Tuesday, September 8, 2009


Last week Kelly Phillips Erb, the blogosphere’s TAX GIRL, ran a series of guest posts from readers on the topic “Hey Congress, Why Don’t You . . .?” She wanted to know, “What . . . would you tell Congress that needed to be fixed, changed or eliminated when it came to taxes?”.

Here are what her respondents suggested that Congress do – with my comments:

* Replace Income Tax with Sales Tax – The author suggests replacing the current income tax system with “something like the VAT in Europe: a federal sales tax.” I think he misunderstands the concept of VAT (Value Added Tax) – it is much more complicated than a basic sales tax. Perhaps he would like to see a system similar to the proposed “Fair Tax”, which is a true federal sales tax.

While I am not a supporter of the Fair Tax plan, I do think that a federal sales tax would have many benefits over our current system and is something to seriously think about. I blogged about this topic in the early days of TWTP, before my current tenure at blogger.com. I will have to dig up that post and reprint it.

* Simplify the Tax Code – This title says it all. The mucking fess that the Tax Code has become must be simplified.

I like the author’s suggestion, which I have seen often elsewhere –

All members of Congress should be forced to do their taxes with pencil, paper, and IRS instructions. I am hopeful they would all conclude that the process is ridiculously complicated, invasive, and needs to be greatly simplified.”

* Audit Every Year – This post does not suggest that everyone go down to the local IRS office to have their tax return audited every year.

The author, a tax preparer for a “large tax company” says, “In some other countries, the government does a quick audit of the tax returns every year, matching up wages with reported income, etc. This is a great idea. It gives immediate closure to taxpayers who are doing the right thing and speeds up payment of taxes. Because audits would be done for every person, it would help catch tax cheats.”

What the quest poster is talking about is the IRS matching program. As I said in my comment to the post –

The IRS has been matching info reported on 1040s and 1040As to W-2s, 1099-INTs, 1099-DIVs, 1099-Rs, and K-1s for many years now. IRS first started matching interest and dividends reported on Schedule B to 1099s back when I first started doing taxes – in 1972! So, in effect, every return is already somewhat ‘audited’ as you suggested.”

* Flat Tax – This guest post proved that brevity is the soul of wit. “Two words: flat tax” is all she wrote.

I support a flat tax. I do not like a highly progressive tax system. I discussed the issue in my post “I’m Telling You Now” –

I am also against taxing the rich simply “because they can afford it”. Recent studies have shown that the “rich” already pay more than their share of taxes. The Tax Foundation’s TAX POLICY BLOG recently posted 'Tax Burden of Top 1% Now Exceeds That of Bottom 95%'.

I do not believe in a highly “progressive” tax system that “punishes” such positive behavior as ambition, entrepreneurship and just plain hard work with a higher tax rate.

It is argued that the rich should pay more because they ultimately get more benefit from the programs and protections of the government (although those who pay absolutely no income tax seem to me to be getting much more benefit from government). With a relatively flat tax system the rich would still pay more than the not so rich – 25% of $1 Million is a lot more than 25% of $50,000

* Eliminate Benefits for Having Kids – The writer says, “If I could make one change in the tax code, I would eliminate any benefits for having children. I chose to be single. I chose not to have children. I am appalled to see how much our tax system subsidizes having children. It is welfare, just put forth another way.”

While I never really thought about it before, except in terms of my concerns about the Earned Income Credit and he refundable aspect of Child Tax Credit, I suppose that I do not totally disagree with the author’s statement, “I don’t think that anyone should receive extra tax benefits because they chose to have children”. But then, like the author, I am a confirmed bachelor and childless by choice.

* Gay Marriage – In this post Gideon Alper, who publishes the GAY COUPLES LAW BLOG, says, “The IRS should recognize gay marriages not just as a matter of equality, but also to encourage socially beneficial behavior in gay relationships.”

To be honest I am not sure if I support recognizing gay marriage on the 1040. I have no problems with “civil unions” but am still a bit hung up on the term “marriage”.

