Yesterday I asked Hillary Spot readers for their thoughts on Edwards’ latest tax proposal, which would create a “Form One” that would have the IRS calculate the tax bill for an estimated 50 million taxpayers who have very basic tax circumstances.
A few readers felt like it wasn’t a bad idea. Quite a few said they would prefer a flat tax or the Fair Tax proposal (Paging Mr. Boortz and Congressman Linder). But many recognized all kinds of ramifications and side effects that had escaped my attention:
William put it succinctly, a point raised by many Hillary Spot readers:
The biggest flaw in Edwards’ proposal is that it allows a segment of the population to believe, to an even greater extent than withholding already causes it to believe, that it does not pay taxes (so all that government “does for them” is free, or is paid for by squeezing the “wealthiest 1%” of Gorean lore). I’m in favor of abolishing withholding for this very reason. Tax paying should be conscious so that it can remain judicious (to whatever extent it still is). There is much moral and political hazard to making it simpler, especially for the Democrats’ client base.
Steve puts it similarly, that there’s a danger in making the tax system too simple for too many people:
I think one of the best things conservatives could do to make people realize just how bad our tax burden is would be to require all taxpayers to file and pay taxes quarterly. The current insidious system of employer withholding was designed to collect income taxes without taxpayers feeling the pain of writing a check.
The minute problem with this attitude – that creating a simpler, easier system of paying taxes for some people would be bad, because they fool the public into thinking that the system is good for everyone – is that this means that as conservatives, we end up opposing any piecemeal effort to simplify the tax system. In fact, considering readers’ strong preference for far-reaching reforms that would effect everyone — the flat tax, the fair tax, Dick Armey’s postcard idea, etc. — we have the conservatives wanting a reform to help everyone and the liberals wanting a reform to only help certain people. Those darn elitists.
I was pleased to hear from Rich’s Trade Guy, because he mentioned an idea that I found fascinating – the sort of thing I’d like to see more of in the federal government:
I once took Game Theory in grad school from a very smart guy who used to help the Navy design contract bidding schemes and stuff. One idea he had that always stuck with me was that the government could save billions of dollars by setting up a “tax gaming institute,” which would take every new piece of tax legislation and set aside a small amount of real money (a couple million) for accountants and lawyers to win if they could figure out ways to scam the proposed system (e.g. you could get paid by paying less in the game than the CBO estimated you would). The information thus generated about unintended consequences would more than pay for itself over the long run.
So if I think “how could I scam Edwards’ proposal?” then the idea comes about that people in certain circumstances would love to misrepresent themselves in order to have the government *under-calculate* their taxes. Let’s say that I only got wage income for a year or two, and then I got a large amount of money from a business or contract which was non-wage income, and which might not be reported to the government if I didn’t self-report. There would be an incentive to take the standard deduction simply so I could get on the list as a person who qualifies for having the government calculate my taxes. Then I would let them do that and not report my other source of income for as long as I could get away with it.
I’m not saying there isn’t a fix for this, or that the costs of people cheating the system this way would outweigh the benefits of simplification for lots of others. But it’s the sort of thing that’s reasonable to think about.
Do the numbers… If only 10,000 taxpayers in CA took advantage of a similar plan in 2004, that would extrapolate to only 88-100 thousand taxpayers across the US (unless advertising and media exposure pushed up participation). How many filers use form 1040EZ today?
Brian says that instead of taxpayers having an easier time, the country would be better off with better-informed taxpayers:
One: You never want the person making the rules and owed the money calculating your taxes. It seems logical to most but to other taxpayers, they may be under the impression that this simplification is the best way out. When in fact, the best way out is to become informed of the code and what deductions and credits you may be able to use so that you pay only what you are required to pay under Gregory v. Helvering.
Two: Reported information is not always correct and if the IRS is the one telling you what you made and what your return should be, then that takes the onus off the to actually become informed and responsible for their taxes.
