What makes the income tax code (and its regulations) so complex, the root of the problem, is that it is based on the "determination of taxable income" requirement. If a definition of income is required, regulations must go to some length to establish what that final figure is to be.
Here is where the problem begins. Politicians love this tool. One can offer credits against the tax--a twist to the income definition that is "after the fact"--or offer a special deduction, an exemption from taxable income, or even a reduction in the tax rate for certain types of income, also "after the fact" of income determination.
This useful-for-political-purposes feature of a tax based on net taxable income is possibly the major reason, I suspect, that any real change to the method we are taxed in the United States will face very stiff opposition in our Congress. They are the ones who came up with their annual tax law update in 2003, titled the "Tax Simplification Act", which added about 4,000 pages to the already gigantic tax code.
One opposing challenge to simplifying the tax system that is brought up is the fact that the income tax is established in our constitution. Its strange that "we must follow the constitution" fits in well here, but look how loosely it is adhered to on issues involving the First or Second Admendment. The quick answer to the concern about the constitution's claim for continuing the income tax system is this: Congress can reduce the income tax rates to zero! (Until a more permanent solution is worked out, or while a trial run of a new system is made.)
That is the problem, then, of a graduated income tax system--defining income to be taxed, either by exclusion of some types of income, or by myriads of deductions of all sorts. And, finally, all kinds of direct tax credits. Over forty years ago, when I first began to prepare income tax returns, it was sort of "fun", to see the bottom line and figure out ways to make it more acceptable to the taxpayer, to the extent allowable by the code. We could prepare the return easily by hand. Actually, there was basically no other way.
Today, Year 2007 returns will require computer software that is, in itself, quite complex to use for a complex tax return. Investments in oil and gas ventures through a limited partnership arrangement blows my imagination. Its like walking into a jungle full of wild, fierce animals with a bean shooter. The younger generation of tax preparers probably cannot relate to this, but compared to "how it once was", the complexity is immense!
Who knows where it will go from here--unless there is a dramatic change in the way we obtain taxes in this country. And any other method that uses a manner of taxing that requires an intricate definition of the amount to be taxed, or a classification of such, will not be enough. That will require an increased rate of tax to obtain the needed revenues, and will require a monitoring bureaucratic agency equalling the IRS to insure its integrity of operation.
The practical guideline: Expand the base, reduce the rate, and simplify the collection process. Those are the only ways to reduce complexity and decrease the need for a massive Internal Revenue Service.
Gene Lawley
Saturday, October 20, 2007
Sunday, October 14, 2007
The Social Security Fund Problem
Thinking in a box gets us nowhere. Its like the often proposed "fixing" of the Social Security problem. Back in the 1970s a committee was formed to solve the problem of the Fund running out of money. They met and discussed and talked and debated the issue. And, finally, they came up with the brilliant idea that to solve the problem, they would "increase the base and raise the rate". (Increase the amount taxed and increase the rate of the tax charged.) It would last until at least 2020, they claimed.
Lo and behold, five years later, it was discovered that the figures were wrong, and it would not survive like that. So, a committee was formed again--our own Senator Church was a part of both committees, I think--and they debated, discussed and dissected the problem again. They came up with a brilliant plan: Increase the base and increase the rate! Wow! What brilliancy!
Now, they are again planning, in the best solution to have been brought forward, to....yeah, you guessed it...raise the base and raise the rate.
The idea of personalization of part of the funds is a no-no. Those funds are wanted in the Treasury for liberal exploitation, in my opinion. That has been the liberal idea for all these years. Otherwise, why is it that so many benefit programs have been funded out of the Social Security Fund over the years, for which it was not meant to be?
I recall a very short article in the Colorado Springs newspaper about forty or so years ago. It made the claim that had the Social Security funds been invested in blue chip stocks, it would have (at that time) owned the companies.
Privatizing means personalizing a part of the funds. What is wrong with that? Its not the socialistic thing to do--is that it? It can't be taken away and given to those who did not earn it? That brings the "soak the rich and bless the poor" down to a low level--for personalization would apply, properly, to every one who earns a wage. Now, thke 7.65% withheld from every paycheck is matched with the same amount by the employer, or the same person, if self-employed, and it all goes into the Federal treasury.
At least the lower level wage earners would have something that is their own. Maybe it would result in a sense of self-worth that would lift their vision to greater possibilities. What do you think?
Gene Lawley
Lo and behold, five years later, it was discovered that the figures were wrong, and it would not survive like that. So, a committee was formed again--our own Senator Church was a part of both committees, I think--and they debated, discussed and dissected the problem again. They came up with a brilliant plan: Increase the base and increase the rate! Wow! What brilliancy!
Now, they are again planning, in the best solution to have been brought forward, to....yeah, you guessed it...raise the base and raise the rate.
The idea of personalization of part of the funds is a no-no. Those funds are wanted in the Treasury for liberal exploitation, in my opinion. That has been the liberal idea for all these years. Otherwise, why is it that so many benefit programs have been funded out of the Social Security Fund over the years, for which it was not meant to be?
I recall a very short article in the Colorado Springs newspaper about forty or so years ago. It made the claim that had the Social Security funds been invested in blue chip stocks, it would have (at that time) owned the companies.
Privatizing means personalizing a part of the funds. What is wrong with that? Its not the socialistic thing to do--is that it? It can't be taken away and given to those who did not earn it? That brings the "soak the rich and bless the poor" down to a low level--for personalization would apply, properly, to every one who earns a wage. Now, thke 7.65% withheld from every paycheck is matched with the same amount by the employer, or the same person, if self-employed, and it all goes into the Federal treasury.
