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04/16/2006

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S. Glazerman

I have a more modest proposal. I'd like the IRS to create a separate set of forms for people who can handle complex mathematical operations. Surely Professor Becker and his colleagues could do it faster if they didn't have to comply with instructions like "Enter the number from line 6 on line 7. Is the number on line 7 greater than the number on line 4? Which is greater 2 or 1? Enter the number from line 7 on lines 8,9, and 16. Now add zero to the number you entered on line 12..."

Just think of how much time would be saved by America's economists using a more mathematically streamlined system.

Bernard Yomtov

I don't find Becker's ideas here very convincing.

Even granting the the 20-hour average, which seems high to me, eliminating deductions would make much less difference than he claims. Only about a third of all returns itemize deductions. No doubt some taxpayers who don't itemize still calculate deductions before deciding, but it still seems safe to say that well under half of taxpayers would save any time at all if there were no deductions.

For those with complicated business affairs a fair amount of time is involved in determining income. It's pretty simple for those who have only labor income and ordinary interest and dividends - a large majority of returns. But those for whom it is complex are not helped by eliminating deductions.

Nor is it clear how a consumption-based system would be simpler. Where and from whom would the tax be collected? How would the necessary reporting and auditing work? And not incidentally, how would the various problems of a consumption tax - transitional issues, regressiveness, for starters - be handled without introducing complex reporting?

The complexity could even be greater than today's. It might not be, but a simple assertion, even from Gary Becker, is not enough to prove the point.

Swampy

My theory in a nutshell is simple: I don't think the number of hours spent preparing a tax return should differ greatly from one household to the next. That's why ever since I took an interest in taxes, I've been advocating a position quite similar to the one espoused by Gary Becker. Of course, I don't think some of his estimates (regarding total hours spent) are correct, but that's a battle that need not be fought at this time. It would be better handled at a lecture or conference.

Thank you.

Matt

A missed issue here is whether or not the time spent preparing taxes, by an individual or tax preparer, would be otherwise spent productively. Perhaps during the weeks prior to tax day the typical individual taxpayer spends a few less hours on the couch watching American Idol. If this is the case, the time spent preparing their taxes would not be taking away from the national productivity at all. Possibly even adding to the productivity for the weeks following the tax-filing deadline, given some individuals may find light in there new (yet temporary) more productive ways.

Davey

W-if I didn't have to begin working on my taxes for next year, I'd have time to rebut virtually every one of your points. You've presented a target-rich opportunity. For instance, "Anyone who has trouble doing their taxes deserves it, because they have so much money and engage in so many complex transactions that hundreds upon hundreds provisions of the tax code apply to them"---Huh? Our most productive people should be encumbered by the tax code because they're productive? They should be freed up to be more productive.

Hey, one more, then I gotta go find some envelopes for my receipts: "And I will add that the tax code is quite efficient. All sorts of goodies are in there, that save all sorts of people cash. Not you, perhaps. But someone. And that someone was given cash by their representative in Washington." Uh, Dub, whenever someone in Washington "gives" us cash, they have to first "take" it from somebody else. They don't actually produce anything in Washington. And, just as they "give" it through the tax code, they "take" it through the tax code.

I've always thought that one sure-fire way to get some serious tax reform started would be to end payroll tax withholding and require everyone to write a check once a month or once a quarter to the government. That way, Joe Six-Pack gets a true feel for how much tax he's paying. Ought to take about two payment cycles for the tax revolt to begin. It'll never happen.

aak

I think the way to phase out a bloated tax system is to give the taxpayer a choice. Let the politicians mess with the 66000 page tax code as much as they want but require all businesses and individuals who have never paid tax to pay a flat / simple / whatever rate and allow those who are under the current system to stay under the current system. Then give all current taxpayers a choice each year. Stay with the existing code or move the simple code. Once you go simple though, you can't go back.

I'm betting most people would prefer to do the 15-20 minute tax return even if they didn't get all of W's "goodies" just so they would have more time to be productive, enjoy their free time or whatever they want to do.

