I’d love to read a well researched article on corporate welfare programs the IRS supervises. Why not spend some time researching that.
As Martin Luther King said: socialism for the wealthy and rugged individualism for the rest of us.
3
Here's a thought. How about one database where all information about everyone is stored, accessible to all the government agencies, and just have them periodically review it and determine all the programs each person is eligible for. What could possibly go wrong with that?
There is only one way to guarantee US dominance.
1) Have a flat 2% tax on all earnings. PERIOD. And a 15% tax paid between the employee and employer or self employment, which ever way it is calculated towards Social Security and Medicare. No exceptions and to include all government employees, the President included. Why the 2%? Because that is the way to identify who makes how much and so when they transfer that to their children,. the inheritance taxes can be calculated and we know where their children began their richness so we avoid criminally acquired money.
2) Remove all Corporate Income Tax but require companies to file a statement of earnings and loss for audit purposes in the event of funny business.
3) Have a 5% border tax for all products and services entering the USA.
4) Raise the sales tax by 7% , which goes directly to the federal govt. This replaces income taxes . The rich pay more automatically.
This will put US in the lead for the next 50 years for sure.
Your example, "A married couple making $75,000 is in the bracket with a 12 percent tax rate on their last dollar of income, meaning a given deduction is only about a third as valuable as for a couple making $425,000 that faces a 35 percent rate." highlights a seldom discussed feature of the Federal income tax code: taxes are reduced indirectly, by treating affected expenditures as deductions from income, taxing only the remainder.
A better approach would be to treat the expenditure directly, say by deducting 25% of the expenditure from the tax. Everyone with the same dollar expenditure would get the same tax reduction instead of "a couple making $425,000" getting three time the benefit of "a married couple making $75,000". And, ideally, the $75,000 couple could get tax money back from the government (a negative tax), if their expenditure was larger enough.
1
One of the worst things about the complications added to the tax code is the fact that if you get advice from the IRS, the agency in charge of the system, and it is wrong the fact that an IRS employee told you to do it the wrong way does not lessen your liability for the error.
1
See, the folks who get subsidies via the tax code are "deserving" while those who get direct payments are "undeserving". >sarcasm<
3
"But taken in the aggregate, they cause a whole lot of problems compared with an alternate world in which the government subsidizes certain behaviors more directly." Interesting article Mr Irwin. I am interested in reading more about the efficiencies and the benefits/costs of proposed alternatives (and or used elsewhere) to the present system.
1
Except for the anomaly of our consumption subsidies being given as tax "deductions" instead of partial tax credits, what's the problem with handling them through IRS? Would it be any more efficient for the government or for the recipient if HHS, DOE sent out checks?
1
The complexities of the tax code are counter productive. Sure, a perfect tax code that accounted for every variation of income, net worth etc. might be more equitable on the surface but complexity itself is a problem. Things like earned income credit and minimum alternative tax should be eliminated. Give those at the bottom a sufficient tax credit to cover the wide range of income adjustments that burden the poor and near poor. Eliminate the mortgage interest deduction and other provisions that make it possible for the ultra wealthy to pay almost no taxes at all. And above all else, fund the IRS adequately to pursue tax cheats starting at the top end of wealth.
4
Let's just say it: the U.S. is just not capable of running itself because it's full of whiny overgrown children that complain about absolutely everything before they get around to doing it.
1
The tax code should collect revenue in as fair and efficient way as possible. This really means reasonably progressive tax rates and almost no deductions.
Let another agency of the federal government administer welfare and social policy programs - if should be straightforward to see the costs of each program/initiative.
6
This is an excellent article, and points to a problem that there seems to be no natural constituency to do anything about it, whereas all the deductions have powerful constituencies. I file returns in the U.S. and in Norway. One of the things I notice when talking to friends and colleagues is that many Americans pay someone to do their taxes, whereas practically no one in Norway does, unless they own a business. In Norway, our tax returns come filled out and if we find them correct, we don't have to do anything except pay any taxes owed, or make sure the bank account for a refund is correct. Even after the due date, we can file a correction on-line and get a refund or a bill for extra taxes owed within a few days.
It might be that the complexity of US tax reporting has a big constituency: the accounting firms and tax preparers that live off of it.
6
@Roger Evans
Professional US income tax preparation fees for expats and emigres, I feel the pain. Nearly a dozen pages of mind numbing exclusions, inclusions, subtract line w from line y and enter the difference on line z unless it is negative then use form 9999X/2, etc. and my financial situation is simple. Good grief!
