Tax Day

Considering taxes are one of my favorite topics to write about, how could I not write something today? Although in browsing the above link of past topics I feel like I'm a broken record when it comes to taxes and tax policy. But, alas I continue...

I am not an anarchist who believes taxes are illegal and should be abolished. I am not participating in any of those "tea party" protests happening across the country. I understand that there are some services that the government provides and we need tax revenue to run those services.

However, I believe the tax code has major problems. Essentially, I think the problem is two-fold: the people who pay tax are too concentrated and the tax code is too complicated. An editorial in the Wall Street Journal from a few days ago has the rundown in detail, but in essence 40% of Americans pay no Federal income tax while the top 10% of income earners pay 70% of all income taxes. And yet, many Democrats think this isn't enough. Says the article:

Today, Mr. Obama and many congressional Democrats want the "wealthy" to pay even more...The president says he wants the wealthy to pay their "fair share." Who can argue with that? But he never defines what that means. Is it fair for 10% to pay 70% of the income tax? Does he believe they should pay 75%, or 95%, or does fairness mean they should pay it all?

I think everyone should pay taxes - I've never been a fan of Obama's campaign promise that 95% of Americans will not see a tax increase. He's proposed trillions of dollars in new spending - why should only 5% of Americans pay for this? It makes no sense. If the spending is beneficial to all Americans, should all Americans help pay for it?

As for the complexity issue, the article has a nice quote:

[T]oday nearly every other social cause is given a loophole -- or a preference -- in the tax code. Want to buy a hybrid vehicle? You get a tax break. Do you own a solar water heater? You get a credit. Want to give to charity? You get a deduction. Own a house? There's another tax deduction for you. How about college savings, certain medical costs, and retirement savings? Yes, yes, and of course yes. Did you move, pay alimony, or "provide housing to a Midwestern displaced individual"? More deductions, credits and exemptions there too, if you qualify.

I complain about these deductions not because I don't have many of them (the only deduction I have is my SEP-IRA which does save me several thousand in taxes) but because I feel that these deductions are pure middle and upper-middle class handouts. If two people make the same income, shouldn't they pay the same income tax? Why should one person's decision to have an expensive house as opposed to renting give him a tax break? Or someone's decision to go to a more expensive college or get a graduate degree, should that person pay less in taxes? To me it just doesn't make sense. Help those who need help, not those that don't.

The article ends with the author's vision of a new tax system:

I favor the abolition of all Social Security, Medicare and estate taxes. In their place, we should create a simple income tax system that has no deductions or credits at all. The result would be a progressive, multitiered income tax in which everyone pays. The bottom 50% won't be excused from paying the cost of government and top earners will no longer have the loopholes they're used to...Social Security and Medicare will be funded from income taxes, ending the myth that these programs are supported through government trust funds and payroll taxes.

I rate this plan as having about a zero percent chance of passing, but I think it would be the most "fair" plan. If Obama is spending to pave the way for the future, I think we should all help pay for it.

As a side note, I owe a lot of tax today. It's a lot of money. Because I'm self-employed I pay quarterly estimated tax but you only have to pay quarterly payments based on what you made last year. In 2008 I made more than twice what I made in 2007 because I was unemployed for about five months of the year in 2007. Therefore I owe a lot this year, which I anticipated and saved for. However, the check I'm writing this morning to United States Treasury is far and away the largest check I've ever written. It's about three times the cost of all the cars I've ever owned. It would pay the rent in my apartment for almost two years (four years if you count the fact that I split the rent with my girlfriend). Is this normal? I'd be curious if taxes are the largest single expense for most people or if I'm unusual in this respect. I suspect that some people may not even know how much they pay in taxes. I think that if most people had to pay this much in taxes there'd be a lot more support for reform. But when you can get more revenue by only having 5% pay for it, that kind of puts a squash on changing the system.