Bryan Buck

As a student of Arthur Laffer and Paul Craig Roberts, I wrote a Senior Thesis in 1985 titled "Tax Reform and Deficit Reduction", which was a beautiful, 150 plus page treatise arguing the supply-side benefits of lowering taxes to increase revenue. I have written countless editorials on this and many other subjects over the years, to no avail. The facts are indisputable; the supremacy of politcs over reality in this country is maddening to the point of fomenting revolutionary thoughts among previously level headed individuals. The failure to address: Tax Reform (especially to repeal the insidious AMT tax)/Border Patrol-Illegal Immigrant Reform/Wasteful Govt. spending/Entitlement Reform/Social Security Reform/Nuclear Proliferation/etc., is leaving our children and grand children an insurmountable burden due to our greed - all sacrificed on an altar of political correctness. Formally a life time Republican (Did I really vote for George Bush Senior [read my lips[, Junior [see the aformentioned] Reagan [remember TEFRA?]?), primarily to support the lesser of two evils, I have now sworn to NEVER vote for one of the two major candidates ever again. The two party system has destroyed our country irreparably, and continues to force us into a downward spiral. For those who think this was written by someone on the lunatic fringe, I refer you to the Declaration of Independence - and encourage all to read it again: "When in the course of human events it becomes necessary for one people to dissolve the political bands which have connected them with another.... it is the Right of the People to alter or to abolish it, and to institute new Government."

Sony

Why is it imperative to shut down the tax planning & preparation business? Since we have permanently moved into a service economy, we should be careful about wiping out industries because a group thinks its wasteful and its practitioners should be in more productive fields.

The government clearly butchered the job of creating a fair and easy revenue collection system, but here we are. I believe it a far more benign government form of neglect than having the government select areas of human economy to be shut down.

I understand the obvious difference that tax preparation is in some form government mandated (not all forms, though), but government mandates create multiple economies that seem excessivly complex(food regulation, immigration controls, schooling, travel, etc). Collecting revenues is no less important than those areas, and the government is bringing its normal ineptitude in execution. At least this one creates high paying jobs.

I don't recognize this as a problem not because it would disappear in a perfect world, but because while we live under a massive and imperfect government, why should we spend our shriveling spare time on this matter over FAA, FDA, DEA, NEA and other wasteful government created economic sectors?

W

whenever someone in Washington "gives" us cash, they have to first "take" it from somebody else. They don't actually produce anything in Washington. And, just as they "give" it through the tax code, they "take" it through the tax code.

How does that make the transfer inefficient? if I am willing to bother consistently my representative so I get the distribution, and you are too busy reading becker-posner to call up your rep, then the money goes to the person who values it most.

W

I'm betting most people would prefer to do the 15-20 minute tax return even if they didn't get all of W's "goodies" just so they would have more time to be productive, enjoy their free time or whatever they want to do.

And you bet wrong. Other people, who are betting differently, have the politicians' ear. They have the policitians' ear because they pay more (in whatever form) for it. You are too busy sitting on your duff complaining about filling out simple tax forms. I believe it was Aristotle who noted that politics is the allocation of resources.

Ben, you're an idiot.

W

W - the first time I have seen pork barrel equated with efficiency.

1. Pork barrel is name-calling, not an argument.
2. You don't read much. That might explain why it takes so long to do your taxes.

W

Our most productive people should be encumbered by the tax code because they're productive?

No, the point is they make so much money that it is unlikely they do their own taxes, which means if they are complaining about doing their taxes, they are cheap idiots who are incredible on the issue of whether X is efficient or not.

Davey

Dub,

Well, I?m back after a productive day and I see you?re back, too.

How does that make the transfer inefficient?

The transfer is all too efficient. That?s the problem. Our legislators are painfully efficient at misallocating resources from point A to point B. My concern is not one of efficiency; my concern is for the enormous hole on the eastern shore into which money is poured, never to be filled. Politics does indeed trump reality in this day and age. I don?t know of any way to stop it except to vote to create legislative gridlock. That does seem to slow it down.

No, the point is they make so much money that it is unlikely they do their own taxes, which means if they are complaining about doing their taxes, they are cheap idiots who are incredible on the issue of whether X is efficient or not.


Actually, I don?t think they are complaining about doing their taxes. I live in a fairly high net worth retirement area, and most of them are out playing golf while their accountants do the taxes. The problem, as pointed out by Mr. Becker, is the draining of resources required to comply with the tax code. That time and money could surely be better spent doing almost anything else. Somebody who is savvy enough to become wealthy and spends a couple thousand dollars a year on accountancy could surely put that money to better use than meeting the onerous requirements of our tax code, even if it's just to buy a case of golf balls to chase around the piney woods of North Carolina.

W

Somebody who is savvy enough to become wealthy and spends a couple thousand dollars a year on accountancy could surely put that money to better use than meeting the onerous requirements of our tax code, even if it's just to buy a case of golf balls to chase around the piney woods of North Carolina.

