Ahead of the Senate hearing on “Offshore Profit Shifting and the U.S. Tax Code,” I released a report reminding us that contrary to the perception created by these types of political spectacles, corporations pay a...
The Tax Policy Blog
As gas prices remain close to $3 per gallon on average, members of Congress are rushing to to put forth various proposals that they claim will help consumers with their ‘pain at the pump.’ One proposal comes from New Jersey Democrat Bob Menendez to temporarily (for 60 days) cut the federal excise tax on gasoline. Another comes from a few Senate Republicans who just want to send every American taxpayer a $100 check in order to theoretically compensate consumers for their gasoline expenses. Highlights of both proposals courtesy of MSNBC.
Senate Republicans advocate sending $100 rebate checks to millions of taxpayers, and a Democrat is leading the campaign for a 60-day gasoline tax holiday.
Either way, it seems no one in Congress wants to be without a plan, however symbolic, to attack the election-year spike in gasoline prices.
A vote is possible as early as this week on the Senate GOP approach, which calls for $100 rebate checks for taxpayers to cushion the impact of higher gasoline prices. The measure seems unlikely to prevail, at least initially, since it includes a highly controversial proposal to open a portion of Alaska’s Arctic National Wildlife Refuge to oil drilling.
Senate Republicans also favor extending a tax break that manufacturers receive for each hybrid vehicle they make, and want President Bush to suspend deliveries to the nation’s strategic petroleum reserve for six months.
Democrats seemed caught off guard by the GOP maneuvering, but a spokesman said they would have a plan of their own.
Sen. Bob Menendez, D-N.J., has proposed a 60-day suspension in the federal tax on gasoline and diesel, a holiday that he says would cut the cost of gasoline by more than 18 cents a gallon and reduce the price of diesel fuel by more than 24 cents a gallon. (Full Story)
Pluses and Minuses for Each Plan
Gas Tax Holiday (Democrat Menendez Proposal)
Plus: Would theoretically target the benefit to exactly those who are purchasing the gasoline; could possibly lower prices at the pump, but drop in prices would be greater as time horizon expands and supply is more elastic.
Minus: Revenue loss; could discourage conservation, yet it would not lower the price of gasoline by the full amount of the tax because producers most likely do bear some of the tax burden, and because of this, it would create a shortage most likely if accompanied by a provision that would require the retail price to fall by the full amount of the tax.
Rebate Check (Senate Republicans Proposal)
Plus: Would not direct that money to go to gasoline purchases, meaning you would get the income effect only in terms of gasoline purchases, not the change in relative prices (substitution effect) that mostly occurs in the Gas Tax Holiday proposal. In other words, it would allow for rising gas prices to continue to encourage conservation.
Minus: Revenue loss; compliance and administration costs of sending out millions of checks; may not expand real purchasing power if prices across the economy merely adjust via an increase in prices.
With talk of windfall profits taxes, rebate checks and gas tax holidays in the news, Federal Reserve Chairman Ben Bernanke warned members of Congress today that nearly all of their attempts at a short-run fix are likely to end up doing little to help consumers. From CNN Money:
In response to several questions about near record high prices for oil and gasoline, Bernanke said that the Fed was concerned about them but that higher oil prices were probably more of a threat for inflation than for causing an economic slowdown.
"One issue we'll be looking at carefully is whether oil price increases pass through into core inflation, whether they go beyond the energy sector. If that were to happen, that would be very deleterious to the economy," he said. "If inflation is not affected by high oil prices, that would give the Fed more leeway," he said.
Bernanke added that he did not see any reason for oil prices to head much lower any time soon. He said that a so-called windfall profit tax on oil companies, which has been discussed by some politicians, would probably not cause them to increase production.
"Unfortunately nothing can be done to effect [sic] oil or gasoline prices in the short term," Bernanke said, adding that the reason oil prices have risen so sharply is simply due to supply and demand issues. He stressed that conservation and initiatives to find alternative sources of energy were needed to put downward pressure on oil and gas prices over the long haul. (Full Story)
Specifically on the issue of a windfall profits tax, we have this testimony excerpt courtesy of the Wall Street Journal:
Rep. Kevin Brady (R., Texas) asked him, “We’ve seen a spate of ideas to deal with energy prices, from a windfall profit tax …to $100 rebates and gas tax holidays. Do these substantively, positively impact the fundamental drivers of our energy prices? Does the windfall profits tax increase production or in any way lower our gas prices any way?”
