Thursday, December 21, 2006

The US Income Tax Headache

According to an opinion piece in yesterday's Wall Street Journal:

Americans who earned more than $1 million in adjusted gross income paid $178
billion, or an average of $740,000 per filer, in income taxes in 2004. That's up
about one-third from 2002, the year before the Bush tax cuts in marginal
income-tax and dividend and capital gains rates. The wealthiest 1% of tax filers
paid a remarkable 35% of all individual income-tax payments that year.

It is no secret that the rich pay the vast proportion of the income taxes in the US, and I think this is a good thing. Our tax system is graduated in such a way that the more you make, the higher a percentage of your income you pay to the IRS. This in effect forces those who have been rewarded by our society with riches to subsidize services for (and yes, even handouts to) those who do not make as much money.

Is the system perfect? I think the answer to that question is "definitely not." but I it is at least closer to good than it is bad.

My biggest problem with the current system is the complexity involved. The rules, the forms, the deductions, the instructions, the carryovers... it makes my head spin every year.

Another problem with our system is the alternative minimum tax, which was put in place to catch rich people, but due to neglect over the course of the past few years, is ensnaring more and more middle class tax payers.

I have heard a lot of different proposals for changing our tax system over the years, and of all the ones I've heard, I think the flat tax is the way to go. The hours I have put into doing my taxes over the years could easily have been put to some more productive use. So could the money I spent the one time I had a tax advisor prepare them for me. Don't even get me started on that ripoff. They charged me PER FORM, and it took about 10 minutes for them to do. My bill ended up north of $200.

I would prefer a graduated flat tax where everybody who makes a certain income pays a certain rate. This way we would be able to keep the system fair, and tax the rich more than we tax the poor.

Yes, tax preparation firms like Jackson-Hewitt and H&R Block would be very upset if we instituted a flat tax, but I would be thrilled.

There are some downsides to the flat tax as well, which you can read about in the Wikipedia article, but I think the simplicity of the system would far outweigh the negatives.


terry said...

The tax code is progressive only at very low and at high incomes, and not exactly progressive in the broad middle of American incomes.

Sure, the income tax is nominally progressive, but there are plenty of deductions, exclusions, preferences, and tax breaks such that when Americans are done preparing their tax returns, progressivity in the middle is largely lost.

I am single, childless, and earn my state minimum wage, yet, because I do not enjoy any tax breaks other than the personal exemption and standard deduction everyone gets (I have NO frienge benefits at work), my effective federal income tax rate is actually higher than the effective tax rate paid by millions of middle class homeowner families with children.

MoneyMan said...

Well put. Another illustration that the system is not perfect.

I am not a homeowner either, and I see that exemption as part of my motivation to one day own my own home (at the right price) and stop paying my rent to the man.

Thanks for commenting.