And here is where you and I disagree. We're arguing over distribution, welfare effects, whatever, not whether the thang is efficient. Which returns to my point -- doing taxes is easy for me, why make it harder for me to your benefit? And I'm sure you think those rich-man accountants' fees could go toward better uses -- because you say so, but all that proves is you ain't an accountant. Maybe you have a problem with legislatures preferring opthamologists over optometrists. I don't. And no, sir, taxing under the 16th Amendment ain't a taking. Is Dick Epstein on this bitch? Does he want to comment on my posts too? God damn.

PINO

There is something of a contradiction between the messages of last week on the cost of compliance and of the one before on lobbying. I mean, you can argue that there should be few constraints on lobbying (and he arguments sound strong) and that the costs of tax compliance are high (they seem high indeed) but the second is to a large measure a result of the first. (Almost) everyone with a substantial stake in the tax system tries to change it in his favour without eliminating the overall tax base with as a result a very complex tax system and a not very wide tax base.

Henry Mohrman

The pressure for an efficient tax system comes at the margin from efficient tax systems in other jurisdictions on the globe. The Cayman Islands and Hong Kong come to mind as examples. When efficient tax systems are available on the globe, they exercise magnetic effect on transactions and enterprises that are profitable and are not location specific. A great deal of investment capital has moved from the U.S. to the Cayman Islands, reducing the capital stock of the U.S.

Given a choice, an entrepreneur with a valuable business concept more often than not will place that business in a tax efficient jurisdiction.

Significant costs of the inefficient U.S. tax system include therefore the dimished capital invested in the U.S. and the new ventures not started in the U.S.

These costs go to a significant portion of the wealth of the Nation, and reducing them is necessary to maintain and increase that wealth at the margin.

There are offsetting benefits to the U.S. from the existence of tax efficient jurisdictions on the globe. U.S. enterprises removed to tax efficient jurisdictions eventually can enhance the capital stock of the U.S. if and when their earnings or capital are brought back to the U.S. The government of the U.S. with a huge international float of its bonds benefits from ownership of its bonds in tax efficient jurisdictions. Demand for its bonds increases with an offsetting reduction in the U.S. government's interest expense. There is a huge pool of U.S. government bonds held in the Cayman Islands.

The offsetting benefits from tax efficient jurisdictions to the U.S. are not likely to be of the same order of magnitude as the costs. Thus, on balance real gains in the wealth of the Nation are available from adopting an efficient tax system.

Yes, airhead

I'll give you a compliance cost and a good example of the efficiency of your fellow American. I brought my 1099-R, sent by the federal government, to the office to do my taxes. At least I thought I brought it, black hole between home and office. Not possible to download online. Called OPM to get a copy a month before taxes; only on hold. Realized there were e-mail possibilities. Received reply e-mail in 3-7 days, pin code would be sent a week after 4-15. Went entirely through drawer it had been in at home. Too much stuff. Throw in trash. Good news; duplicate sent. Received 4-14. Bad news 4-21. $3500 charged at one story, $1600 at another, $355 at Chedddar's the previous evening. Altogther $10,000 range. Man wih a goatee with a New Mexico driver's license. Mine, Texas. I'm more known for a bump on my head. At tax time, your fellow American may well go through your trash and, efficiently, profit thereby.

Haris

Good point bringing up the intersection of lobbying and the tax code. One is certainly the effect of the other.

More importantly, it pretty much explains why W's 'idea' that those who are willing to hassle their congressman obviously value the money more and thus should get it. With those incentives in place, there would be no reason for anyone to be productive. Instead, everyone would use their resources to lobby for tax breaks and handout, and the tax base would dwindle quickly with no one working. Try to get tax money redistributed to you then, when there is no tax revenue at all.

The tax code, and actually everything the government does, should encourage the creation of value, not redistribution.

jeff

Dr. Becker,

thanks for your post. some of these comments are especially enlightening. I don't buy some of the class envy, income redistribution arguments here. I do know it takes me a terrifically long time to do my taxes, and I have to devote a lot of storage space just for documentation.

meanwhile, the paper trail that is generated from bank, brokerage, and other statements to satisfy IRS and legal requirements is mind boggling.

I do think we need a revolution of the tax code.
It needs to be based on income, not on lobbyist postions. In looking for a place to put income, and a place to retire, taxes are an integral part of the decision. America is losing vital capital from its tax policy.

In looking at the structure of the code, it penalizes risk taking. It penalizes small business. These are just the things we should be advocating at this point in our countries development.