Bernanke replied: “I don’t think it would. Profits taxes have the adverse effect of removing one of the major incentives of our market system; if people think that their profits are going to be taxed away, that reduces their incentive to engage in certain activities. So I would like to let the market system work as much as possible to generate new supplies — both of oil but also of alternatives — and for the prices, painful as they may be, to help generate more conservation and alternative uses of energy on the demand side.”
For more on gasoline tax policy, visit our newly added section on the topic.
Time to celebrate America it is Tax Freedom Day! Congratulations, today is the 116th day of the year- April 26th- and you have now finally made enough money to pay your total tax bill for the year.
Unfortunately we will work 3 days more this year than last year, when Tax Freedom day fell on April 23rd, and a whopping 10 days more than in 2004 when Tax Freedom day fell on April 16th.
The Bush tax cuts of 2001 and 2003 lowered Tax Freedom Day from its high of May 3 in 2000 to its recent low in 2004, but a vibrant economy has again increased the nation’s tax burden. As the economy expands the government taxes a larger chunk of the nation’s income due to the progressive federal income tax code.
Read the full Tax Freedom Day report to learn more about the nation’s tax burden and each state’s unique tax freedom day.
As national gasoline prices top $3 per gallon, some of our elected officials are cashing in on their opportunity to score political points by attacking the oil industry. The nation’s capital suffers from a predictable case of the “do something disease,” and every lawmaker wants to find a government solution to rising gas prices.
While lawmakers in California debate a windfall profits tax for their state, numerous lawmakers in Washington, D.C. have renewed calls for a federal windfall profits on oil companies.
From the Detroit Free Press:
Sen. Carl Levin, D-Mich., said Sunday on CNN's "Late Edition" that the president should push for a windfall profits tax on what he called the oil companies' extreme, obscene profits.
Sen. Arlen Specter, R-Pa., said on the same show that a windfall profits tax is "something worth considering," as well as legislation targeting consolidation of oil companies.
In a recent statement that condemned “profiteering” by oil companies, Pennsylvania Governor Ed Rendell added: "The profits are ungodly; there is no excuse for this…Oil companies should not be permitted to drain Americans' bank accounts to collect record-breaking profits."
Statements like this bear more than a hint of irony. Previous Tax Foundation work has illustrated that local, state and federal treasuries themselves profit substantially from oil industry sales, collecting billions of dollars in tax revenues annually. Currently, local state and federal gasoline taxes total to an average of 45.9 cents per gallon of gasoline purchased.
As we’ve detailed before (http://www.taxfoundation.org/legacy/show/1168.html), the federal windfall profits tax of the 1980s was a failed experiment. It raised only a fraction of the revenue originally projected, and ended up steeply curtailing domestic oil production—the opposite of what the law was intended to do.
Judging from recent statements by lawmakers supporting windfall profits taxes in recent days, it appears that those who fail to learn from history are indeed doomed to repeat it. Let’s hope lawmakers come to their senses and reject recent attempts—however politically popular—to impose economically harmful surtaxes on domestic energy producers.
With new proposals to tax "windfall" profits of oil companies in the news, it's easy to forget how old the notion of taxing "windfalls" is, let alone how thoroughly discredited it's been by economists.
Here's a gem from our archives that sheds some light on the issue. It's a statement from Nobel Laureate economist Thomas Schelling before the Joint Economic Committee on June 27, 1979—during the time of America's last windfall profits tax—noting the counter-productive nature of the policy:
"Any windfall profits tax, or excess profits tax, that applies to future discoveries and developments of fuel is very much like the IRS treatment of casino gains and losses. The government proposes to capture only the 'excessive profits' of the lucky strikes that lead to profits in excess of cost. If you gamble in the casino, or on the horses, and win handsomely, the IRS will share your winnings with you, and indeed the bigger you win, the higher the share the IRS takes. If you lose, you lose alone; the IRS neither commiserates nor shares in your loss. The scheme is asymmetrical; it exists largely because people believe that this is a way to discourage gambling.
"This is a sure way to discourage risky enterprises. It is built into our income tax policy because it does.
