Simple Taxes
- posted by KLR
There’s been some talk in Washington recently about simplifying the tax codes and there’s hardly anyone who wouldn’t agree -- our income tax system is too complicated. Why is that? Hasn’t congress simplified the system before?
The answer is: yes, the tax code has been rewritten many times. Sometimes to make sections of the code simpler and twice, in 1954 and 1986 the tax code was completely rewritten cover to cover. If that’s the case, why does the current code stand at 70,000 plus pages? The answer is simple… it has to be.
Every time congress makes the tax code less complicated, two things happen. One, savvy tax advisors find loopholes in the law and show their clients how to save money by structuring their transactions accordingly. There is nothing illegal about this, the tax code is there to be adhered to, whether that helps or hurts. Congress then reacts by modifying the law and closing the loophole. The second phenomena we see is congress realizing that many things can be accomplished quickly by putting a monetary incentive to it. This tool can really rack up the page count.
These are just two of the reasons you probably will never see a simple tax system in the U.S. Another major factor is fairness. Believe it or not, our tax system is designed to allow taxpayers with the lowest incomes to pay the least tax (as a percentage of income). Despite all the commentary, high income earners pay a much higher percentage than their lower income counterpart and many of the deductions and credits afforded to lower bracket taxpayers are passed out or disallowed for higher earners. This is partially what complicates the tax code. There are countless triggers and mechanics to calculate and formalize who gets a deduction/exemption/ credit and who doesn’t.
So what are the alternatives? There’s always a flat tax, but is that the best way to administer a tax system considering the same total dollars need to be collected? Wouldn’t it shift the tax burden? If it doesn’t, how would it be different than what we have now? Many European countries have implemented a variation of a flat tax by using a value added tax. The disadvantages of a value added tax are: anyone who provides goods or services becomes the tax collector and, the tax is continuously rolled into the cost of the product so no one really knows how much tax they are paying. Ask a European how much tax they pay and many will respond with - I don’t pay tax. In the U.S. there have been proposals of a national sales tax. This, unfortunately, isn’t much different than a value added tax because tax is paid as part of the cost of goods and services.
There have also been proposals to have the IRS prepare income tax returns for all tax payers having simple sources of income like W2 wages and bank interest. Does this really help considering that the real complexities of the tax law don’t affect this category of taxpayer?
So what’s the solution? Do we continue with the system we have, do we opt for stealth taxes like the value added tax or do we have the IRS do tax returns for us? It’s likely that there is no easier solution than the tax code we have. For every gain in simplification, we lose in transparency, fairness, and administration. How about no tax at all? Oh yea, that doesn’t work either.
The answer is: yes, the tax code has been rewritten many times. Sometimes to make sections of the code simpler and twice, in 1954 and 1986 the tax code was completely rewritten cover to cover. If that’s the case, why does the current code stand at 70,000 plus pages? The answer is simple… it has to be.
Every time congress makes the tax code less complicated, two things happen. One, savvy tax advisors find loopholes in the law and show their clients how to save money by structuring their transactions accordingly. There is nothing illegal about this, the tax code is there to be adhered to, whether that helps or hurts. Congress then reacts by modifying the law and closing the loophole. The second phenomena we see is congress realizing that many things can be accomplished quickly by putting a monetary incentive to it. This tool can really rack up the page count.
These are just two of the reasons you probably will never see a simple tax system in the U.S. Another major factor is fairness. Believe it or not, our tax system is designed to allow taxpayers with the lowest incomes to pay the least tax (as a percentage of income). Despite all the commentary, high income earners pay a much higher percentage than their lower income counterpart and many of the deductions and credits afforded to lower bracket taxpayers are passed out or disallowed for higher earners. This is partially what complicates the tax code. There are countless triggers and mechanics to calculate and formalize who gets a deduction/exemption/ credit and who doesn’t.
So what are the alternatives? There’s always a flat tax, but is that the best way to administer a tax system considering the same total dollars need to be collected? Wouldn’t it shift the tax burden? If it doesn’t, how would it be different than what we have now? Many European countries have implemented a variation of a flat tax by using a value added tax. The disadvantages of a value added tax are: anyone who provides goods or services becomes the tax collector and, the tax is continuously rolled into the cost of the product so no one really knows how much tax they are paying. Ask a European how much tax they pay and many will respond with - I don’t pay tax. In the U.S. there have been proposals of a national sales tax. This, unfortunately, isn’t much different than a value added tax because tax is paid as part of the cost of goods and services.
There have also been proposals to have the IRS prepare income tax returns for all tax payers having simple sources of income like W2 wages and bank interest. Does this really help considering that the real complexities of the tax law don’t affect this category of taxpayer?
So what’s the solution? Do we continue with the system we have, do we opt for stealth taxes like the value added tax or do we have the IRS do tax returns for us? It’s likely that there is no easier solution than the tax code we have. For every gain in simplification, we lose in transparency, fairness, and administration. How about no tax at all? Oh yea, that doesn’t work either.
By Norman LeBlanc, CPA
Tax Services Group
Super Tax Incentives
- posted by KLR
Wow – if you like incentives, tis the season. Cash for clunkers; First time homebuyers; Bonus depreciation; Energy credits. One of these is sure to get you stimulated.