Andrew shot the proposal full of holes:
1) If you get one of these forms offering to calculate your taxes for you, and you sign it and send it back, does that make you immune from an audit? Whichever way you answer, you’re wrong. Because if the form does not confer immunity, it’s going to get an awful lot of people very angry. And if it does, it opens a whole can of worms. See below.
2) If the form does come with an offer of immunity, the IRS has just told you everything they know about your income. Which means that if you have a source of income they don’t know about, you have just learned that you can get away with not reporting it.
3) There will certainly have to be limits beyond which you can’t use this service. For example, form 1040-EZ excludes people with more than $1,500 in interest. There will thus be a great incentive to avoid behavior that might push one out of the pre-prepared tax return category. As a simple example, would owning shares of stock kick one out of that category? What about mutual funds?
Insert from Jim: I’m pretty sure either of those would knock one out of the “simple” category.
4) If this program is successful, it will greatly increase the burden on people who don’t participate in it. Every time the tax code becomes more complicated, Congress will argue that it doesn’t matter because the IRS figures out so many taxpayers’ taxes for them.
5) It will also increase pressure on businesses to report data to the IRS, so that they can improve the accuracy of their calculations. How long do you think it will be before eBay is required to report every auction to the IRS?
6) There is an implicit assumption behind this program that it is a good thing to make taxes easier to file. The conservative argument would seem to go in the other direction: Anything that hides any part of the burden of paying taxes is a bad thing. For that matter, I think we should do away with payroll tax withholding. Every taxpayer should be required to send in estimated taxes every quarter. That way people won’t forget what they’re paying, as they do now.
Douglas made a similar point:
It is an efficient proposal, and if this a business I would say great. This is not business, this the federal government taking our money. Having been self-employed all my life, I have had to pay quarterly and then again on April 15.
If everyone had their money for the year (or the quarter) and then had to return it to the Feds, there would be a lot more conservatives. Its one thing to see a check stub that starts out (for example) at $2,000, then makes all kinds of deductions to a net of $1,350. And quite another to have that $650 in your hands to do with as you wish until April 15th.
For that reason, I would prefer that the Fed not make it any easier or less painful to pay taxes for anyone.
John, one of those Hillary Spot readers in the mainstream media, notes:
50 million returns prepared by the IRS? And mailed out? And rechecked again? How many more IRS employees would that take, and how much would it cost? That’s one objection. Sure it would save people some trouble. But, as you point out, it would help those who need it least. Surely, if we have to have this ridiculous tax code, a small burden of shared sacrifice is the few minutes (not hours) it takes to fill out an EZ form. Particularly if you are going to get something back from the government in the form of the EITC. We’ve already made sure the lower middle class pays no income tax, and that the working poor pay no income tax AND receive free money from the government. Now we want reduce their “burden” further by spending, probably, a few extra billion for new employees and technology. No thanks.
I like Ray’s attitude:
How sad it is that we have such a system that we have to rely on the “fox” to stock the hen house – much less watch it. I’ll do my own returns and check my own math, thank you very much. I won’t voluntarily turn over ANY tasks to the federal bureaucracy I can do for myself.
To sum up, Edwards’ proposal aims to reduce the burden of paperwork, energy and time for tax filing, but it only does it for people whose circumstances are so simple, that filling out the current forms really shouldn’t take that long at all. In this light, despite sounding good at the unveiling, it amounts to a nothingburger of an idea.
Perhaps more significantly, it would create another huge incentive to do things “off the books.” Selling something? Don’t report the income to the IRS, because you’ll not only have to pay taxes on it, you’ll lose your status as a free-preparation taxpayer. It would increase the workload on the IRS by a not-insignificant amount.
Finally, there’s the “opportunity cost” argument, that of all the tax reforms we could see in this Congress or the next, or pushed by the next president, this would affect the fewest people and make the smallest difference. In the end, this proposal seems to modest to get all that excited about.