"To apply it to natural resource development is therefore misguided. We want people to invest risk capital in the search for new petroleum, and in the development of new technologies for liquid fuel. If we promise them that we'll share their happy investments, taking a cut for the Treasury as windfall profits, but if they lose, they lose alone, we are simply applying to liquid fuel development the philosophy that has historically been found attractive and effective in discouraging risky enterprise.
"I wish it were possible to tax away today's and yesterday's windfall profits without causing any anticipation that we may do the same thing next year, and the year after, and ten years from now. But you cannot forever treat bygones as bygones without people anticipating that you'll do it again."
Source: Prof. Thomas Schelling quoted in Prof. David I. Meiselman, "The Oil Excise Tax: Another Government Windfall," Tax Foundation Tax Review (October 1979).
Fresh from the printers, the new Spring 2006 issue of Tax Watch is now available online.
In case you haven't seen it, Tax Watch is our quarterly newsletter designed to summarize our economic research in a simple, easy-to-read layout that's accessible to non-economists.
Tomorrow, April 22, is Earth Day. To mark this occasion we bring to you an amusing personal income tax deduction from Hawaii. The ‘exceptional tree’ deduction is as follows, from the Hawaii Personal Income Tax Instructions:
You may deduct up to $3,000 per exceptional tree for qualified expenditures you made during the taxable year to maintain the tree on your private property. The tree must be designated as an exceptional tree by the local county arborist advisory committee under chapter 58, HRS. Qualified expenditures are those expenses you incurred to maintain the exceptional tree (excluding interest) that are deemed “reasonably necessary” by a certified arborist. No deduction is allowed in more than one taxable year out of every three consecutive taxable years. The deduction is allowed for amounts paid in taxable years beginning after December 31, 2003. An affidavit signed by a certified arborist stating that the amount of expenditures are deemed reasonably necessary must be attached to your tax return. The affidavit also must include the following information: (1) type of tree, (2) location of tree, and (3) description and amount of expenditures made in 2005 to maintain the tree. The affidavit must be notarized.
Specialized deductions such as this inevitably spawn their own interest groups dedicated to the preservation of the deduction. In this case the arborists have the incentive to make sure the deduction remains in the code. Special interest groups make it difficult to remove deductions from the code, which makes fundamental tax reform next to impossible.
Policy makers would be well advised to leave these deductions out of the code altogether. See our State Business Tax Climate Index for a more in depth discussion of the pitfalls of numerous deductions, exemptions and credits.
In case you missed Tax Foundation president Scott A. Hodge's appearance on CNBC's "Kudlow & Company" on Monday, we've posted full video of the segment to our website. Enjoy:
Be sure to drop us a line and tell us what you think.
The cost of complying with the federal individual income tax—that is, the cost of filling out paperwork, hiring accountants, and gathering documentation—rose to over $265 billion in 2005, amounting or a 22-cent tax compliance surcharge for every dollar the income tax system collects.
The California Franchise Tax Board is attempting to address this problem at the state level with a pilot program called ReadyReturn. California prepared 50,000 of the simplest tax returns—for single, childless, low-income taxpayers with no special deductions or credits—and mailed them to the taxpayers, giving them the option of signing the returns or redoing them. Only 11,523 taxpayers used the "ready returns"; most of the recipients just threw them away and calculated their tax liabilities on their own.
Congress is keeping an eye on California, wondering if such a program could work at the federal level. There is, however, quite a bit of well justified opposition.
“Who would believe the IRS would strive to get your lowest possible tax?" said John T. Hewitt, chief executive officer of Liberty Tax Service, a nationwide tax-preparation company.
Treasury Secretary John W. Snow told Congress this month that government-prepared tax returns could create a conflict of interest.
"We aren't tax-preparation people," Mr. Snow said. "We're not software-development people. There is a private market out there that does that and does it well."
IRS officials said a better option might be to use the money needed for government tax preparation to hire more auditors and increase enforcement. The agency has no estimate of how much such a program would cost or how many employees would be required to administer it.
Federal legislation was introduced two weeks ago by Rep. Melissa A. Hart, Pennsylvania Republican, to prevent the federal government from getting involved in tax preparation.
Former IRS commissioner Charles Rossotti has studied the issue and believes such a program is not feasible. He explained his opposition in The Wall Street Journal last week, stating, “[T]here are some very significant practical problems that rule it out.”
