Friday, June 3, 2011

An Inconvenient Tax-Review

I mentioned this movie just a few days ago. Since then, I discovered that it’s available on iTunes so I downloaded it and watched it yesterday.

I will say that it’s the best documentary on the U.S. tax code that you’re likely to see. It’s enjoyable and informative. However, it’s still a documentary on the U.S. tax code. It’s not Harry Potter and the Deathly Hallows Part 2, Thor, or even Atlas Shrugged. You need to want to know about the tax code to watch it.

Participants in the movie include notable personalities from the left and the right, which is nice. You don’t feel like you’re being indoctrinated to a single point of view. Instead, the movie matter-of-factly lays out the history of the U.S. tax code, and what it means for today. They start actually with the Boston Tea Party, and go all the way up to President Barack Obama’s (D-USA) administration.

As an aside, if you have the time, you really should do some research into what the Boston Tea Party was really all about. We put up today with far more than what they considered intolerable. Those patriots would have long since stormed the Capitol and demanded change. The modern day Tea Party movement is called extreme, but our requests are incredibly tame compared to 1773.

Anyway, as usual for me of late, I digress. That’s not covered in much detail in the film, so you’ll have to do your own research. What is covered in the film is the origin of the income tax during the Civil War, its resurgence just before WWI, and the expansion to affect the middle class during WWII.

After WWII, most changes to the tax code were done as a way to curry political favor rather than to affect revenue. This is the primary reason for the explosive growth in the size of the tax code, which is what the movie is truly about. I know I’ve shown this chart multiple times in the past, but it’s worth seeing again.

There are several very important points that are made in pretty rapid succession at about this point in the film, and they’re all worth noting.

  1. Since President Ronald Reagan (R-USA) signed the Tax Reform Act of 1986, the size of the tax code has exploded. There have been over 14,000 changes to the tax code. That’s about 1.5 changes per day since then.
  2. Politicians like how complex the tax code is. It enables them to hide things in it or to buy votes or buy corporate support.
  3. Politicians use the tax code to encourage or discourage behavior (home ownership, for example).

There’s a great quote here too:

“The tax code should raise revenue and then try to do as little else as possible, because almost everything else that it does is harmful.”

Another:

“The federal government forgoes about $1 trillion dollars a year because of deductions, credits, and exclusions in the tax code.”

Yes, you probably take advantage of several of these credits and deductions. I do, too. But if they weren’t there, your marginal rate would be much lower. And you’d be more confident when you turned in your tax forms every year, that it was actually right and that you’re not going to be audited. And you’d know that you didn’t miss some obvious deduction that could’ve saved you thousands of dollars.

The whole point of the film is that our tax code is a monster and that we’re in desperate need of real tax reform. Not just the limited tax reform that we had in 1986, but a complete overhaul of our tax system. The film is aimed more at making you understand the problem rather than present solutions, but it does spend a little time on the three most likely solutions at the end, with proponents of each speaking a bit on it.

The first solution is a flat tax. Over the last 20 years or so, this has probably been the favorite choice of your average taxpayer and many politicians. It’s the infamous 3 line tax form. What’s not to like? Well, progressives hate it. They don’t feel that it’s fair to low income earners. There’s a way to work around that of course (assuming you feel it’s necessary), by moving away from a completely flat tax rate to a sliding one so that even your rate is dependent upon your income.

My problem with the flat tax is that I don’t trust politicians. I don’t expect it to remain flat. I think if we completely flattened the tax code, after 20 years, or the first major funding crisis, we’d end up with 50,000+ pages of tax code again. I like the flat tax. I just think the idea is naïve.

The second solution is some sort of broad based consumption tax. The FairTax is shown as the prime choice in this regard. If you’ve read this blog for any length of time, you know that this is the one that I support. It’s much harder to game. There are no exceptions to the FairTax. Any exception makes it unfair. Any change is immediately obvious because your tax amount is right there on the receipt of anything you buy. Politics are experts at gaming things, and I’m sure they’d get around to gaming the FairTax eventually, but they’d have to work harder at it. I see no reason to make it easy for them.

The third choice is a different type of consumption tax that’s popular in Europe. It’s a VAT tax (actually, tax in that phrase is redundant, since VAT means Value Added Tax). The VAT has become increasingly popular among politicians in America the last few years. Sadly, you hear most often about adding a VAT to our existing tax code, rather than as a replacement. We should have a Boston Tea Party over that, because it’s insane and amounts to thievery. Anyway, a VAT adds a little tax in at every step of a production process. The problem with a VAT is that it’s not nearly as transparent as a flat tax or the FairTax, and in fact is subject to just as much gamesmanship and lobbying as our existing tax code. A VAT isn’t likely to reduce the complexity of the tax code to any significant degree over the long term. All it does it make it so you don’t have to write a check to the IRS once a year or once a quarter.

The film makes a good point that we desperately need this real tax reform. We probably need it right now more than at any time in our country’s history, as the tax code is incredibly burdensome on business, and we need the economy to start growing and growing fast. However, it also makes the point that there’s not a lot of political will in Washington to really reform the tax code and it’s hard to get people excited about it. “You mean we’re going to reform the tax code, but I’m not going to save any money? Uhhh…”.

Sadly, as much as I believe in tax reform, I don’t see it happening any time soon. The current administration has no interest in it, and one of the people in the film points out that it would likely have to happen in a second term Presidency to happen at all. So that means it’s not going to happen until after 2016. Even if I didn’t agree with that part, the simple fact is that we’re facing an economic crisis and an entitlement crisis at the moment (not unrelated to each other) as well as this tax code crisis (also not unrelated). It’s going to take an enormous amount of political will to solve the economic and entitlement crises. It’s hard to believe that politicians would be willing to stick out their necks even further to take on the tax code.

So, my opinion is that while this may be the most important time in American history to have tax reform, it’s probably the least likely time in American history for it to actually happen.

But I’ll keep banging the drum for it, and especially for the FairTax anyway. I’m stubborn that way.

Regardless of all of this, I enjoyed the film, and I think that if you want to spend an hour and a half understanding our income tax, that you’ll likely learn quite a bit in a fairly enjoyable fashion.

3 comments:

irs form 2290 said...

Filing these forms annually gives people tax cuts and deductions, also a way to evade penalties.

Jade Turner said...

“The tax code should raise revenue and then try to do as little else as possible, because almost everything else that it does is harmful.” - I strongly agree with this quote. Tax code is essential to encourage or discourage behaviors like home ownership, car owner ship and even loans. Tax code was made to help us resolve any issue related to taxes.

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