Is it possible to reform the current US tax system to eliminate the need for filing of W2s?
Of course there’s the flat tax idea, but since some of you, and apparently even Cecil, has bashed it, I’ll eliminate that option from this discussion.
So then, what other ways could you change the tax system so that the government knows that it took out the right amount of taxes the first time, saving us the trouble of having to fill out forms to see if we owe, or if we’re owed money?
The only thing I can think of, is change the system from an annual one, to a one where what you pay is based solely on what you make each time you get paid. Weather it’s in money or stock, or whatever. But I know that things are more complicated than that, and I’ll get a host of reasons why that could never work.
Nore that a national sales tax would be incredibly regressive, as the more well-to-do save/invest a higher percentage of their income/wealth, and so (on a percentage of income/wealth basis) would pay less taxes than thelr less well-to-do counterparts. In fact, the poorer you are the more taxes you’d pay on a percentage basis.
Their idea is that low income people would get credit for all the sales tax they paid during the year. How one would keep the hundreds of receipts i dunno, but thats what they say.
So now we have a national sales tax with the low income folks saving all of their sales receipts and having to use them to fill out tax forms, the middle-class ending up paying the bulk of the taxes and the more well-to-do (like me) paying a lower percentage of our income/wealth on taxes.
Would it TRULY be regressive if it applied to all purchases?
Sure, the better-off save a more significant portion of their income. But a lot of that savings is made through purchasing saving vehicles like stocks and such. If each of those purchases came with an 8% (or whatever) tax would that balance out?
Given the pressure the government is under to improve the ratio of saving/investing to consumption, declaring all investments as “purchases” and taxing them on the way in (as opposed to on the way out if a profit was involved as it’s done currently) doesn’t seem likely.
However, let’s assume that the government decides that making investments are “purchasing” and taxes them the same way that all other purchases are taxed. What did we just accomplish here? We’ve declared that every dollar you earn “purchases” something, and we’re going to tax all of our “purchases” at the same rate. Looks like a flat income tax to me - except with a lot more paperwork. Instead of one tax receipt per paycheck, we have one every time money changes hands.
(BTW, even though it gores my personal ox, I’m in favor of a progressive tax system. It’s just a simple fact that the wealthy are more able to cover a higher percentage of the bill than their less wealthy counterparts, and I’m in favor of a system that effectively “hurts” everyone evenly.)
To go with the national sales tax, how about a national purchase card? Like a discount card in a supermarket. You swipe your card and it keeps track of all your taxes/expenses paid and with a card reader at home, you can check out all that data and keep track of your spending. Now you don’t have to keep track of receipts anymore.
This is a longshot but a real proposal with more than a pipedream’s chance of passage.
The beauty of a value added tax (VAT) is that is largely self-enforcing. At each step in the manufacture of a product, the person adding value pays tax on teh total price less what he can document in costs - therefore, if you buy an input such as lumber and agree with teh lumber merchant to buy the lumber “under the table”, then you can deduct the cost of your lumber in computing the tax on your finished piece of furniture.
A VAT need not be regressive. The Fair Tax folks are proposing a tax that includes a significant exemption for living expenses - something like $30-50,000 per family. So there would be a mechanism where tax would be paid only to the extent one’s consumption exceeded this amount.
And to be precise, terms like regressive and progressive should not be used. These terms include a value judgment that assumes that a proper function of the federal tax system is to redistributer wealth.
What is amazing to me about the VAT or any consumption tax is that it is estimated that the tax would only have to be 17% to 23% in order to be revenue neutral, and this would replace all other federal taxes such as the income tax, estate and gift tax, payroll taxes, etc. Of course estimates vary and the devil is in the details, but the point is that numbers-wise such a tax is more than feasible.
Still, there are numerous special interests that are beneficiaries of the current tax regime, from mortgage lenders, home builders, charities, tax lawyers, etc to name the tip of the iceberg. What is ironic is that charities are very much opposed to it because they fear a loss of revenues if the charitable deduction is eliminated (through simplifying the tax code). In fact, IIRC, when Dick Armey was proposing a simplied tax code even his proposal retained deductions for mortgage interest and charitable deductions.
I remember discussing the fairtax system on another message board a few months ago.
My main points against it revolved around two potentially large loopholes:
Underestimating the effects of a cash-based ‘black economy’.
A likely proliferation of setting up of ‘shell’ businesses for the purpose of tax evasion.
If you look at a tax system as a big net, designed to ‘catch’ resources, then it seems evident that to avoid large ‘loopholes’, you need a fine mesh (i.e. a complicated system).
Try as I might, I cannot seem to gat an answer from the National Sales Tax proponents about two issues: 1) How money (i.e., savings) that I have in the bank is treated, and 2) How my Roth IRA is treated.
It seems in the first case, any saving I have in the bank has already been taxed once under the Income Tax, and a switch the a National Sales Tax would be double taxing that money, right? If I had, say, $50,000 in the bank, I’d need a $50,000 exemption from the National Sales Tax as I spend that money.
In the case of the Roth IRA, I’ve selected an investment vehicle and commited (after tax) funds to it with the promise that the earning will not be subject to income tax when I meet the requirements for withdrawal. Again, I’d need another exemption to the National Sales Tax, or else I’ve just been had by Congress.
By the way, the proponent of the National Sales Tax that has yet to provide an answer is Congressman Steve Pearce, (R-NM), who is sponsoring such a bill. I sent a letter to him about two months ago asking about the two issues I’ve outlined above. A follow up call to his office has so far resulted in nothing. I’m interested in what he has to say about it. Until then, do any Dopers have an idea how savings and Roth IRA’s will be treated?
I spoke to soon. A spokesman from his office just called (and he did have a copy of my original message). He tried to convince me that the new system wasn’t any different than the current system in that interest from savings would be taxed when it was spent. I explained to him that I understood that, but I was asking about the initial savings amount being taxed again when spent, not the interest. He tried to explain again about the interest. After a few rounds of this and some discussion about the Roth IRA, he finally admitted that the new ‘Fair Tax’ law was far from perfect. Duh.
What I really wanted to know was if the Congressman had any solutions for this problem, or if he was supporting legislation without any concern for the unintended (but reasonably foreseen) consequences. I think I know the answer to that now. I should have asked the spokesman if Pearce will withdraw his support of this bill if these problems are not addressed. Maybe it’s time for another letter…
Well, if there was simply an overall VAT- with just food non-taxed, the % would be something like 20%. And that would ONLY replace Income tax- not Social Security. I haven’t seen any realistic plans that would replace SS (i.e “Payroll tax”). For most of these taxes- without some wierd and impossible to enforce- exclusion- those of us in the Middle Class would pay more. Lots more. We’d HAVE to, since the rich would pay lots less, and they shoulder a large % of the tax burden right now.
Next- as ferris points out- when you combine a 20% national Sales or VAT with a State sales tax of 8%- you have 28%- and anytime a tax gets much over 14% there is huge non-complaince. Thus "flea markets’ everywhere, and plenty of “jack booted thugs” to stop them. The underground economy would boom. Thus they have to raise the tax- which would cause more non-compliance, which means the tax would have to be raised…
Show me a major Western Industrialized nation that doesn’t collect any Income Tax and relies wholey instead on a VAT. :dubious:
Now, what we could do is have a 10% VAT, and increase the Standard deduction by a LARGE AMOUNT so that it’d be Revenue Neutral. Most Middle class dudes wouldn’t owe any Income Tax then.