3
Corporations should have no deductions, just a Flat Tax.
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@Sutter
An alternative minimum tax equal to executive compensation, political contributions/lobbying and advertising. No loss rollovers.
1
I have filed tax returns in many jurisdictions, mostly Canadian Provinces and U.S. States, as well as the Federal Governments in both countries.
Over time, all of these governments have made their tax systems more complicated. The elected politicians, eager to claim credit while avoiding responsibility, use the tax code to conceal what they are taking and giving away. We can safely assume, however, that those most capable of paying for favors will be among the most likely to receive them.
I’m not expecting any great improvement in the quality of our elected representatives. If I had to make a prediction, I’d say that tax law will follow the same path as immigration law. Complexity. Absurdity. Massive evasion. Official lies. Special police. Contracting out to bounty hunters. Vigilante justice. Anything is possible.
I’d like to think that taxation without representation would strike a historical chord, at least in the United States, but our modern sensibilities tend to dismiss the Revolution as a flawed enterprise driven by racist and misogynistic white men, whose concept of Social Justice would not pass muster with our current Warriors. So we can probably count on things getting worse before they get better.
2
I have thought for some time that our system would work better if congress had the power to set spending, but a separate government branch, a sort of 'independent tax court', should be given the responsibility to collect what is necessary to meet spending targets, operating according to some constitutional principles that would lay down difficult-to-change structure. The principles would state goals for managing economic disparity, maintaining a stable economy, fairness (e.g. if the government has to clean up after your industry, you deserve to pay tax to support it). Obviously, crafting an ideal set of such principles is tricky, but it shouldn't be hard to beat the system we have now.
4
I always appreciate the numerical info presented in Upshot pieces. To help ground the discussion on taxes, here are some more numbers (mostly from BLS 2018 data):
US GDP $20.6 trillion
Total wages and compensation $10.8 trillion
Total wages $8.8 trillion
Personal income from assets $2.2 trillion
Total personal income $17.6 trillion
Corporate profits $2.1 trillion
US population 330 million
US workforce 164 million
US Federal budget $4.5 trillion
The simplest "fair" tax would divide the federal budget by the number of people (a head tax), about $13,000 per person (or $27,000 per worker). That would represent about 50% of wages paid or 25% of all personal income.
These percentages are the same for a straight tax rate. Thus taxing only wages would require 50%, and taxing all personal income equally would require 25%.
Also note that personal income, even just wages, dwarfs corporate income. Facile statements about significant funding sources from increased corporate taxes do not actually make sense.
All the divergence from straight rates, whatever the motivations and administration, makes for both complications and skewness of liability (both intended and unintended). But as a fundamental reference, the federal government spends $13,000 on behalf of each of us. If you and each person in your household pays much less than this in federal taxes, you are getting a bargain.
2
This happens because tax breaks, deductions, subsidies are not viewed the same as Government spending. Use the tax code and it's just Government taking less of your money. Spending is seen as real. This is true whether it is EITC, green energy tax breaks or "corporate welfare". A simple progressive tax without the social engineering would help. Then we would see what we are really paying and for what.
4
One of the more egregious things with deductions has been taking them away from individuals while showering corporations with them.
19
Great article! I wish we could have a simple progressive flat tax. Everyone pays something. If you make less than 20k$, you pay 1%; if you make > 500k$/yr you pay 40%. No deductions, subsidies or loopholes.
There's plenty of other ways for governments to motivate its citizenry than an income tax. I'd be in favor of a significant carbon tax for example to incent environmental behavior. Simple is always better.
8
In an address to Congress, Ronald Reagan said
http://www.presidency.ucsb.edu/ws/index.php?pid=43425
"The taxing power of government ... must not be used to regulate the the economy or bring about social change."
In the same speech he advocated "a tax program which provides incentive to increase productivity" which of course IS a social change, and thus contradicts the first principle.
Nevertheless both lines got applause.
6
Very thought provoking article.
I discovered another example of this when filing my taxes last month.
For a few years due to job loss and intermittent work assignments, I was forced to take early withdrawals from my 401-K. Those withdrawals were subject to taxation at my bracket rate plus a 10% penalty.
Prior to last year I was able to deduct the amount I paid in child support from the withdrawal amount subject to the 10% penalty (there were a few other allowances from what I remember, for example loss of primary residence, etc..)
This year I checked and all of those allowable deductions were gone. So now basically there is no financial hardship you can use to be excused from the 10% early 401-K withdrawal penalty.
