Ed Cook: Taxes – What a Mess!

I would venture to guess that most of you have an opinion on taxes.  Undoubtedly most of those opinions are some variation of, you don’t like them, or they are too high or some other negative sentiment.

So, first…I want a show of hands.  Who among you, and I mean everybody out there, have finished their tax return and found you were getting a refund and said, “oh just keep the refund, the government needs it more than I do”. Or who found you owed extra tax and said, “oh, I’ll just add on an extra 25% because the government could use the extra.”  Anyone…anyone??  OK, I did not think so.  Nobody in their collective right mind pays more tax than they have to or than the Tax Code says they must.

No doubt many of you, if not all of you have heard the broo-ha-ha about the Republican Candidates taxes.  Newt is not poor, very few high level politicians are, but compared to Mitt Romney he is a piker.  Romney through inheritance, and a very successful career as an Venture Capital investor has made tens of millions of dollars and now has a net worth of over $200 Million.  His income mainly is derived from investment and related income.  If you saw his tax return in the Wall Street Journal last week it showed his income was over $21 million, on which he paid over $3 million actual tax or about 17.5% tax.  No more than he “had” to pay.  Millionaire or pauper, I’ll say it again, Nobody in their collective right mind pays more tax than they have to or than the Tax Code says they must.

So what is the big deal about?  Here is the issue that Newt is whining about, and the Occupy dopes are complaining about (even though they don’t know it) and millions of lower and middle class people too.  The US Tax Code, created by Congress and approved by many Presidents, is complex, confusing and contradictory. It claims to be a progressive tax but in reality most people pay somewhere around 15% of your income in Federal income tax.  Seriously, look at your 2010 tax return and if you are like most, the total tax as a percentage of your “Taxable” income is going to be between 14% and 18%. Mine has been this way for years.  It varied in this range based on my income to some extent but also on Child Tax Credits, Child Care, contributions to IRAs and other nebulous items contained in the Tax Code.  Last year was the highest I ever paid because the severance package I got from the company that laid me off after working there for 10 years pushed me into the next higher tax bracket for a good chunk of income.  But, my tax was still in that range of 14% and 18%. I did not pay more or less than what the Federal Tax Code said I had to pay.  I’m like you, I never pay more.

A Progressive Tax (taxing “progressively” higher incomes at higher tax rates) sounds like a great idea, but in reality people with higher incomes, under this current Tax Code, get extra write-off, extra tax sheltered income etc., so they are paying about the same percentage as you and me.

I have been using tax software to do my taxes since the mid 1990’s.  Even with this wonderful invention it still takes me hours to do all of my taxes.  I have added time this year because all three of my children have jobs now and my “loving” wife told them, “have Daddy do your taxes”.  Theirs were easy though, so no complaints.  But between Unemployment, a temp job and my part-time/fulltime teaching plus my wife’s job and all the things the average middle-class family has for deductions, credits etc. I expect that it will take the better part of a day to do.  Good thing I’m unemployed and have the time.   I am going to do them soon because I have to do the FAFSA dance this week.

In the 90’s when Jerry Brown, (D) and later when Steve Forbes (R) each ran for President, they were shrugged off as crazy when they proposed a Flat Federal Income tax. I forget which, but one of them suggested that you could do your entire tax return on a 4 x 6 inch index card.  Enter Name, check. Enter Address, check. Add up and enter All Income, check.  Multiply all income by 15%. Enter the total as the tax you owe, enter the amount withheld from your pay, or that you have pre-paid if self-employed. Subtract Tax from payments. See if too much or not enough was withheld from your pay on your W-2. Put down the amount you owe or get as a refund, check. DONE!  No exemptions, no deductions, no Adjustments, no schedules.

The IRS could be cut by 90%. Audits, what audits?  Most audits are about someone taking liberties on deductions or credits. With this system, there are none of those.  OK there would be many accountants looking for something to do between January and April 15, and the Tax Preparation industry would go away.  But think of the simplicity for the vast number of Americans.

You could do a variation of this for Corporate Taxes.  This would make it less cumbersome and less costly on companies to prepare their taxes, and considering that over 90% of companies in the US are Small Business I bet that the owners of these small businesses would rather spend their money improving their business on Main Street USA than paying an accountant.  Corporate tax rates could come down and be more friendly to small business, thus creating more jobs.  (The USA has the highest Corporate Tax rates in the world except Japan.)

Every now and then there is a banner headline that Huge Company X paid no taxes last year.  That is the exception not the rule.  I look at a lot of these things for classes I teach.  The zero payments are allowed because Congress passed all these credits and, like individuals, like you and me, corporations are not going to pay more than they have to.  GE which famously paid no Federal tax a few years ago paid almost a $1 Billion in Federal tax in 2010 or 8%.  McDonalds on the other hand paid almost 30% of their income in taxes in 2010.  Why the difference? GE could take advantage of more tax credit provisions in the tax law. But neither of them paid more than they had to.

So if you think the Tax Code is unfair, write to Congress and tell them to simplify it. Nobody pays more than they should just some Congressional actions in the past have given some an advantage.  Don’t yap at people who have money (Trust me, I’m not one of them) for doing exactly what you and I do, yap at Congress to fix the system.

One last thing.  Warren Buffet has tax obligations like Romney.  His income is all Investment Related income taxes at a lower rate.  I like Warren Buffet.  Seems like a very genuine and very SMART man. He says rich people should pay more tax than non-rich.   But he does not pay more than he has to and I bet he won’t until he HAS to, which means Congress has to change the Tax Code to make him pay more.  Like I said, he’s very smart.