Just because you can make it complicated doesn’t mean you should.

Everyone has heard about fraud, waste, abuse, pork, goofy grants, etc., but there’s another vampire sucking on our economy.  It’s overhead.  Now some overhead is essential to running any program but excess overhead is a nonproductive use of resources.  Business figured this out years ago and responded by cutting management levels, improving communication, eliminating duplication, seeking best practices, modifying supply and distribution chains, and taking advantage of technology.  The government hasn’t gotten the message: our systems are too complicated.  Every time technology enables more data tracking the government demands more data.  Washington is always issuing new rules but programs don’t get simplified (or eliminated if they haven’t proven to accomplish their objective).  Our convoluted income tax code is a prime example of excess overhead, as are health care administration and the alphabet soup of welfare programs.  No one benefits from all this wasted effort.

The economy is a car, efficiency is the gas, excess overhead is the brake, so which do you step on to get moving?

Flat out easier.

The principle of a flat tax is simple.  All income is taxed at the same rate for everyone.  I specify all income because some wealthy individuals want a flat tax that leaves capital gains untaxed (I wonder why).  I don’t believe in “wealth redistribution” but I do believe everyone should pay their fair share and there’s no reason why passive income is “better” than earned wages.  To encourage small investors and help seniors without gifting hedge fund managers a limited amount of investment income (interest, dividends, and capital gains) could be exempt, e.g. $10-25K.  The capital gain exemption on the sale of a primary residence should also remain.  A flat tax would provide larger personal exemptions to protect low wage earners, a higher standard deduction to reduce the need for itemizing, and no loopholes.  There would be no tables or scales.  If the government wanted to impose any surcharges they would also be flat.  Deductions for those who chose to itemize would include dependents, state and local taxes, uninsured medical expenses, charitable contributions capped at 10% of income (if you’re poor you can’t afford to give away more and if you’re rich you don’t need taxpayer support for your generosity), uninsured catastrophic losses, and capital losses with carryover to be written off at an age-dependent rate.  The mortgage interest deduction would go away as would both the AMT and the current EITC.  As I said, the sole purpose of a tax is to collect revenue.

Corporations have asked for a lower tax rate to be more competitive in the world.  Let’s give it to them, but in exchange they must give up some of the subsidies and other taxpayer-funded benefits they enjoy.  Make it simpler and reduce overhead, that’s the goal.

While a national sales tax would be even simpler it would hit lower income people disproportionally hard as they spend more of their income on necessities and less on discretionary items. If they had to file for some form of refund the system could be as complicated as the income tax it replaced.

It’s that time of year again, so let’s talk taxes.

No one likes paying taxes, but they’re the cost of “having a civilized nation”.

People ask “where’s my refund?” or “what do I owe?” but how many are asking “what am I getting for my money?”?    These would be questions like “are my taxes fixing bridges in the US or in Iraq?”, or “why do they keep funding programs year after year that show no success? ” or “are my taxes helping welfare recipients get back on their feet or helping welfare cheats stay off them?”.  You get the idea.  Here are my criteria for taxes:

  1. The sole purpose of a tax is to raise revenue. “Social Engineering” is overdone.
  2. Revenue from a special purpose tax must be used for that purpose.   If the gas tax is earmarked for highway maintenance I expect to see road crews out.
  3. Niche taxes that generate no significant revenue should go away.   Eliminate the overhead.
  4. Taxes should be easy to understand and easy to file.

The last item is the biggest problem: it’s excess overhead, something I will discuss further in more detail.  No one person could understand the entire tax code and various court decisions about it.  The IRS has over 100,000 employees (and increasing) to keep track of it all and supposedly watch for fraud.  People spend millions of dollars a year getting tax forms prepared (essentially a tax on a tax).  The IRS gets all wage, pension, interest, dividend, and brokerage transaction information yet it all has to be entered again.  If those are your only sources of income you should be able to file on one page.  A simpler tax structure would also make it harder to cheat.  The simplest income tax structure is a flat tax and I’ll make specific recommendations next.

Once individual and corporate taxes are simplified, the IRS could be downsized for real tax dollar savings.  IRS employees at GS-11 and 12 grades (typical working level) earn from $60,000 to over $80,000, with supervisors earning more.  Using $75,000 as an average, if IRS employment could be reduced by 25% it would save almost 2 billion dollars a year just in wages!  Factoring in employee benefits, contractors, facilities maintenance, and technology the actual savings would easily double.  If we could simplify (not “reform”) tax law and get the IRS out of other businesses like welfare and health care, it could be downsized by 50%.  Simpler and fairer taxes, smaller and less expensive government, and less fraud sound good to me.