If the IRS had discovered the quadratic formula...
cs.amherst.edu
cs.amherst.edu
Of course, things get complicated when you have different kinds of incomes with different rates and all sorts of deductions with different rules that Congress cooks up every year. But that's what computer programs are for. I hope they'll make bug-free and intuitive tax programs some day.
In the meantime, I like Canadian tax forms better. Federal and provincial forms come in different colours, and the boxes seem to be more clearly labeled.
That said, it is rather few where this is needed. Most old people over here are intelligent enough to learn IT-stuff.
The US is an outlier in developed nations in lacking basic social amenities.
I even bought an introductory book on this stuff, but that too assumes you have an accountant and fluffs over the actual mechanics of filing. Grr!
One positive: at least you can do all of it online and the tax code is available as PDFs (thousands upon thousands of pages of course). It also checks simple invariants (e.g. it yells at you if fields A + B must be the same as fields C + D - E and they don't match) and calculates the total amount due.
Edit: Google Translate is trained using EU legal texts, so it does a good job on these forms. This is a translation of part of the VAT (sales tax) form you need to fill out once a quarter or once a month (depending on revenues) as a corporation or self-employed person:
(no, it doesn't make any more sense in German, unless you're a lawyer or accountant, presumably)
Trivia: "young wood" in the second screenshot is an attempted translation of the town "Jungholz", an exclave joined to the rest of the country by a quadripoint[1], which gets the same sales tax rate as Germany, along with Mittelberg, which is not an exclave but only reachable by road via Germany. They apparently even used German currency before introduction of the Euro[2]. The stuff you learn when filing taxes!
I'm gonna bet that you don't file 1120S.
If I were King of America, I would mandate that the entire tax code fit on a single typewritten page with specified font and margin. Each year, a group of 3rd-graders would be asked to complete the tax form given all the necessary information. If they couldn't, the tax code would be considered invalid.
Its actually worse than that. Those in the tax prep industry actually lobby against major tax reforms. http://www.nytimes.com/2010/01/24/business/24digi.html
Its similar to where the AV companies complain when Microsoft release the free version of their own AV software. Ultimately its about protecting your own profits and not about the users.
And why set the threshold to 3rd graders? They aren't the ones filling out taxes. Maybe high school seniors would be a more nonsensical threshold.
Herman Cain's failure was not adding the prebate into his 999 plan (which was just a stepping stone to the FairTax). Without the prebate, yes much of the tax regression is gone, and the poor end up paying nearly the same rate as the rich until the FairTax is fully implemented. With that adjustment, it could make sense.
With the FairTax, if you are using ($tax spent / $wage earned). Then yes, this could be low for a high earner. Ex. a 200k earner saving 75% of their income would be paying an effective tax rate of 12% of consumption or 3% of wages vs 20% if they spent everything. Seems like a nice incentive to invest doesn't it? But eventually all savings get spent. If it's spent by their kids as an inheritance, then they will pay a higher effective rate of consumption than to their labor wage reversing the difference. Now if it's spent by the couple in retirement, the tax to wage calculation makes absolutely no sense because it is INFINITE % taxes to (zero) wages. Whereas focusing on consumption would be 10% tax rate if they keep the same lifestyle under the FairTax. See why focusing on the percent of consumption is important? Either way, the earned dollar will eventually be taxed.
One caveat... There is a disincentive to consume primary goods or first run items and buy used. This IMO is a good thing frankly as our natural resources continue to decline with no end in sight. For the wealthy, marginal increases are low but effective tax is high. So there is a much greater incentive to consume than to save for high earners than they have today (increasing market velocity) and a greater incentive to save for low earners. This will also shift investment power from richest of the rich to be more democratic as more small investors enter the market.
Cain's failure was basing so much of his plan on sales tax, which is basically impossible to make progressive.
Studies have shown, most wealthy people will pay more tax in $ than they do today under the FairTax, and the poor will pay less tax $ than they do today. This is essentially the definition of a more regressive tax system. Not to even mention the other benefits like the time value of money and the international labor competition.
Why doesn't looking at tax / wages make sense in this system? The correct metric used to evaluate the fairness of a system doesn't depend on the system. It makes little sense to me that I would get net money from the government if I made $10 million in a year but managed to only spend $2,000 of it on taxable items (perhaps while spending the rest on non-taxed items like used houses and such).
You can metric the system however you want. It is just out of context under the FairTax to focus on labor wages. Warren Buffet only makes like 600k in "wages" and just pays the capital gains taxes on everything else he cashes out (or consumes). That's why is tax/earnings is so low. But calling the FairTax progressive by saying the rich who save/invest will be paying less is short-sighted. One can just as easily do this exact same thing with tax-deferred accounts or other complicated financial engineering today.
Yes, even if you make $10MM labor wages in a year, you will still get the prebate. Adding X,000 to your $10MM income will barely make a dent, but all citizens over 18? (I believe) will receive the prebate, similar to a social security check, and this can have significantly positive effect on the lower income bracket--especially coupled with the lack of withholding.