Would taxpayers—especially those with high incomes or numerous deductions—trust the IRS to calculate their tax liabilities? While this would, on the surface, reduce compliance costs, any task that increases IRS employees’ workload would ultimately be borne by taxpayers. A better way to reduce compliance costs is to simplify the tax code through fundamental tax reform.
This morning's USA Today explores the rapid growth in taxes and fees imposed on the rental cars in recent years, often in an attempt to fund municipal projects that have no clear relationship to the rental car industry. We're cited toward the end of the piece:
Increasingly, governments are viewing taxes and fees on its cars as a primary option for local civic projects that the rental industry says should be funded locally: sports stadiums, art centers and convention centers.
"It's taken on a wave of popularity," says Richard Broome, a vice president at Hertz. "It's politically expedient to tax out-of-towners because the presumption is that they don't vote."...
Enterprise estimates about 80 special car rental taxes — not including airport fees — have been imposed across the USA, and at least 44 proposals are pending. Some examples:
• To pay for a performing arts center and expand a culinary institute, Clark County, which includes Las Vegas, approved legislation last year to charge car renters 2% of the base price.
• In Dallas, renters pay a 5% charge to help pay for the American Airlines Center, home of the NBA's Dallas Mavericks.
• In Arkansas, a part of the 10% rental car tax goes toward teachers' salaries.
• In Wisconsin and several municipalities, the rental car tax is a key funding source for public transportation projects. "It's like taxing Pepsi to build a Coke manufacturing plant," Broome says....
The industry has plenty of support from business travelers such as Richard Hadden, a Jacksonville-based author and professional speaker who rents frequently in Florida. "The excessive amounts being charged in some localities are wrong," he says...
Rental car taxes unfairly single out one industry for a special tax, says Andrew Chamberlain of the Tax Foundation... "And it's not for the benefit of that industry."
The industry has complained about it repeatedly in the past. But competitiveness and the lack of a trade group that lobbies have undermined past lobbying attempts, Chamberlain says. (Full story here.)
From an economist's perspective, these special excise taxes on the rental car industry are hard to defend. Most of them fail to satisfy basic, widely-agreed-upon principles of sound public finance.
For one, they're highly non-neutral. A basic goal of any tax system is to raise appropriate revenue for programs while doing the least harm to the economy. But these taxes seem designed to do the opposite. By singling out one industry for special taxation, these levies actually maximize the economic distortion of the tax system. A much more sound approach is to rely on broadly-based and low-rate taxes which raise large amounts of revenue but do less harm to the underlying economic activity.
Second, special rental car excise taxes don't closely link taxes paid with government services provided. This is a violation of what economists call the "benefit principle." For example, a special tax on gasoline to fund roads provided directly to drivers who use gas makes sense. But a special rental car tax used to supplement teacher's salaries, build sports stadiums, or fund other general government services bears no relationship to the industry being taxed. That's just poorly designed tax policy. General government services that benefit all residents should be funded through broadly-based levies, not high-rate excises on politically unpopular industries.
As we've noted before, there's a perception among lawmakers that rental car excise taxes are "good" taxes because they fall on tourists from other cities and states. While this is often not the case—more than half of rental car customer are local, not visiting tourists—it's a belief held by many lawmakers. As Tom Ambrosino, mayor of Revere, Mass. is quoted in the story, "We try to shift the (tax) burden away from our citizens as much as we can."
But this predatory approach to tax policy is impossible to defend from the perspective of sound public finance. The primary goal of tax policy is to raise revenue for programs demanded by citizens. To make intelligent choices about the costs and benefits of those programs, citizens must understand their full costs. How is this possible when the benefits of programs accrue to residents, while the tax burden supporting the programs is "exported" to taxpayers in other areas?
As a result, many of the current and proposed rental car excise taxes are a vivid illustration of the old slogan "taxation without representation." And in a democratic system, that's just poor public policy.
As my wife and I were recently preparing our income tax data to give to our accountant, I began my annual guess about the cost of complying in the U.S. with the Federal Tax code. But instead of just shaking my head over it, as I usually do, I made a few simple calculations that I will share with our readers. I will also offer some suggestions on how to cut down drastically compliance costs and reduce the negative effect of federal taxes on the efficiency of the economy.
