An excellent piece appears today in the Wall Street Journal on the politics, complexity, and bad economics of our crazy taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code. David Wessel describes his own personal problem he has had with the complexity of complying with many deductions, as well as provides a great summary of the overall problem at hand.
For years, I went to the grocery store with a blue plastic envelope full of coupons — 50 cents off, buy-one-get-one-free — just as my mother did. She still does. I eventually decided it wasn’t worth it, though I still rejoice silently when displaying a supermarket loyalty card saves me 50 cents on a jar of tomato sauce.
I am, however, hooked on the tax breaks the government offers to shield slices of my paycheck from taxes. I have some of my wages diverted to a flexible spending account so they aren’t taxed, and then use that account to cover medical bills that the insurance company doesn’t pay. I divert more to cover parking at a garage near my subway stop, and my wife diverts some of her pay to get untaxed subway fare cards instead of taxable wages.
And then there are tax breaks for saving, each with its own rules and caps. I set aside money in my 401(k) plan at work. My wife sets aside money in hers. Both of us then set aside an extra $5,000 because we’re over 50 and the government lets us. I put a bit more in a separate retirement plan funded with money I earn from free-lancing.
And then there’s the money I set aside after taxes for my children’s college education, at a big mutual-fund company, where it grows — at least I hope it grows — tax-free. I’ve also opened a couple of smaller accounts at another mutual fund to take advantage of a District of Columbia tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state/local taxes paid, mortgage interest, and charitable contributions. ($3,000 per parent) for college saving.
Wessel then provides a perfect succinct summary of the problem that exists with these seemingly harmless tax provisions:
But the real driver of all this is that Congress has turned the tax code into a theme park, with a tax break for every good cause. Each one makes sense: Congress decides it’s in the public interest to encourage people to use mass transit. Allowing employers to take money out of workers’ checks, shield the money from taxes, and then give workers fare cards instead of pay is a reasonable, cheap approach. Workers are happy: They’ve saved money. Some probably think employers are giving them an extra benefit. Employers surely don’t mind that.
So what’s the problem? Add this tax break to the dozens of others that decorate the tax code, and we get higher tax rates than otherwise needed to bring in the same sum. We get a lot of hassle and complexity that chews up time and money. And, I suspect, the government creates tax breaks that are claimed far more often by sophisticated, upper-income taxpayers than by others. (Full Story)
The central point that Mr. Wessel makes is that for every special tax provision inserted into the code, one of three things must happen (or a combination thereof): either you must cut spending, raise marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. s now on everyone, and/or raise marginal tax rates later on everyone (i.e. run a deficit now).Share