By the way, to say one can only spend 2,000 on taxable items is impossible. Even if you simply look at the "essentials"... food, clothes, utilities, insurance, & transportation, you will easily top $2k in taxable spending but that isn't the point.
If you spend all your discretionary income buying used homes, that is certainly your prerogative and would owe zero upfront tax on that purchase. You could just as easily put the money in a 401k type investment or any other tax-deferred account today and get the same effect. The current system uses a tax deduction and then the net income is what is used to calculate your tax. The difference though, is when you cash out that investment, you will pay the standard rate on the principle, but only 15% on the capital gains. Does that make sense? In the FairTax you will pay the standard rate on both the principle and the capital gains. The complexities would be gone. I think the bill itself is only around 100 pages. The high-priced tax accountants and lawyers won't be able to finagle P&L statements, establish irrelevant corporations to funnel money through, and lobby for special deductions.
I'm not trying to compare the FairTax to the current system. I'm simply stating what the FairTax proposal does. I don't understand how it's short-sighted to say that rich people who save/invest will pay less. It's a simple fact. One of the problems with regressive taxation is that wealth tends to snowball and this can be bad when the tax system perpetuates that effect. Why should a poor person pay X% on half his income because he has to spend half his income on taxed necessities, while a rich person pays 0% on most of his income which he spends buying up rental properties to rent to people like the aforementioned poor person? I'm not trying to say that investment like that is inherently bad, simply that this particular arrangement makes it very difficult for the poor person to get ahead, and much easier for the rich person to get even richer.
I'm not actually attempting to compare this system to the current one at all, so your continued criticism of the current system is off-base. I'm simply stating that the FairTax is fairly regressive, a feature inherent is essentially any system based heavily on sales tax, and this makes it deeply unattractive to me and a lot of other people.
Yes, the top wage earners could pay less % in tax to their income than they do today, because there are more tax-deferred investment opportunities available. But again, tax-deferred investments, are simply that... deferred. The rental income would be spent unless it is re-invested, but again, no one saves into infinity and you have that same opportunity today if you really wanted to. Now, I haven't seen evidence of a income snowballing effect as you say though, but I would like to see it. In fact there is little debate on the overall economic impact, like one study that showed a 10% increase in GDP, real wages, and total employment plus a doubling of domestic investment after 5 years.
Again I ask for examples and data to discuss and look at. Studies using the Gini coefficient for example which is the most popular statistic of progressivity, show the FairTax as highly progressive. That number also rises even more if you raise the prebate base. We can certainly debate the merits of such a progressive system, but calling the FairTax "fairly" regressive because you believe it so based on your impression of sales tax systems shows that you are not well informed. There is study after study that shows that it is the most progressive tax system proposal.
BTW, an influx in rental home speculation will only drive rental prices down as more rental supply enters the market. Which is good for the lower income brackets.
What's your point? The current system is widely ridiculed, too. Hey, I'm ridiculing it now.
"It should be complicated to reflect the complications and nuances of our societies. Enough of us obviously think that there should be special cases for certain situations that special cases will arise."
I agree, special cases will arise. But I think we have to aggressively limit the number of those. I'm suggesting a way. If there is a hard limit on the length of the tax code, there will come a point when to add Special Case X, you have to delete Special Case Y.
Law is like code; indeed, it's called a legal code. One of the best predictors of how many bugs your code will have is simply how much code there is. Our legal code is massive bloatware, and it's buggy as heck.
Want a working tax code? Make it short.
Because of my immigration status I paid an accountant to prepare my forms and was a little surprised to find out I owed the IRS. I tried to work backwards to figure out why but this was all but impossible. Few of the values are labelled and all are interdependent on each other. To figure out what a single value I had to work backwards through multiple branches until I reached the root input.
I'm convinced the forms were designed by writing someone in the IRS taking the code for their tax calculators, removing the identifiers and converting it into English text. I have no idea what each variable represents so am unable to be sure the totals are correct. I got the impression that an error early in the process could easily carry through without me noticing. The whole process is opaque and doesn't make me feel like I can trust the IRS or the process to produce an accurate result.
By contrast the Australian eTax application asks me a series of yes/no questions, used that to calculate my deductions and income and showed breakdowns for each. For anything non-standard they ask you to use online calculators and provide or retain your documentation. The UK system was even easier and seemed to be calculated based on data supplied directly by employers. My wife was able to get a tax return without submitting any paperwork (there may have been a single form, I can't really remember).
It's funny you said eight year old; the US average adult reading level is 8th grade. That's a skill most use to some degree every day, just for reading signs, billboards, and text on TV. Can you imagine how rusty arithmetic must be?
Completely made up, but probably generous.
