An Alternative to Federal Income Tax

 Okay, I know that for many Americans, filing their federal income tax is simple and takes very little time.  It must almost be fun.  A side effect of being rich is that along with regular income reported on W-2, there is business income, interest income, dividend income, taxes due on capital gains and the joy of Schedule K-1.  (This is used for partnerships; one of the mutual funds that I bought some years ago is actually categorized as a limited partnership.  Decoding Schedule K-1 and filling in the equivalent information in the tax return is almost enough to forgo the very reliable 10% annual return.  It is some type of Permian Basin oil service company.) 

The federal individual income tax produces 1.609 trillion dollars a year.  Total U.S. retail sales for 2020 were 5.6 trillion dollars.  A 28% national sales tax would produce the same revenue.  Yes, you would notice that, but consider the advantages:

1. Just about every state charges sales tax.  Retailers already have a form for calculating this.  I have done it myself for ScopeRoller.  It is simple.  Once you computed your taxable sales, send the federal sales tax in with the same form.  (Retailers in the five states with no sales tax will find the form not so hard; they are already computing their total sales, I am sure.)

2. If you have low income but but buy stuff that is in the toy category, you can afford that sales tax.  (This is why most states do not tax groceries, but do tax restaurant meals: one is a necessity; one is a luxury.)

3. The incentive to work hard and make money would be encouraged.  This would also be a disincentive to buy stuff; savings would likely increase; mindless consumer spending would likely drop a bit.

4. Much of the IRS would no longer be needed.  Yes, they will still be auditing corporate income tax returns, estate taxes, and excise taxes, but I find it hard to believe that processing sales tax reports from America's retailers would require the armies of people that process individual tax returns now.  Think of the time spent unstapling W-2 from tax returns and feeding them into scanners.  (I think I would like to see this process; it must be positively gargantuan.)

A Surprise From IRS

I received a several hundred dollar refund from IRS a few days ago, much to my surprise.  I never get refunds from IRS; usually, I write them a check for four or five figures each year.  The wexplanation arrived a few days later, and it makes me wonder if TurboTax screwed up (again).  The refund was for the Individual Shared Responsibility payment, which is the tax for not having health insurance.  It appears that either TurboTax did not ask me the right questions, or it miscomputed my taxes and had me pay this penalty when I did not owe it.  If you use TurboTax, you might want to look through your return and see if you inadvertantlly paid this penalty.

Another surprise a few days before was a warning from IRS that seemed to say that someon else had filed a tax return with my Social Security #, and encouraging me took into identity theft protection.  I have done so.  But it strikes me that if someone filed a tax return with my SSN to get a refund they did not deserve they would have been sorely disappointed.

Taxes

I have just spent the last three hours walking some Canadians through completing 2006 through 2008 tax returns for their American mother with Alzheimer's (hence the need to file tax returns from that far back).  As we worked our way through these forms and worksheets, the sheer insanity and Rube Goldbergesque nature of these forms became more and more apparent.

Even worse: they paid Tax Masters $5400 back in September to take care of this matter.  We have now discovered that they did...nothing.  Tax Masters told them do not contact IRS, "now that we are taking care of it."  When I talked to IRS collections this morning, I found out that Tax Masters had not contacted them at all.  Nor, as near as I can tell, have they done anything about this matter at all, except cash the check.  Nor has their experience been unusual.  The Texas Attorney-General's office is the next step on this.

UPDATE: And it turns out that Texas is already almost two years into legal action against Tax Masters:

Texas Attorney General files enforcement action against TaxMasters, Inc.; cites nearly 1,000 complaints about defendants’ conduct and business practices

HOUSTON – Texas Attorney General Greg Abbott today charged Houston-based TaxMasters, Inc., and its chief executive officer, Patrick Cox, with multiple violations of the Texas Deceptive Trade Practices Act and Texas Debt Collection Act. 

Cutting Corporate Income Tax Rates

I was skeptical that Obama's sudden concern for business was real.  From the February 22, 2012 New York Times:

While details were sketchy, an official said Mr. Obama’s tax framework would “refocus the manufacturing deduction and use the savings to reduce the effective rate on manufacturing to no more than 25 percent, while encouraging greater research and development and the production of clean energy.”

Ah yes, more money being shoveled into the pockets of the people who will be supporting his re-election campaign.

There is no question that serious reforms are required.  The U.S. has one of the highest corporate income tax rates in the industrialized world.  (Any guesses whether this might encourage multinationals to move manufacturing offshore?)  The article also discusses the problem that our high tax rates encourages U.S. companies to find ways to move profits made in the U.S. into their foreign subsidiaries, where corporate tax rates are lower.  One strategy is for X-USA to pay X-Istan $110/barrel for oil, when the market price is actually $100/barrel, because Istan has a lower corporate tax rate.  This is actually already illegal, but you have to audit X's tax return very carefully to make sure that you catch it--and apparently, big companies are not audited as carefully as you might assume.

The deferred compensation plans that executives of big corporations enjoy are an area that desperately needs reform (although not strictly part of the corporate income tax problem).  To be blunt, there is no reason why a person who makes millions of dollars a year should get any special tax treatment of that income.  Let them have  access to a 401(k) plan, like people that make tens of thousands of dollars a year.  If that isn't enough to hold them, the corporation can raise their salary or stock options, and let them pay at either the high marginal tax rates, or enjoy the capital gains advantages from sale of stock options.  The fact that deferred compensation is only for the fattest of the fat cats is like reversed socialism.

Democratic Self-Destruction

Watching progressive Democrats turn on Obama over the Bush tax cuts is so luscious--a chance to watch our enemies engage in group seppuku. 

I confess that I have slightly mixed feelings about this tax cut matter. On the one hand, we have a serious deficit problem, and in a static way, extending the tax cuts increases the deficit. In addition, it is difficult for me to cry a lot of tears for families making more than $250,000 a year. Also, the cost of living in California, New York City, and Washington DC is so high that $250,000 a year for some families is not living quite as high on the hog as it sounds like here in Horseshoe Bend.

On the other hand, raising tax cuts during a deep recession like this will almost certainly reduce revenue even more, making the deficit even heavier. This is especially the case since a fair number of those families earning $250,000 a year are actually businesses filing Schedule C. Raising tax rates might well cause some small business owners to decide that it makes more sense to work less, and spend more time with their kids. You know, that might not be a bad idea, anyway.

Nick Gillespie claims that cutting 3.6% of the budget in each of the next ten years would make up for extending the tax cuts.  It does not appear that he is assuming any Laffer curve magic, either.