A new survey on tax attitudes by Bankrate.com finds that despite the complexity of filing an income tax return, most Americans don't want the government to fill it out for them.
Two-thirds of Americans would prefer to maintain control over their tax returns (65 percent) rather than let the government prepare their returns, if given that option.
And the IRS doesn't want that responsibility either. They'd rather take whatever money would be required to implement that plan (probably a huge amount) and spend it on their current auditing operations.
We've written before here and here about California's failed experiment with the so-called ReadyReturn. To test how Californians would react to a pre-filled-out tax return, the state mailed out 50,000 tax returns that were all filled out for people to just sign and return. 39,000 people threw them away and filled out their own returns.
That failure didn't stop John Edwards and Barack Obama from promising that if they're elected, they'll have the IRS fill out our tax returns.
The best way to reduce the staggering costs of tax compliance -- at the state or federal level -- is to simplify the income tax code to the point where taxpayers can easily and quickly calculate their own tax liabilities. That will require fundamental tax reform.
Although it is likely that Congress will pass an AMT patch today and send it to President Bush for signature, it is still an interesting question to ask what the economic ramifications would be if the patch wasn't passed versus its passing.
The main downside to a patch from an economic efficiency perspective is that a patch for 2007 tax law would not change economic behavior (for the better) for 2007 as it has already been done. Because of this, there is little, if any, Laffer curve effect from the patch either, meaning the static revenue score will be the same as the dynamic score. Here are some of the other economic ramifications of a patch for 2007 tax law:
(1) Keynesian View
--Short-run economic boost from the patch when tax refund checks are sent out versus people having to write huge checks to the IRS this spring. Could have significant effects given higher probability of a recession next year than the past five years.(2) Optimal Tax Theory View
--No patch for 2007 may lower people's expectations of a patch being passed for 2008, thereby increasing their expected marginal tax rates for 2008, and thereby reducing economic efficiency. This is very similar to the economic effects of a windfall profits tax on past profits, which would have no harmful economic effect (in terms of reduced future investment) if there was somehow a guarantee that no such tax would be passed in the future.(3) Deficit-Hawk View
--The deficit-financing of the AMT patch will have to be paid somehow, whether in the form of higher taxes or lower spending in the future.(4) Public choice view
--To the extent that a deficit-financed AMT patch is able to "starve the beast" and prevent excessive future growth in government spending beyond social welfare maximizing levels, it can enhance social welfare, exceeding the harm done in #3.
From an economist's perspective, one must also look at the opportunity cost of a $50 billion patch for AMT in 2007. In other words, what else could we have done with that $50 billion and is it better than a 2007 patch for AMT? In my opinion, the answer is yes. I can think of about 10 tax cuts that would likely be better than patching AMT from an economic efficiency perspective and my own normative view of what is good tax policy, including what is fair. However, fairness is in the eye of the beholder. And most politicians see the AMT as putting an unfair burden on AMT taxpayers, despite the fact that these are the same people that often benefit from the myriad of deductions and exemptions that are in the tax code to begin with, while those outside of AMT that don't benefit from such provisions pay even more than these AMT payers, as explained for some typical families here.
If there were a future's market on whether an AMT patch is going to be passed by this weekend (before Congress recesses for the year), the odds would most likely still be yes, but the stock would be falling. The latest from the Washington Examiner:
The congressional struggle over how to protect millions of middle-class people from getting soaked by the alternative minimum tax this year entered its final stage Tuesday as the Senate rejected a House demand that the $50 billion in tax relief be paid for.
The Senate voted 48-46 for the House-passed bill, well short of the 60 needed to advance the measure to shield 21 million from an average AMT bill of $2,000. The measure would have covered the cost of the lost revenue by closing a loophole on offshore tax havens.
With that vote, the House was scheduled to vote Wednesday on a Senate-passed measure that fixes the AMT for a year but provides no offsets to pay for it.
"Democrats are determined to protect middle-class taxpayers from the AMT before we adjourn for the year, and we are very disappointed that Republicans continue to block responsible relief," House Majority Leader Steny Hoyer, D-Md., said.
Republicans and the White House insist that, because the AMT was never meant to affect millions of people, there is no need to raise taxes to pay for legislation to keep it from growing.
Here is the roll call vote. Only Snowe (R-ME) crossed party lines in the vote, while the presidential candidates and Feinstein were absent.
CongressDaily PM (subscription only) had this to say earlier about whether or not the House will pass a patch with no offsets.
Pressure from House Blue Dog Democrats and a gambit by Speaker Pelosi today prompted Senate Majority Leader Reid to agree to a vote on an alternative minimum tax patch that is fully offset. Reid agreed to include the offsets after Pelosi threatened to delay sending the omnibus spending bill to the Senate. (See story above). The persistence of the Blue Dogs -- and more than 30 votes they wield on the floor to press their position -- appeared to have put House leaders in a pickle about how to pass the AMT patch and prevent 21 million taxpayers from seeing tax increases next year. Asked this morning whether the House will pass an AMT patch before leaving for the year, House Majority Leader Hoyer said "maybe."
