A better way to do 2 would be to do away with withholding. After a year of that we’d see a radically different tax system.
What happens when you don't have the cash to pay? Do we then see a whole new sector of predatory loans? Imprisonment? Increasing unpayable fines? None of those are good ideas, yet when things like this happen, our system has already fallen into these pitfalls. Witholding is an essential idea.
What would be nice is if we make the easy filing system but explicitly highlight the amount you paid in taxes compared to your income. Most people only judge on refund amount and rarely check the math on the exact taxes owed.
Without the painful transparency, it becomes too easy for the government to nearly invisibly turn up the tax rate on individuals to pay for whatever boondoggle or foreign war they see fit.
A failing public education system and increasingly consumerist culture that encourages bad spending habits using psychological advertising tricks, to start. Go look at how little savings Americans have currently as well, which has been covered ad nauseam by most news outlets in the past few years.
> Without the painful transparency, it becomes too easy for the government to nearly invisibly turn up the tax rate on individuals to pay for whatever boondoggle or foreign war they see fit.
Given that it directly affects take-home pay, any significant change is pretty noticeable. Heck, even Trump's very small changes for the middle class were noticed on paychecks slightly, though there was also an unequal decrease in witholding that made people's refunds smaller.
While these may play a small part in why people couldn't budget for it now, I think a bigger part of it is that income tax just did not apply to most people in as large of sums that it does today.
For example. The lowest tax bracket in 1940 was 4% and went from $0-4000. Median income at that time in the US was about $950.
Check out https://taxfoundation.org/summary-federal-income-tax-data-20... for an analysis on 2015 US taxes. The bottom 50% of the US paid an average of 3.59% of their income. MarketWatch claims that 44.4% of Americans pay no federal income tax at all: https://www.marketwatch.com/story/81-million-americans-wont-...
The tax was intended primarily as a tax on the wealthy or middle class, but over time by not adjusting the standard deduction/exemptions, more and more people ended up paying the tax. You could also make the argument that more and more people became middle class.
This would probably require some simplification of the tax code.
Or not.
Source. I live in a country where the vast majority have income taxes handled by their employer. It would still be front page news if income tax rates increased or decreased.
Painful transparency is just pain.
Do it in the US and it's front page news on the day and then it's on the second and third pages January through April the following year.
How many days is it reasonable for something to be front page news? Personally I'd prefer 365 different headlines then the same one for 4 months straight.
This narrative is based on nothing. The overall tax rate has been basically flat bouncing between 15% and 20% since WWII[1].
[1] https://en.wikipedia.org/wiki/Income_tax_in_the_United_State...
Non-sequitur. Taxes are already seen on every pay stub and tax return. Even if taxes weren't explicitly state, simply having less money is painfully transparent.
But if I were to design a tax system, it likely wouldn't have withholding. I'd probably mess around with some weird purely transactional/continuous tax system though.
The penalty for not paying is much lower than the penalty for not filling, if you owe.
It's possible your tax prep software does their own version as a middleman, but the IRS offers it directly through the same system that quarterly estimates are paid.
You ask as if it would be a new concept to penalize people who don't pay their taxes...
There are clear laws on the books for tax evasion. No need to doubt about what happens.
https://www.gov.uk/government/news/millions-start-receiving-...
This includes capital gains, rent collected from tenants, AdSense revenue.
The right way to handle this stuff is not immediately obvious to me.
I used to make $80k per year in salary(which is far less than most of the top decile in the USA) and in one of those years had over $10k in capital gains. In the same year I thought about buying a house to rent out. I ultimately didn't do it, but if I had, then I would have had to declare the income as part of my tax return filing process. Just as one data point.
Plus they have the means to spend their earnings abroad.
But a fixed credit could offset some of those concerns.
The paycheck credit I proposed should address that. Plus rich p eople definitely spend a lot more compared to others.
> Plus they have the means to spend their earnings abroad
While that's true, they certainly could be taxes on major purchases. For example, I could buy souvenirs abroad without passing tax on them, but I wouldn't be able to buy a car and not pay the tax before titling it here.
In short, there's a reason that no other developed nation taxes this way, and they all have income taxes. And all those other nations manage to have relatively simple taxes for most taxpayers that don't require paying H&R Block to file for them.
The same thing can apply to real estate as it does for cars. That is, a sales tax you pay when you purchase the home. And the sales tax doesn't have to be a flat amount. It could be a greater percentage of the value of the home for homes that are valued at several million dollars as opposed to those that are worth only several hundred thousand dollars.
> rich people aren't going to be paying much in taxes
Isn't that the case currently (compared to what they could be paying due to all the loopholes in the current tax code)? If we focused on taxing transactions as opposed to possessions and income, then the rich could be taxed far more. Invest in stocks? Then you can be taxed when you buy them. Invest in real estate? Then you can be taxed when you buy property, etc.
> Rich people spend a lot on foreign vacations and travel, which is untaxable domestically for obvious reasons.
That is true, but it seems that the US is one of the few nations in the world that states that you have to pay taxes on income you earn outside the country (assuming you don't pay taxes on it in the other country). That said, I think that we should focus on the majority of tax payers in terms of making how they pay taxes easier and hopefully more fair.
> there's a reason that no other developed nation taxes this way, and they all have income taxes. And all those other nations manage to have relatively simple taxes for most taxpayers that don't require paying H&R Block to file for them.
I don't pay anyone for filing taxes, but it takes days to read through all the instructions for the 1040 form and other associated forms to see what applies to me and what doesn't. Personally, if I was able to take care of my tax obligation by just buying various things throughout the year and getting my full paycheck, then I would certainly be happier and not have to essentially waste several days every year figuring my taxes.
I get the attempt to sidestep the regressive counterarguments normally in play with sales tax replacement systems, but I think this system would be equally regressive.
They shouldn't have to do anything more than file a W4 whenever they start a new job or their income statutes changes. That's certainly less burdensome than even just the 1040 form now.
> put temporary financial strain in place when waiting for credit for purchases
What I proposed would be a credit that would be applied to every paycheck, much like the withholding we currently have applied to every paycheck. So the wait for credit wouldn't be ant longer than it currently is before the next payday (assuming they're living from paycheck to paycheck).
> and actually make the IRS more complicated and onerous for most Americans?
Having this credit calculated based on the reported earnings on the W-2 form and filing a W4 is certainly less complex than just filing the 1040 form. Plus, most people wouldn't have to worry come later this month if they haven't had enough withheld from their paychecks in the last year.
> but I think this system would be equally regressive.
If people with less income are getting a credit on every paycheck and they spend less overall compared to people who earn more and get less or no credit on their paychecks, then why do you believe that the proposed system would be equally regressive?
This works if everyone has a exactly one job at all times that is their sole source of income, but fails otherwise. Of course, if the conditions it works were always true, irreducible complexity (that is, excluding the complexity that is maintained simply because both conservative politicians and tax-prep businesses have an interest in making tax prep onerous unless you pay for an additional service) for taxpayers of the current to tax system would be significantly less.
It doesn't, even in the case it works, address the problem that a regressive tax with a flat credit is...still a regressive tax.
The current W4 form takes dual income/second jobs into account and adjusts the withholding based on that. Changing that withholding to a credit based on income, number of jobs, dependents, etc wouldn't be any worse than it is now, but eliminating the 1040 and other associated forms would definitely be a big benefit.
> even in the case it works, address the problem that a regressive tax with a flat credit is...still a regressive tax.
We have tax brackets now based on income level. Would basing a credit on similar income brackets be any different? Or are you claiming that out current tax system is regressive and my proposal wouldn't fix the underlying issue?