Mr Alper’s main concern in this entry is with alimony. While I do understand his point, as well as the gay community’s desire to be treated equally, considering the potential “marriage penalty tax” I don’t see why the rush to pay more income tax. Many “traditional” married couple that I know would be thrilled to be able to file as Single and Head of Household.

* Fix the AMT – I would go one step further and eliminate the AMT.

This entry specifically discusses the AMT consequences of stock options and does not go into the many other problems with this dreaded “maximum mandatory tax”.

* Estate Tax and Dividends - The author is against “double taxation” as he sees it on two fronts.

First the “estate tax” (aka “death tax”). “Eliminate the estate tax. You pay taxes on everything you make and then you get taxed again when you die? Tell me that makes any sense.”

I am not a fan of the estate tax, but I am concerned about how its total elimination would affect the concept of “stepped up basis”. Under current law the “cost basis” of inherited property for tax purposes (i.e. depreciation, capital gain or loss) is the “fair market value” of the property on the date of death (or 6 months after). This is because a person’s taxable estate is based on the “fair market value” of assets. If repealing the estate tax means that the tax basis of inherited property would become a “carry over” of the deceased’s basis this would truly create a nightmare for tax preparers. Clients rarely know the cost of investments they have purchased themselves, let along what their grandfather paid for a stock 50 years ago.

The second front concerns the double-taxation of corporate dividends. A corporation pays income tax on its profits, and stockholders pay income tax on the dividends paid by the corporation out of the already taxed profits.

The author says, “Stop taxing Dividends on personal accounts”. I, too, am against the double-taxation of dividends, but I prefer to see a “dividends paid deduction” for corporations. A corporation would reduce its net taxable income by the amount of dividends paid out. This way only the stockholder would be taxed on the income. I feel this would encourage the pay-out of dividends and discourage corporations from using Enron-like unethical methods to avoid paying corporate income tax as well as possibly reducing prices and fees for corporations’ products and services.

* Tax Bad Behaviors – The author says, “I think this idea of taxing unhealthy behavior is a smart one. I think we should tax things that make us sick: cigarettes, alcohol, fatty foods and sugary foods.” A former heavy smoker, she sites the high taxes on cigarettes as her reason for quitting.

I am totally against “sin taxes”. As I explain in my post “I’m Telling You Now” –

One of the main reasons I am against ‘sin taxes’ is that I do not want the local, state or federal government to determine what is a “sin’ or what is ‘bad’ behavior. I do believe the phrase is ‘a slippery slope’. What if, God forbid (no pun intended), the extreme religious right comes to power? The possibilities are frightening.”

* Explain Our Taxes – Attorney Philip Miles, author of the LAWFFICE SPACE blog, begins his entry by quoting the episode of the FRIENDS tv series where Rachel asks, “Who’s FICA? Why is he getting all my money?

If Mr. Miles had his druthers he would have Congress –

1. Actually bill the taxpayers for new appropriations; and

2. Tell taxpayers where their money is going on every paycheck

He says –

Billing the taxpayers would force us to actually pay for the bright ideas coming out of Washington instead of just throwing more debt on the 14-figure pile. It would also let us know how our money is being spent. When we feel the sting of deductions in each paycheck, it forces us to think about new appropriations a little more.”

While a worthy concept, it is obviously impractical to implement. Actually there is information available on the total tax cost of specific items proposed or passed by Congress. Whenever I read a press release or item about a Tax Act it usually states something to the effect that, “this tax break will cost $30 Billion over a ten year period”.

So that is what I think about the suggestions put forward by TAX GIRL readers. What do you think about these ideas? And what would you change in the Tax Code?

Before I end – make sure you read my entry in the series, which Kelly has titled “Hey Congress, Why Don’t You…? Take a Second Look”. FYI, the post on eliminating depreciation is “Here Is Something to Think About”. I am interested in hearing what you think of my list, especially my thoughts on eliminating the deduction for depreciation of real estate.


1 comment:

Kelly said...

Hey, thanks for the link! It was, by far, the most fun I've had doing a series. Expect to see something like it again! ;)