There are much more important WTFs. For example, there are two different tax rates which you might be paying -- one for capital gains and certain dividends, and one for income. The first is always taxed at a lower rate. Meanwhile, you have a "deduction" -- an amount of money that you're allowed to deduct from your return as if you'd never gotten it in the first place.
The IRS forms actually implement a worksheet which just says, "subtract your deduction from your income, and if your deduction is larger than your income, subtract whatever else there is from your capital gains."
At least, I think that's what it does. As this article shows, you have no conscious idea what the heck you're really doing when the IRS invites you to play Turing Machine.
Actually, on second thoughts, I can't speak Greek so I think I'll pass.
(Of course, the IRS doesn't actually let their forms go negative.)
What is a standard deduction? It sounds like you get an amount of money back no matter what you paid. Is this true?
It's NOT INCOME. It was already my money. If anything, I should get it back with interest, since they had it for a while.
It's as easy easy as (not pie) flying with wax and feather wings.
For state/local taxes, as smoyer points out, if you erroneously deducted a larger amount of state taxes than you actually owe, then, when you get the difference back, you have to correct that on the next year's form, if you had claimed the larger amount as a deduction. If that weren't the case, you could game the system by purposely having your state taxes massively over-withheld, deducting the inflated amount from your federal taxes, then receiving a state tax refund.
You only get money refunded if you have a "refundable tax credit". Tax credits lower your tax liability; refundable credits can lower it below zero liability such that you are owed money. One common refundable credit is earned by paying higher education tuition.
(It should go without saying that I'm not an accountant; I only play one on the Internet.)
The difference, though, seems to be that in Australia, all of your deductions reduce your taxable income whereas if Australia was using the same tax system as the US, you would have to have more than $6,000 in deductions before actually affecting your taxable income.
That's the way I see it, anyway.
1) Exemptions - each person gets $x worth of income before any tax is owed at all. Roughly, this depends on your family size (there are many other nuances). This sounds like your $6,000 rule. 2) Deductions -- these are allowable expenses (business expenses, charitable contributions, certain types of interest, and so on). You can either keep records and claim the actual amount (which sounds like your system), or you can take the "standard deduction", which is the IRS's estimate of the amount of expenses an average person might have. The advantages of the standard deduction are that you don't have to keep records, and the standard deduction may actually be more than your real expenses if you don't have a lot of them.
If you assert that people with low incomes wouldn't have itemized expenses greater than the standard deduction then it is somewhat progressive, but deductions in general are of greater benefit to people with higher marginal rates.
So suppose someone had $60,000 income, and $5,000 in expenses which fall into the permitted categories; they could calculate their tax as if their income was $55,000.
But to do this, you must use what is called "itemized deduction"; you must be able, if asked, to provide documentation of the amount of each expense and proof that it was of a permitted type.
Or you can use the "standard deduction". This is a simple flat amount that anyone can apply with no questions asked. For example, if the standard deduction was $6,000, the person above with $60,000 income could simply apply the standard deduction and pay tax on income of $54,000, and not have to document any specific expenses.
The exact amount of the deduction depends on whether you are single or married, have children you pay to care for, etc.
Some people spend a lot of time figuring out which option will result in the lowest amount of tax; most people just use the standard deduction unless they know that they have enough large expenses to be worth the trouble of itemizing.
For some people with low income, this means they pay no tax at all, or even receive a refund -- in the US, employers have you fill out a form stating how you plan to file your taxes (i.e., if you will be applying deductions for being married/having children/etc.) and automatically withhold from your pay and send to the IRS an amount calculated to match what you will probably owe. If the amount withheld is greater than the amount of tax you actually needed to pay, you receive money back. Some people with higher income also deliberately have their withholding set high; this is based on the idea that it is better to withhold too much and receive a refund than it is to withhold too little and perhaps have an unexpectedly large tax bill that must suddenly be paid.
So that's deductions. You don't get the money back, you just get to subtract it, as if you'd never earned it in the first place.
How do I calculate these deductions? Well, the first problem is that you will need to keep a bunch of receipts for a couple years, just in case the IRS summons you to account for your deductions. But okay, what receipts should you save?
(1) If you donate to a registered charity, it's as if you never earned the money in the first place. This is the least WTF-y part of this idea.
(2) If you paid medical bills, you are only taxed on the first 7.5% of those bills (wtf?) -- the rest is a deduction. Old wealthy white folks, rejoice.
(3) You also have to pay taxes to your state, because otherwise the 50 states would get into a nasty tug of war over federal money. (But they do this anyway.) These taxes are deductible.
(4) Certain forms of interest (mortgages and investments) might not count in certain cases.
Since that's complicated and is entirely devoted to making rich people pay less tax, there is also a deduction for poor folk like myself who don't want to keep receipts, and that is called your "standard deduction". Standard deductions are also a bit WTF, but less so.
The concept of getting back more money than you paid is called "negative income tax". (http://en.wikipedia.org/wiki/Negative_income_tax)