the source of the problem and where the solution lies? Please?)
That makes perfect sense to those of us who delve deeply into how the tax system actually works, which only occasionally bears a resemblance to what politicians and pundits say and what the news media report.
For the 2,800 largest American corporations, which own more than 80 percent of all business assets, the corporate income tax is not a burden, but a profit center. Here’s how it works:
When Congress started taxing corporate profits in 1909 it imposed penalties to prevent companies from hoarding cash. If it weren’t for these penalties, profitable companies would become bloated tax shelters and avoid taking the risks of reinvesting profits, which is essential to economic growth. (This assertion in itself is worthy of extended analysis, but I cannot undertake that here. Suffice to say, the author makes an a prioi assumption that Congress can and should hold the reigns of the economy and force business to kowtow to its version of what a private company should do with its own money.)
In 1986, a tiny change was made to Section 531 of the Internal Revenue Code creating an exception to the limits on holding cash and other liquid assets. Congress decreed (Congress duly passed a law.) that unlimited amounts of cash could be held provided that the money was owned by subsidiaries located offshore.
Since then, multinational companies have moved their intellectual property — including many patents on manufacturing processes — to subsidiaries in Bermuda, the Cayman Islands, Singapore, Switzerland and other distant places. Other companies, notably Apple, entered into cost-sharing arrangements for research and development with subsidiaries in countries like Ireland. (The author is inadvertently arguing against his own position. Because of the complexities of the tax code and the high corporate tax rate, it makes economic sense to take advantage of LEGAL MEANS to save money. Again, these corporations are doing exactly what the author does when he takes a deduction on his own tax return.) A Senate subcommittee (sic)
For example, if a company holds $1 billion outside of the United States and then buys Treasury bonds that net a four percent return, after three decades the compound interest will total $2.4 billion.
Then in 2044 the company pays its billion-dollar tax bill. Thirty years later, inflation will have eroded its value to about $400 million.
After paying its tax the company still has the $2.4 billion in interest. That will be worth about $1 billion in 2044 dollars proving that under American tax law multinational companies can eat their cake and have it, too. (Wow. Here's another series of statements that deserve an extended rebuttal, but I can't do that here. Instead, I will briefly note that none of this happens in real life. A company does not simply let a billion dollars sit around. They most likely wouldn't buy treasury bonds. Treasury bonds do not net anywhere near 4%. No business holds a single investment for 30 years. Inflation is the result of government manipulation due to bad monetary policy. It is not illegal to invest or reap the benefits of the investment. The company paid its taxes as is required. And so on...)
Meanwhile, other taxpayers have lost out on the interest the government paid the company on the Treasury bills, and are net losers by the exact amount that the multinationals turned into profits. This has turned from idiocy to outright ignorance. Government floats insane amounts of debt, which is financed by selling bonds. No one would buy bonds unless they paid a return. The interest is an obligation owed to the purchaser of the bond, just like Social Security payments paid to a retiree. The taxpayers only lose because of government policy that obligates taxpayers to fund the idiocy of government.)
Stopping this system will not make taxes easier for anyone, but it would ease the burden you bear by stopping multinationals from shifting their burdens onto you.
David Cay Johnston, a 2001 Pulitzer Prize winner, teaches at Syracuse University College of Law and writes for Newsweek, TaxAnalysts.com, NationalMemo.com and Al Jazeera America.
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