We spent at least 25 hours in 2005 preparing and keeping track of our 2005 income, deductible expenses, and other data relevant for tax purposes. Our accountant spent another 6 or so hours, so together our tax filing used over 30 hours. Last year the IRS processed about 130 million tax returns. If the average filer along with any professional help together spent about 20 hours, 2.6 billion hours would have gone into complying with the 2005 tax code. This may seem huge, but the Tax Foundation put much more effort into their calculations, and finds that about 6 billion hours were spent in complying with the federal income tax code alone...
If we value my 2.6 billion hours estimate conservatively at an average of about $40 per hour because higher income filers and tax preparers spend many more hours in tax preparation than lower income filers, the aggregate cost of complying would be over $100 billion. This is almost 10 per cent of the approximately $1.2 trillion that will be paid in 2005 in federal income taxes. The Tax Foundation concludes that total compliance costs for 2005 will amount to $265 billion, or over 20 per cent of federal income tax revenue. (Full piece here.)
Here are a couple illustrative figures on the costs of complying with the federal income tax, from our study released in January.
The first illustrates the tax compliance "surcharge" borne by the economy in addition to actual tax collections. This year that surcharge is estimated to be 22 cents per tax dollar collected. As the time series shows, there's been a dramatic increase in this compliance burden since 2000.
This has likely occurred for two reasons. First, while tax collections fell steeply during the most recent recession, compliance costs did not, suggesting they're less cyclical than collections. Second, although federal income taxes were substantially cut in recent years, it's unlikely they made the tax system simpler, since they were often accompanied by expansions of complex tax preferences rewarding family structure, alternative energy production and various other social goals.
Federal Income Tax Compliance Costs as a Percentage of Revenue Collected, 1990-2015:
The second illustrates an often-ignored aspect of tax compliance costs—they're highly regressive. This shouldn't be a surprise to anyone who's explored the staggering complexity of tax provisions targeted at low-income Americans such as the Earned Income Tax Credit. For this reason, tax simplification is one type of tax reform lawmakers on on all points of the political spectrum should be willing to support:
The Regressive Distribution of Federal Individual Income Tax Compliance Costs:
An editorial in this morning’s Wall Street Journal by Dr. Glenn Hubbard, Dean of Columbia Business School, discusses how the budget situation facing the federal government may give us a glimpse of future Tax Freedom Days possibly being as late as June. From WSJ Online:
(W)hat should keep us all up at night is the image of a Dickensian Ghost of Tax Day Future showing us the shadows of what might but need not be. Imagine the nightmare of a tax burden 50% higher -- not so farfetched as it sounds.
Economists' thoughts about "taxes" quickly turn to thoughts about "government spending." The important first question we decide through our elected officials is the size of government -- the level of spending on defense and homeland security and the rest. These decisions raise the question of how we pay for all that: taxes today or taxes tomorrow (deficits today)? Then we get to the question of how we structure those taxes: What should be taxed? At what rates? How important is economic growth? Fairness?
The Congressional Budget Office regularly quantifies these shadows of the Ghost of Tax Day Future. Their forecasts are not sanguine. A generation from now, absent any changes, increases in Social Security and Medicare spending alone are projected to consume 10 more percentage points of national GDP than they do today. (This growth could be greater still if the pace of health-care cost increases is not mitigated.)
It is difficult to believe that the present size of the federal government (about 20% of GDP) would be maintained in the presence of this entitlement spending surge. What other component of spending would give? After all, we spend only 4% of GDP on national defense. And we spend at the federal level only 3.1% of GDP on all current programs outside national defense, Social Security, Medicare, other health programs, income security and net interest. Would America play the same role in the world with a shrunken commitment to national defense? Will we be able to make the investments in education and basic research that are essential to competitiveness? Could it be that this is the grim budget arithmetic withering the global standing and domestic health of continental European democracies?