And if I have to pay that da%$ AMT tax again I might begin to sympathize with the Unibomber!

Thales

One comment that I'd be interested to hear an economist's (and Judge Posner's) perspective on:
Becker aludes to the special interest group sponsorship of the tax deduction for interest paid on home mortgages. This is indeed a type of special interest preference in the tax code, but only because of omission of deductibility of other types of loan interest paid. Consider--when taxpayer takes out a loan to buy, say, a car, the principal amount he borrows is not income. Why? Because the money received is offset by a corresponding obligation to pay it back. The same is true for a home mortgage loan, but the difference is the taxpayer also is not taxed on the income (or can deduct it subject to the 2% threshold anyway) necessary to pay the interest on the loan. Put this way, why not make all such interest deductible? When corporations issue bonds and other debt securities, all payments they make on these to securityholders are likewise deductible. The theory that should treat these situations uniformly is that as loans/debt obligations are not income, neither are the expenses, including interest required to repay them. Such expenses are not "accession to wealth," the Supreme Court pronouncement on what "income" is. Student loan, credit card loan, auto loan, all types of business loan, etc. interest payments should also in theory be deductible. Further, it is my understanding of most versions of the tax code prior to 1986 that all interest was in fact deductible. So for the home loan interest deduction to persist is a special preference, but one that if expanded to its original parameters would have substantial justification. The arguments used by the housing industry in favor of the special preference are silly and self-interested (home prices of course adjust upward to account for likely tax savings, and thus no general incentive for home ownership over renting exists), but the basic theoretical point in favor of the deductibility of interest payments is perfectly sound.

W

At tax time, your fellow American may well go through your trash and, efficiently, profit thereby.

This only proves that the cost of buying a shredder, indexed to inflation, should be included as an itemized deduction or incorporated to the standard deduction amount. Those who choose not to purchase shredders and instead file online should be able to check a box for a reimbursement check.

ben

W - you are confusing arguments over efficiency with concepts of effort and fairness, a fundamental error.

You accuse me of using labels not arguments and then call me an idiot.

Fine. Replace "pork barrel" with "the allocation of public funds according to political influence" in my comment above. Yours is still a wrongheaded argument.

ssr

Dr. Becker, it is gratifying to me to read your original 16 April posting and to know that someone of your intellectual caliber considers our US tax system to be a problem and recognizes the kinds of effort many of us have to exert to comply. If anything, your estimate of 25 hours of effort on taxes is an underestimate. Besides keeping records all year and organizing them at the end of the year, there is time for getting the forms or materials needed to prepare a return. You have to do at least one of three things: collect forms and read the instructions and revisions OR choose, install, and learn a tax preparation software, OR meet with an accountant or tax preparer. It is possible that all three of these steps will need to be done. Then, throughout the year anyone who has to make quarterly payments must keep up with all the calculations required to revise income to determine the amounts of those payments. The smart tax payer also must try to determine changes that occur to the tax laws during the year, revising spending/giving/behavior as required to take maximum advantage of any changes.

However, the time required to "do taxes" is only a part of the problem.

Another problem is that most people don't pay attention to how much tax they pay. Davey, I agree with you that making everyone send in quarterly tax payments would be a step in the right direction in making people aware of the size of their tax bite. And to mvpy--I think you are on target in saying that taxing people easily (as through payroll withholdings) leads to larger government and less efficiency. We certainly are there already!

I am not going to chime in on the price our country pays in lost efficiency, questionable social engineering agendas promoted by the tax code, or income redistribution, but all of those are serious problems. Here is my main point: I am surprised in reading all of the responses that one issue has not been raised, either by the writers who do their taxes in a few hours or by those who have to do more complicated filings. If you get it wrong, the IRS has the power to brand you as a criminal. Sure, you may only have to pay a penalty plus the back taxes, but if you run a small business, for example, your reputation and possibly your company's existence are on the line. No mistake is considered innocent, even though the error may well fall into that category. No one has time to run a business AND understand 66,000 pages of tax code. The IRS has admitted to not understanding the tax code--how can anyone else? That's why there are tax lawyers and tax approaches based on interpretation of court cases. The whole system is scary, and we all should worry--even those of you who do 1040EZ--or whatever it is called now.

W

BEN THE IDIOT: you are confusing arguments over efficiency with concepts of effort

Someone who thinks that effort categorically has nothing to do with efficiency is an idiot. Calling you an idiot is not name-calling, it is a statement of fact.

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