Naive question about reforming US taxes

Great Debates
1

First of all, mods and admins, I’m sorry if this thread is in the wrong forum, but I wasn’t quiet sure where to put it.

Since I’ve never heard this brought up, I’m assuming that it must be a really bad idea, but I’ll ask about it anyway, because I’m a glutton for punishment. :cool:

Why do taxes need to be yearly? Why can’t they be based on every time you get paid? Keeping with our current progressive tax system, it could look something like (and I’m pulling numbers out of thin air here) if you get a $1,000 paycheck, you owe 12%. If you make $3,000 you pay 15% (or whatever the tax rates would be)

Granted, not everyone gets paychecks, some CEOs, like the ones who famously state that they only get paid $1.00/year, or something ridiculous like that get their money from owning stocks. OK, no biggie, every time the sell some stock to make some money, tax them on that. Actually, any time anybody sell stock, tax them on it.

The reason I’ve thought about it is, in debates on how to simplify that tax code, I’ve only heard that we should either go to a flat tax, or a national sales tax, but with this way, things would be simplified because you wouldn’t need to file W2s at the end of the year. Never worry about owing money, although you’d never get a refund either, because you’d know that you paid exactly the right amount of taxes, because it would be based on each paycheck that you earned and/or each stock that you sold, or, if you make money some other way, that would get taxed right then and there, so you wouldn’t have to worry about it at the end of the year.

So anyway, I’m guessing this probably wouldn’t work. Why not?

2

Whoops, a W2 is what you get, a 1040, or similar is what you fill out at the end of the year of course :o

3

I’m guessing one reason is because you’d have to lay off nearly an entire bureaucracy, and of course, you can’t have that. :wink:

4

How would you do that?

5

This assumes that everybody gets paid at a steady rate throughout the year. Suppose you make a living shoveling snow. You make $3000 a week for the first three months of the year and get taxed based on whatever rate a $156,000 annual salary pays. Then in April, you stop getting paid and your actual annual salary is $36,000. Meanwhile the guy who gets paid $1500 a week all year paid less taxes even though he earned $78,000 annually.

6

The same way you would under our current system.

7

When I was in either JR High, or High school (it’s been a while, I foget which), one of the arguments against simplifying the tax system was that it would put a lot of accountants out of work.

8

If there were a flat tax with the same percentage from $0.01 on up this would work, but even with your simple example it fails. I work 3 jobs and each pays me $1000 per paycheck. I should be paying 15% of the total ($450) right? But instead I’m only paying $360. Also, would there be a distinction between those that get paychecks twice a month and once a month? Would bonuses be allowed to be prorated?

9

Using a rate of 15%, yes, you would be paying $450 I suppose. So you’re saying that, at least under our current progressive system (which I don’t like) you’d end paying more per paycheck than per year. Good point.

As for once a month, or twice a month, since this is per paycheck, each check would get taxed individually.

And why would bonuses get prorated? You get the bonus, minus whatever the precentage for taxes is, and that’s that.

10

It is more likely that we pay taxes “annually” (although they are collected throughout the year) because the government (and the corporations doing the accounting) need to be able to compute tax withholding, track taxes sent to the government, and estimate future taxes in ways that can be reconciled with annual budgets.

11

So since a national sales tax wouldn’t have people paying annually, but simply for every purchase, would there be a problem reconciling annual budgets?

12

Probably not. But I am not arguing a particular position, only pointing out the more probable answer to why we currently pursue the policy in place, with all its adjustments, deductions, credits, etc. that make an annual practice more logistically feasible.

13

You mean something like Pay As You Earn (PAYE). The system we have in the UK.

14

One tax reform idea that’s intrigued me is the APT Tax, which would exact a fractional percentage tax on all automated payment transactions. This means not only wages/salaries and sales transactions, but all other transactions in the economy including fund transfers between accounts, the exchange of bonds and securities and foreign exchange transactions. Because this dramatically broadens the tax base, it correspondingly reduces the individual tax burden felt by wage earners.

The particular proposal linked is a “revenue neutral” proposal to generate only the same revenues which are expected for the taxes it would replace. Although there are some possible downsides***** to this tax, it’s quite well researched and reasoned, and I’ve been unable to come up with any reasons it wouldn’t work. -I invite other critical analyses, however.

*****[sub]The main potential negative listed by the author of the proposal is “public insensitivity to the expansion of government and commensurate regulation” due to the painlessness of the tiny increases in marginal rates which would yield relatively massive increases in gov’t revenues.[/sub]

15

So you would be taxed on your presumed tax for the year? Then any change in your pay during the year will result in over/under payment. Little Nemo did a good job with seasonal work. Here’s a couple more examples. You make $1000/mo (12% tax). In January, get your yearly bonus of $2000 for the entire year (based on last year profits) but your tax is now (15%). Since your bonus is one-time, you should be taxed as if you were making $1166.67 every month.

What if you get a raise? Minus the math, a linear growth rate in the tax percentage would make no difference but assuming the growth rate is not linear (for example, current taxes use a step function) you’ll end up with a case of someone making $48000/yr @ $4000/mo paying more or less tax than someone making $48000/yr @$3500/mo the first six months and $4500/mo the last six months.

16

Another argument against the OP’s proposal is the current American income tax system’s use of filing statuses (ie married filing sep, married filing joint, single, head of household), plus dependency exemptions and itemized deductions. One reason people support the current tax system is because they think they’re getting a tax break by paying mortgage interest and by making charitable contributions.

17

Wouldn’t it be easiest, at the end of the year/six-months/whatever, just report your income, regardless of form, and get taxed based on living status (married, single, whatever)?

This eliminates the whole “snowshoveller” problem.
You could still include write-offs.
Or maybe it’s just because i’m young and naive.

18

No, that would defeat the whole purpose. A new system would have to be devised.

Nope. If a national sales tax was passed, there would be no such thing as over or under paying the government since the tax would be based on each purchase, so I’m sure a way could be devised to have a tax on your income, that wouldn’t result in over paying or under paying because it would based on each payment.

Each $1,000 check would have its own tax. The bonus would also have its own tax.

Well, I did ask for criticism and it looks like I’m getting it. :slight_smile: I guess the only defence I can offer is that, our current system also has some unfairness, but at least under my plan, while you still might have some unfairness, at least you’d be rid of the hassle of filling out 1040s and/or other tax forms at the end of the year, or paying money to an accountant to fill them for you, and you’d never have to worry about underpaying taxes and having the IRS breathing down your neck.

19

Holy crap, why did it take me this long to read my typo
“Naive question about remorming US taxes” ?
Guess I’ll ask a mod to fix it.

20

Not sure, I’ll have to check out the link.