At least the lower level wage earners would have something that is their own. Maybe it would result in a sense of self-worth that would lift their vision to greater possibilities. What do you think?
Gene Lawley
Friday, October 12, 2007
The Hype for the "Fair Tax""
There is considerable publicity for "The Fair Tax" by its author, Neal Boortz, and seems to be embraced readily by many front-line politicos and spokesmen. But, having read the book, I see no indication that there has been any input by any practicing tax preparer accountant or tax attorney.
Had there been, they would surely have seen the weaknesses in that plan. Here are some apparent ones:
1) It claims to eliminate the IRS, and perhaps it would because it switches from an income tax to a retail sales tax. BUT, the features of the plan result in an overbearing requirement for bureaucratic oversight. Do we want the IRS, or would the FBI be better?
2) To explain the above, let's look at its taxing provision. It plans to tax only new retail items. No used items would be taxed. At 23 cents on the dollar--23%--, a new auto priced at $20,000 would cost an additional $4,600 in the form of a tax. But a used car would not cost any tax. How many miles should a car have on it before it can be classed as "used"?
The doorway for fraud swings wide open right there! Plus, the new car market would drop like a rock! How long would it take in an environment such as I have depicted for the auto market to begin developing "used" vehicles in order to create more sales--in order to survive? Or, apply the principles to any large item market in which only new items are taxed--a house full of furniture would have quite a price addition to cover the tax.
3) The claim that 22% of every item's price in the market place is really the built-in tax build-up, and that the prices would drop by that amount, is an assumption that is hopeful, but not realistic. At the least, it would not become an immediate response in the market place, were the plan to be adopted. And, it may never fully wring out the 22% build up.
4) In order to offset the cost of basic living expenses, the plan has provision for a "pre-bate" payment to every household, on the first of every month. The government would issue a check to each verified household at the first of every month, based on previously determined amounts according to the number of persons in the household. How many truly conservcative-minded, independet-minded citizens really want to get on the public "dole" and become akin to the welfare class? Are we not trying to get people off welfare and on their own? Socialism starts where? So, which bureau of the government will be watching over this aspect of the plan?
5) How about the collection of the tax? Who will oversee that aspect? The retailer is supposed to "send it in" at month's end. Suppose he decides those accumulated 23% dollars of his total take that month are so much that he cannot see that the government needs them more than he does. There goes your Irs elimination factor, it seems to me!
6) And, how does this switch to the "fair tax" work out with states which have gradually developed a seemingly inseparable hookup with our present income tax code? Can they switch, too, and what would their tax rate be, added to the 23%? As a matter of fact, state retail sales taxes have the most invasive, contrary regulations of them all. And if they were to stay the same, taxing both new and used items, perhaps also services, those rates on top of the 23% would really give us a jolt at the cash register. Right?
There is a better plan. Simplify the system by broadening the base, setting the rate low, and collecting the tax immediately. If you want to know the details, contact me.
Gene Lawley, MBA, CPA
Twin Falls, Idaho
fiddlefax@yahoo.com
Had there been, they would surely have seen the weaknesses in that plan. Here are some apparent ones:
1) It claims to eliminate the IRS, and perhaps it would because it switches from an income tax to a retail sales tax. BUT, the features of the plan result in an overbearing requirement for bureaucratic oversight. Do we want the IRS, or would the FBI be better?
2) To explain the above, let's look at its taxing provision. It plans to tax only new retail items. No used items would be taxed. At 23 cents on the dollar--23%--, a new auto priced at $20,000 would cost an additional $4,600 in the form of a tax. But a used car would not cost any tax. How many miles should a car have on it before it can be classed as "used"?
The doorway for fraud swings wide open right there! Plus, the new car market would drop like a rock! How long would it take in an environment such as I have depicted for the auto market to begin developing "used" vehicles in order to create more sales--in order to survive? Or, apply the principles to any large item market in which only new items are taxed--a house full of furniture would have quite a price addition to cover the tax.
3) The claim that 22% of every item's price in the market place is really the built-in tax build-up, and that the prices would drop by that amount, is an assumption that is hopeful, but not realistic. At the least, it would not become an immediate response in the market place, were the plan to be adopted. And, it may never fully wring out the 22% build up.
4) In order to offset the cost of basic living expenses, the plan has provision for a "pre-bate" payment to every household, on the first of every month. The government would issue a check to each verified household at the first of every month, based on previously determined amounts according to the number of persons in the household. How many truly conservcative-minded, independet-minded citizens really want to get on the public "dole" and become akin to the welfare class? Are we not trying to get people off welfare and on their own? Socialism starts where? So, which bureau of the government will be watching over this aspect of the plan?
5) How about the collection of the tax? Who will oversee that aspect? The retailer is supposed to "send it in" at month's end. Suppose he decides those accumulated 23% dollars of his total take that month are so much that he cannot see that the government needs them more than he does. There goes your Irs elimination factor, it seems to me!
6) And, how does this switch to the "fair tax" work out with states which have gradually developed a seemingly inseparable hookup with our present income tax code? Can they switch, too, and what would their tax rate be, added to the 23%? As a matter of fact, state retail sales taxes have the most invasive, contrary regulations of them all. And if they were to stay the same, taxing both new and used items, perhaps also services, those rates on top of the 23% would really give us a jolt at the cash register. Right?
There is a better plan. Simplify the system by broadening the base, setting the rate low, and collecting the tax immediately. If you want to know the details, contact me.
Gene Lawley, MBA, CPA
Twin Falls, Idaho
fiddlefax@yahoo.com
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