If we set aside the possibility of a government simply devoted to entitlement programs, a rise in federal government spending of 10 percentage points of GDP from its present level of 20% means increased taxes; from an economic and political perspective, decisions are about spending and taxes, not deficits per se. To frame that path, it is useful to highlight the Tax Foundation's popular "Tax Freedom Day" concept. The day this year that taxpayers on average stop working to pay their tax obligations and begin earning for their own spending and saving plans is April 26. And the foundation cheerily notes that this is earlier than in 2000 (May 3), when higher tax rates and real bracket creep were at work. But the variation between April 26 and May 3 loses our interest if we start to contemplate a Tax Freedom Day in, say, mid-June. (Full Story, Subscription Required)
Hubbard’s basic view of tax policy is one members of Congress should emulate. That is, they should determine the necessary level of government spending and then impose a tax system that funds that spending level in a manner that imposes the least economic distortion.
For more on Tax Freedom Day 2006, check out this press release from last week’s announcement.
As the tax deadline approaches next Monday for most Americans, much of the attention on tax policy recently has focused on the issue of the Alternative Minimum Tax, or AMT. Tax year 2005 for which taxpayers are filing right now will mark an estimated 16 percent increase in the number of filers that will be subject to AMT compared to last year (TY 2004). Overall, since President Bush took office and immediately began cutting rates on regular income taxes, the number of taxpayers that are hit with AMT has nearly tripled, going from 1.3 million in 2000 to an estimated 3.6 million in 2005.
For tax year 2006 (which you will file next spring) that number will see its biggest up tick ever because the exemption threshold is set to fall (under current law). As the table below shows, projections from the Joint Committee on Taxation have approximately 19 million tax returns being subject to AMT, compared to its estimate that only 3.6 million were hit for tax year 2005, a near six-fold increase.
Numbers on AMT
# of AMT Returns
| Amount of AMT minus Regular Tax |
Note: ^ Preliminary 2004 IRS Statistics.
Currently, the exemption amount for married couples filing jointly is $58,000 and $40,250 for unmarried filers. Next year, those numbers revert back to their pre-2001 schedules of $45,000 for married couples filing jointly and $33,750 for unmarried filers. Unlike elsewhere in the tax code, these numbers are not adjusted annually for inflation (based upon the CPI-U inflation measure).
Those numbers do not mean that everyone whose adjusted gross income (AGI) exceeds that mark will be subject to AMT, however. Tax returns are subject to AMT only if the alternative minimum tax exceeds the regular tax. AMT uses a broader definition of income than the regular tax and limits the use of certain deductions – specifically the deduction for state/local taxes, the medical and dental expenses deduction, and other miscellaneous deductions.
Because AMT will only apply if one’s alternative minimum tax exceeds the regular tax, then any policy that significantly lowers regular tax liabilities while mostly leaving AMT alone is going to obviously cause more tax returns to have the AMT exceed the regular tax. This impact is evident by the sharp decline projected for the number of AMT filers in 2011. In 2011, when all of the Bush tax cuts are expected to expire, the number of AMT filers is projected to be cut nearly in half (from 29 million in 2010 to 14.8 million in 2011). Therefore, despite its drawbacks, one could look at AMT as mitigating for many the tax hike that would come in 2011 for millions of Americans if the “Bush” tax cuts were not made permanent, as they would already be paying AMT -- a tax higher than their currently reduced regular tax.
In summary, five factors have caused and are continuing to cause the number of AMT filers to grow:
(1) In 2006, the statutory threshold exemption is set to fall.
(2) Nominal incomes are growing, while AMT thresholds are not adjusted for inflation.
(3) Higher local taxes on income and property (partially the result of higher property values caused by the housing boom), meaning the deduction for state/local taxes (which is not allowed on AMT) will grow, thereby increasing the likelihood that one’s alternative minimum tax will be greater than one’s regular tax.
(4) PEP/Pease elimination, which too will expand the value in the regular tax of those currently AMT-restricted deductions, thereby increasing the likelihood that one’s alternative minimum tax will be greater than one’s regular tax.
(5) Lower taxes on regular income (i.e. the “Bush” tax cuts).
The Internal Revenue Service is a favorite media whipping-boy each tax-filing season. And although much criticism aimed at the IRS isn't really fair—they can only do what Congress authorizes them to do, so lawmakers are the real culprits—that doesn't mean it isn't funny.
From the Los Angeles Times, a hilarious parody of a Q&A with the federal agency frusterated tax filers love to hate:
Question: I am a private citizen filing a single return with no itemized deductions. My company automatically deducts federal taxes from my salary. When are my taxes due?
Answer: This is a complicated matter and can't be answered in the space provided.