And politicians wonder why the working class 'death of despair' percentages are through the roof.
18
I mean, I think the worst part of this is who it ends up making these benefits disproportionately go to people who don't need it. A poor person who pays no or few taxes doesn't benefit from a tax incentive to take out a mortgage on a home, but an affluent family who does it not only gets a huge tax break, then end up with an asset that will likely increase their wealth.
Likewise, things like 401ks and health benefits plans etc. disproportionately favor large businesses over small ones, because big businesses can afford to administrate these programs whereas a mom and pop restaurant cannot.
10
This article defines a fundamental liability in American culture. On the one hand, we embrace individualism and limited government. On the other hand we live in a complicated large nation, in which regulation is essential and inevitable. Rather than accept this reality, we disguise regulation and assign it to the tax code and the insurance industry, resorting to litigation when those agents fail.
This liability shows up again and again at all levels of society, from medical malpractice, which leads to litigation that does good for no one, to homeownership and community services, the direction of which have been outsourced to HOAs. 
Our ideas about individualism versus community and libertarianism versus government, were viable in the 19th century when we were devoted to exploiting resources, clearing the land, and eradicating the natives. In the 21st-century this approach doesn’t work so well.
10
Oh no! Awful!
Everyone knows we're supposed to fiddle with the tax code to help the super-rich and corporate "people"!
Pathetic.
9
Guess it depends on how you define problems. This country uses the IRS to destroy lower income folks who break the law either voluntarily or involuntarily. But the IRS doesn't even bother auditing most wealthy taxes. Too much work, too little funding. Just another way for our government to soak the public and feed the rich.
14
@Andrew
The IRS has been underfunded for years and every year the Commissioner goes to Congress requesting money for increased compliance and audit and every year the Congress ignores this ( despite the fact that the IRS has shown that the return on the dollar can be over 400%) so that our Congressmen and Congresswomen can go back their districts and say they voted to protect their residents from the IRS . The reality is that they have punished the honest taxpayers to protect the tax dodgers.
11
Every 4 years, Americans complain, or. convinced to complain, about how complex the tax code is...about how many pages the tax code is. Then, 2 years after that, they are told that the solution to "this", "that" or "the other" problem" cab be fixed by a tax break. Grrrr!
5
I question why a third of audits target the poor who apply for the EITC when the article says the wealthy get the most tax credits. That strikes me as a severe bias against the working poor, not to mention un-Christian.
5
Auditing the complex tax returns of the ultra wealthy is hard—because they squeeze and bend the tax code in so many ways. OTOH the poors’ returns are quite simple and easy to audit.
Let's keep the collection of taxes as simple and uniform as possible. Something close to the old idea of filing your taxes on a postcard.
For the programs that we want to support, let's process those separately with a an application. If your company wants a R&D tax credit, apply for it. If you want support for buying an electric vehicle, apply for it. Make the process transparent, listing all programs on a web site so that people can see what is available. Maybe list all the payouts too, at least the large ones.
7
@Angmar Bokanberry
Have you seen a 1040 lately? It is just over one page (two partial sides of a piece of paper) and a good portion of that is identifying and refund/payment information. This year and last it has taken me 15-20 minutes to fill out -- less time than I spent raving about how straightforward it was.
Of course, most people I talk to are still convinced that they have to pay Turbotax.
4
@Clotario It's not the 1040, it's all the additional schedules and calculations. If we wanted to keep it simple, just total up AGI, subtract $50K, and then multiply by 25%. That's the amount owed. No special rates, all income is included, no deductions other than the standard deduction.
13
@Angmar Bokanberry
We could still have progressive rates. Those who make more can pay a larger percentage. I would get rid of the standard deduction. NO deductions at ALL.
2
The earned income credit means that each of us is subsidizing companies paying minimum wage, some of which companies do not themselves pay income taxes.
19
@John Graybeard hey, agree, see my earlier post...
2
Agreed that the taxpayer shouldn’t be funding people’s life choices but neither should this be the responsibility of one’s employer. The life you live should reflect the value of your labor. Period. If I decide to have a spouse, procreate, own a home, etc., that’s all in me age my boss shouldn’t be expected to pay me accordingly. Especially since they have absolutely no input into my actions.
3
@From Where I Sit
The problem with this is that there doesn’t seem to be any agreement as to a basic social contract in the US and so ‘‘funding other’s lifestyles’ is really a code for racism/classism, etc. I suppose this is not surprising for a country founded on the belief that people are property, but elsewhere shelter, healthcare and schooling are part of the social contract, all funded through taxes. Live how you like, but let’s agree on basic decency.
