April 15 means one thing, and one thing only, to Americans, (even if the 15th falls on the 18th as it does this year): tax-filing day.
The daffodils are in bloom, the birds are chirping as they scout possible venues for nest-building, and we humans are stuck inside with endless forms and incomprehensible schedules, which more often than not forces us to seek the help of a tax professional.
What better time for Congress to attempt real tax reform than now, when the public is fed up with the cost — time and money — of complying with an increasingly complex tax code?
As I wrote last month, tax reform is complicated. The concept is a winner with almost everyone, tax attorneys notwithstanding. The problem is the execution: the reduction or elimination of tax breaks required to facilitate a simpler, flatter tax code.
Is there a way to make the dreaded April 15 tax deadline just another day in the calendar year? Here are some possible solutions.
1. Move the date
One problem with April 15 is its timing. Americans go to the polls in early November. They pay their federal and state income taxes five months later. The two events are disconnected.
By the time April 15 rolls around, the cost of government (taxes) is totally divorced from the benefits we receive, as determined by our elected representatives. Maybe it’s time to link costs and benefits in the minds of taxpaying voters.
A decade ago, Roscoe Bartlett, a Republican congressman from Maryland, tried to do just that. Bartlett, who fashioned himself as a citizen legislator, introduced H.R. 77 in January 2007. The bill proposed to change the tax-filing deadline from April 15 to the first Monday in November, which happens to be the day before Election Day.
Bartlett believed taxes should be a top priority for Americans and wanted to re-establish the connection between what we pay and who earns our vote.
Congress has the authority to change tax-filing day, but it is not costless. When Bartlett introduced his bill in 2007, the National Taxpayers Union estimated that changing the date would cost the federal government $3 billion: notifying taxpayers, updating computers and, most importantly, finding a source of revenue to carry the government from April until November.
How your mind can make you fat(1:48)
Medical costs related to obesity are estimated at $147 billion per year. But according to recent research, the answer to the obesity epidemic might in fact have more to do with our brains than with our bodies.
Our tax system uses an array of gimmicks to distract us from our true tax burden. Income taxes are automatically withheld from our paychecks. Payroll taxes are withheld for Social Security and Medicare (employee and employer share the burden). Some people pay estimated taxes four times a year.
About 70% of taxpayers will receive a refund this year, according to the Internal Revenue Service. Many of them treat it as some kind of “gift,” which makes no sense. What it is, is an interest-free loan to the U.S. Treasury.
While it’s true that the Treasury has been able to borrow for the last eight years at negligible rates of interest, it still makes no sense to let the government have free use of your money. At minimum, buy some T-bills.
2. A flat tax
The flat tax, as originally conceived by economists Robert Hall and Alvin Rabushka in 1981, would tax income once, and only once, at a flat rate of 19%. That rate was chosen because it was found to produce the same amount of revenue as the prevailing tax system.
Workers would pay tax on wages, salary and pension distributions. Businesses would pay taxes on sales after deductions for wages, salary, pension contributions, materials costs and capital investment. No deductions, no double-taxation, no 1099 forms.
To make the system more progressive, only earnings above a per-family allowance would be taxed.
Some economists view the flat tax as a backdoor route to a consumption tax. (You can read the explanation here because I have never been able to grasp the connection.) They agree that, absent the inefficient allocation of resources encouraged by loopholes in the current tax code, the economy would be better off.
It’s hard to argue with the simplicity of the flat tax. Add up a few numbers, multiply by 0.19, then go out and smell the flowers on April 15.
3. A national retail sales tax
A group known as Americans for Fair Taxation has been promoting a true consumption tax, known as the FairTax, since 1995. A bill to replace the current tax code with a national consumption tax is regularly introduced in Congress.
What would it cost? Advocates of the FairTax talk about a 23% “inclusive rate,” or the amount of tax that the seller remits to the government. The true mark-up rate — the rate that the customer pays at the register — is 30%.
People swoon when they hear that. A can of soda that normally sells for $1.50 would cost $1.95.
What they forget is: no income tax, no payroll tax, no IRS. That’s it. And there is a “prebate” for low-income households. Fair and simple.
Don’t pay your taxes. You will not be alone.
Last year, the IRS reported that the average annual tax gap — the difference between taxes owed and taxes paid on time — was $458 billion in years 2008-2010. That’s 18% of the total tax liability. The IRS recovered $52 billion, leaving a net tax gap of $406 billion, most of which is owed by individuals.
IRS enforcement has declined in recent years as budget cuts stretched available resources. So you may just get away with being a tax scofflaw.
Even if you are caught and convicted of tax evasion, you still won’t have to worry about April 15. Tax day is not a big day in the Big House. It’s the other 364 days you have to worry about.