Q: My New Orleans home was swept away by floods last summer and I've been living in a soggy cardboard box ever since. I've already filed Form 4868 (Application for Automatic Extension of Time to File U.S. Income Tax Return), but I think I will need more time to track down financial records. I heard that in cases of "undue hardship," more time can be granted. Is that true?
A: We'd like to thank you for the silliest question we've ever received, and that's saying something. It will bring howls of laughter from our staff.
Q: Should I mail or e-mail my tax return?
A: You seem to be searching for a black-and-white answer. Wouldn't life be grand if everything were as simple as you made it seem? As an "either/or" personality, you should be more concerned with your unhealthy obsession for absolutes. Consult your personal physician for further details.
Q: I owe more in taxes than I earn in a year. I can't pay that much, and even if I could, how could this be? And what should I do about this egregious situation?
A: Your best bet is to think of a really good prison nickname, like "Mad Dog" or "Tinkerbell."
Q: I have a home office, but I also use it a couple times a year as a guestroom. Can I still take the home office deduction without being flagged for an audit?
A: Asking questions about the home office deduction automatically triggers an audit — and a full body-cavity search.
Q: I'm still waiting for my refund from 2004. Where is it?
A: The check is in the e-mail.
Do taxpayers understand the full cost of the government services they demand? There's and interesting op-ed in this morning's USA Today exploring the role federal income tax withholding has played in shielding the cost of federal spending from taxpayers:
Two sentiments about government spending prevail as we approach Tax Day, traditionally April 15: First, that it's out of control, and second, no one cares. They're related, the latter causing the former. The reason no one cares comes down to one word: withholding.
If you're like most Americans, the government extracts taxes from your wages before you ever see the cash. You might have been upset about that when you got your first paycheck, but you soon learned to skim to the take-home section. Out of sight, out of mind.
That collective shrug is precisely the reason Congress implemented mandatory withholding in 1943. It feels relatively painless for the 131 million Americans who pay this way — especially when a refund check arrives. Consequently, few withholdees truly care what happens with their money.
But others do. Nearly 12 million of us, the IRS reports, pay estimated taxes by writing checks to the government, usually every quarter. Often self-employed types, we deposit checks into our accounts, dream of the vacations those funds could finance, and then mail those funds to the U.S. Treasury instead. It's a painful process.
Spreading the pain But one way to slow out-of-control spending in Washington is to make everyone feel the same pain that quarterly payers experience. Ending withholding would do that — and it's not as crazy as it sounds.
Most Americans have paid taxes through withholding for so long, we think it's as inevitable as taxes themselves. But the income tax wasn't even constitutional until 1913. For its first three decades, citizens usually paid in lump sums. They grumbled, which kept rates low and made new programs hard to justify. For both those reasons, Congress insisted that Social Security taxes be withheld from paychecks when that program began in 1935.
Officials suspected that withholding "makes it harder for people to see the amount of money that's actually been taken from them," notes Charlotte Twight, Boise State University economist and author of Dependent on DC. Citizens would not see a connection between their payments and the things governments chose to finance.
When it began Upon the outbreak of World War II, the Treasury needed more blank checks, so in 1943, Congress decreed that income taxes be withheld alongside Social Security ones. Against the backdrop of war and heavy propaganda, Americans acquiesced.
The scheme worked as planned. Americans didn't revolt when rates rose. Taxpayers even started to think of withholding as convenient, though people often overpay; last year, about $100 in potential investment returns was lost on the average refund of $2,423. Most people can't imagine another system.
But the nearly 12 million Americans who pay estimated taxes can. Technology makes starting businesses easier and cheaper than ever these days; as the ranks of the self-employed grow, more Americans are discovering the pain that writing tax checks inflicts.
Don't be fooled by the moaning. As a freelancer, I think it's a good pain, one that keeps you conscious. (Read the full piece here.)
As we've written before, some economists have criticized federal income tax withholding on grounds that it conceals the "price" of federal programs. After all, if we expect voters to make good choices about the level of government spending, they'll need good information about the full costs. For all the administrative efficiency of federal income tax withholding, this reduction in tax transparency is a major drawback.
However, even if you don't find that criticism persuasive, there's another big problem with income tax withholding—the uncompensated opportunity cost borne by taxpayers for making interest-free loans to the U.S. Treasury.