6
There are difficulties with the administration of welfare through the tax system, but the main problem with the IRS is the way that it has been deliberately shrunken to reduce its ability to enforce the tax code on corporations and high-income individuals. There are many tax breaks in the code which are actually tailored for specific wealthy individuals or groups.
28
Like with anything else in life, anything can be abused.
Tax breaks when done right and careful and agreed upon by most Americans can be good but it has been turned into a free for all, whoever has the most political clout will get one.
Also you left out the biggest injustice, the corporate welfare queens. When you have a majority of the Fortune 500 companies not paying any tax, it is grossly obscene.
It makes the average American abuser look like peanuts.
32
the earned-income tax credit is aimed at those with "relatively low income" as you say, but a major beneficiary of this (and the child care tax credit, etc.) are corporations, and companies large and small...without these handouts from the federal government (as well as local charities and food banks) hundreds of thousands (millions?) of people would not be able to survive...there would be a small (large?) revolution...these credits are, in effect, subsidies for big business...if people were paid a living wage many of the tax code "fixes" could be eliminated because there would be no problem requiring fixing...
24
If your job pays you the minimum wage, you need to live an austere life. It really is that simple. My own job doesn’t allow the time, finds of energy to do anything beyond work, eat, sleep, repeat. It’s not impossible if you follow the souls advice I received in basic training: “If you can’t fit everything you own into your duffle bag, you’ve got too much.”
5
@From Where I Sit
If the minimum wage is not enough to pay for the essentials of food, shelter and health care, then what do you cut? Food? Medicine? Live on the street?
9
@From Where I Sit
You say "If your job pays you the minimum wage, you need to live an austere life. It really is that simple."
It's really not that simple when we have a gulf between the rich and everyone else in this country that we haven't seen since the last guided age. Inequality is obscene and it's not simple.
The minimum wage is not a living wage. People who work should be able to live.
We tax work more than we tax wealth in this country. That means the rich don't work and the working poor are faced with an impossible equation.
We have a decades-long crisis of homelessness and unaffordable housing in this country. In the wealthiest country the world has ever seen, people who work shouldn't be forced to live in their cars. People who can't work due to mental illness and addiction shouldn't be forced to live on the street without treatment. It's not simple.
The Trumps and the super rich do not live by your duffle bag maxim ... and trump doesn't respect patriots who have served in our military, or federal workers and public servants like my son who has worked for the National Park Service because he is dedicated to the mission. My son can't get more than seasonal work at the NPS, doesn't have health insurance, and is provided with no incentive to continue his public service.
YOU have the right to expect more from your life beyond work, eat, sleep, repeat. You are duped if you've decided you -- or anyone else -- doesn't have the right to expect more.
4
The tax code is a politicians' grab-bag of subsidies and loopholes. It does not adequately fund the federal government, its primary purpose.
12
@AynRant
That is why the only way to do tax reform is to eliminate ALL deductions, period. There should be NO way to reduce the amount of taxes owed. Then the rates could be set to pay for the government required for that year.
8
Considering the 78,000+ pages of the tax code, no wonder. The most glaring example of failed tax reform is the 1986 Reagan deal. It "eliminated" a whole host of tax deductions, loopholes, exemptions or whatever you wish to call them. By 2010, over 95% were back in the tax code mostly through lobbyists of every stripe backing them. The real question is who benefits either on the revenue side or the disbursement side. My argument about any tax code reform is to look at who benefits from any deduction or credit. Start with the ones that benefit the fewest number and abolish them and work your way up the list.
15
@tom" Fewest number" benefited is only part of it, it seems to me. How about "most in need?" I'm thinking, for example, of people with a child born with severe health issues. That would not necessarily be a large number/percentage of the population, but those folks need help.
6
Taxes have always existed once societies were formed from the simplest to the most sophisticated. In the past the revenue collected went to war making and maintaining an opulent class. As we drift towards this ancient governmental form, taxes in freer society cause discontent.
General agreement or disagreement on Federal programs determines their presence as boon or bust.
This column also did not mention that poorer states depend on more dollars sent to them from more prosperous states. Without some sense what determines general well being, suffering among the population would increase.
Taxes are not any program's wellspring, but are shaped by who voters put in office and who is influencing them by a different revenue stream. Major business lobbyists or organizations bring their dollars to dismiss the public's wishes.
5