Remember in my last post (Constantly Changing Tax Laws) I talked about how tax policy is often used as a means to social policy…..and I promised to cover super incentives next time. Well, the supers are here!!
We all know it’s nice to get a tax deduction for mortgage interest (subject to limits of course) or it’s nice to get a learning credit for spending on higher ed, but these probably aren’t big enough by themselves to make or break your decision to buy a house or go to college. Why? Because they are governmental tokens of affection and not a lot more than that. And, they are chump change compared to a super incentive like the homebuyer credit. Think about this: If you’re a first time homebuyer and closing before November 30, 2009, you can get a credit of $8,000 directly on your tax return -- and this credit is refundable, which means a check from the US Treasury. Still seems small? Did you know that an $8,000 tax credit is equivalent to a $40,000 deduction for most taxpayers? And, it gets better.
In the cash for clunkers program, you don’t even need to wait for a tax return. You don’t even need to file a thing. A payment of $4,500 can go directly to the auto dealer – no waiting. Now, $8,000 for the homebuyer sounded pretty good but when your buying a house, $8,000 doesn’t go far (it’s probably only 4-5% of the purchase price). A clunker rebate is closer to 25% of a car’s price tag. Who wouldn’t want that? Match that up with a few dealer incentives and the cars are flying off the lot.
How about going green? The federal government will give you a 30% tax credit towards the cost of adding alternative energy sources to your home – things like solar, wind, and geothermal. The best part -- there’s no limit to this credit. So, if you spent $50,000 on a wind turbine, you get a tax credit of $15,000 which can be used just like a tax payment on your personal return. It’s like someone is sending a payment to the IRS for you!
But we can’t leave out the business owner. Here is the granddaddy of all incentives -- bonus depreciation. It doesn’t sound fancy, but what it does is allow businesses who buy brand new furniture, fixtures, and equipment to deduct half the cost in the year of purchase. Under normal circumstances, a business is required to deduct these purchases over 7 years. Still doesn’t sound like much? How about this: MegaStore buys $10 million dollars of new store shelving in 2009. They get to bonus depreciate $5 million in 2009 alone – this saves MegaStore $2,000,000 in federal taxes! Under the normal rules, Mega would have saved $500,000. That’s an incentive of $1.5 million dollars. Wouldn’t you think it was super if someone lowered your tax bill by $1.5 million? It’s so good; the States don’t even allow it.
Now the hard part – someone has to pay for these jumbo credits and deductions. To see how that’s done, tune in next time when we’ll talk about disincentives.
Remember in my last post (Constantly Changing Tax Laws) I talked about how tax policy is often used as a means to social policy…..and I promised to cover super incentives next time. Well, the supers are here!!
We all know it’s nice to get a tax deduction for mortgage interest (subject to limits of course) or it’s nice to get a learning credit for spending on higher ed, but these probably aren’t big enough by themselves to make or break your decision to buy a house or go to college. Why? Because they are governmental tokens of affection and not a lot more than that. And, they are chump change compared to a super incentive like the homebuyer credit. Think about this: If you’re a first time homebuyer and closing before November 30, 2009, you can get a credit of $8,000 directly on your tax return -- and this credit is refundable, which means a check from the US Treasury. Still seems small? Did you know that an $8,000 tax credit is equivalent to a $40,000 deduction for most taxpayers? And, it gets better.
In the cash for clunkers program, you don’t even need to wait for a tax return. You don’t even need to file a thing. A payment of $4,500 can go directly to the auto dealer – no waiting. Now, $8,000 for the homebuyer sounded pretty good but when your buying a house, $8,000 doesn’t go far (it’s probably only 4-5% of the purchase price). A clunker rebate is closer to 25% of a car’s price tag. Who wouldn’t want that? Match that up with a few dealer incentives and the cars are flying off the lot.
How about going green? The federal government will give you a 30% tax credit towards the cost of adding alternative energy sources to your home – things like solar, wind, and geothermal. The best part -- there’s no limit to this credit. So, if you spent $50,000 on a wind turbine, you get a tax credit of $15,000 which can be used just like a tax payment on your personal return. It’s like someone is sending a payment to the IRS for you!
But we can’t leave out the business owner. Here is the granddaddy of all incentives -- bonus depreciation. It doesn’t sound fancy, but what it does is allow businesses who buy brand new furniture, fixtures, and equipment to deduct half the cost in the year of purchase. Under normal circumstances, a business is required to deduct these purchases over 7 years. Still doesn’t sound like much? How about this: MegaStore buys $10 million dollars of new store shelving in 2009. They get to bonus depreciate $5 million in 2009 alone – this saves MegaStore $2,000,000 in federal taxes! Under the normal rules, Mega would have saved $500,000. That’s an incentive of $1.5 million dollars. Wouldn’t you think it was super if someone lowered your tax bill by $1.5 million? It’s so good; the States don’t even allow it.
Now the hard part – someone has to pay for these jumbo credits and deductions. To see how that’s done, tune in next time when we’ll talk about disincentives.
By. Norman LeBlanc, CPA
Tax Services Group
Labels: Government Tax Credit, Green, IRS, KLR, LeBlanc
About this Blog
KLR is one of New England's premier accounting and business consulting firms. With 160 team members and offices in Providence, Boston, Waltham and Newport, KLR provides a wide range of services to both individuals and businesses.
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