Today, President Bush signed into law a new tax law that puts in place a three year exclusion from income of mortgage debt forgiveness. Currently, individuals who receive forgiveness of their mortgage must claim the forgiveness as income on their IRS tax forms. This change in tax law is bad tax policy for two reasons. First, it's temporary. If mortgage debt forgiveness should not be taxable income, then why should somebody who is in financial trouble in 2008 be more deserving of somebody who is in financial trouble in 2012? Such a provision defies logic and basically shows that the politicians are just trying to appease the short-run concern of voters, void of any true principle.
But then again, tax policy in Washington is rarely driven by principle. And that brings us to the second reason why this is bad tax policy mortgage debt forgiveness is income and should be taxed under an income tax. There is a reason that the IRS lawyers have ruled that this type of mortgage debt forgiveness should be treated as ordinary income.
Under a pure income tax, a house would be treated as an investment that pays annual dividends (in the form of imputed rental income) and which can have capital gains or losses which are realized upon sale. But for political reasons, we have decided that not only should imputed rental income not be taxed and capital gains on primary housing non taxed, but that homeowners should be able to deduct the mortgage interest that they pay. (It really is bizarre policy when you think about MID allowing people to deduct mortgage interest against income that they don't have to claim.)
Now on the issue of debt forgiveness, if an individual seeks to purchase a $450,000 home and needs to borrow $450,000 to do so, the interest expenses should be deductible under the pure income tax assuming the imputed rental income is taxed. For simplicity, however, assume there was a zero percent interest rate. Suppose one year later, the value of the home now falls to $200,000 given the market and the bank forgives the remainder of the loan. $15,000 has been paid off, but the bank now forgives the person of the remaining $435,000 and takes the home. Should that $435,000 be taxed?
From a Haig-Simons perspective, the person's change in net wealth is zero relative to the starting point (before the investment). Ignoring the imputed rental income (the consumption portion of HSI), the person would be forced to claim the forgiveness as income but also be allowed to deduct from income the huge capital loss as a result of the house depreciation. However, the U.S. tax system does not tax the capital gains from housing nor does it allow for housing-related capital losses to be deducted against income. Therefore, the forgiveness should still be treated as income and the person should have a positive tax liability.
Finally, it is worth noting that this will cost $1 billion. So how do we pay for that? Raise taxes on somebody else of course. Bloomberg News reports that "the $1 billion cost of the bill will be offset by raising penalties on partnerships and small businesses that fail to file tax returns." That is not sound tax policy either. The penalties on partnerships and small businesses for not filing tax returns should be set in order to ensure proper compliance, and should not be increased merely because politicians want to raise revenue to pay for something else. (Same principle as Virginia drivers' fees and cigarette taxes.) There is an optimal fine amount, which is independent of the need to raise money to help bailout homeowners who happen to be struggling when others are struggling.
55,000 Egyptian tax department employees are returning to work after a work stoppage where they demanded higher wages:
They carried banners reading, "Our salaries do not even allow us to get a pair of shoes" and shouted for the finance minister and prime minister to hear them out and meet their demands. Police surrounded the protesters with metal barricades to prevent them from reaching the Cabinet building.
[...]
The protesters were demanding a pay hike or that they be incorporated into the Finance Ministry, where wages are higher, rather than local administrations.Later Thursday, the state-run news agency MENA, reported that Finance Minister Youssef Boutros Ghali has accepted to move the 55,000 Real Estate Tax employees to his ministry.
"We were asking for our rights, we do most of the taxes' work and we get almost nothing," said Nada. He said a new employee of the real estate tax authority starts out with a salary as low as $45 a month.
Imagine if U.S. property tax assessors were treated that badly! Of course, it's still better treatment than early American tax collectors got:
On January 25, 1774, according to the account in the Massachusetts Gazette, Hewes saw [British Customs Agent John] Malcolm threatening to strike a boy with his cane. When Hewes intervened to stop Malcolm, the two began insulting each other, after which Malcolm struck Hewes hard on the forehead with the cane. After receiving treatment from the well-known Patriot doctor, Joseph Warren, Hewes went to a magistrate’s office to get a warrant for John Malcolm’s arrest.
That night, a mob seized Malcolm in his house and dragged him into King Street, where, over the objections of Hewes, he was covered with tar and feathers [and made to drink hot tea]. They then took him to the Liberty Tree, where they first threatened to hang him and then threatened cut off his ears if he did not apologize for his behavior and renounce his customs commission. Malcolm relented and was sent home. The event was reported in newspapers on both sides of the Atlantic.
"Bostonians Paying the Excise-Man"
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