Monday, April 23, 2012

Taxation in the United States

Yeah, it's a mess.  While we're far from alone in having a screwed up tax system, it's the one I deal with so it's the one I care the most about.  All this talk of the Buffet rule lately got me thinking about it, and apparently I'm in the mood to write today :-)
First and foremost I want to address the whole 'the rich should pay their fair share of taxes thing'  I'm all for everyone paying their fair share, but before we go blaming the person following the rules, shouldn't we look at the ones making the rules?  Our system is designed to reward people for doing certain things (giving to charities, investing in business, etc) by giving them breaks on their taxes.  I'm not saying it's right, just that it's the way it is.  Then we get politicians, the ones in charge of making the rules, complaining that certain people, by following the rules the politicians made, aren't paying enough taxes.  That is NOT to say every wealthy person in America does follow the rules and pays everything they should, but it's likely that a good chunk of them do their honest best to follow the law.

So, personally I call it 25% the rich, and 75% the politicians. Everyone has their own bias on where that should fall, and I'm not really here to debate that particular point, mostly throwing it out so you know where I'm coming from.  What gets me about the Buffet rule is that it sounds like a brand new version of the alternative minimum tax, a program that has caused a great deal of trouble for the Government because it was never set up to deal with inflation, requiring Congress to act almost every year to keep it from targeting people it was never meant for.

So, I'm sitting here blasting the idea the current administration has come up with to fix things, without offering up my own plan.  Not really fair, is it?  Personally, I feel it's a really simple fix, but one that will probably never happen.  Toss the deductions out.  Each and every last little thing has to go.  If there's a way to hide money from the tax man, someone smarter then the people writing the rules is going to come up with a way to exploit it.  Balance out the corporate income taxes so income and dividends are taxed the same, that way the decision becomes a mater of what is best for the company and the shareholders, not what gives them the best tax advantage.  I'd even go so far as to say withhold the tax from the dividend payment, just like you do on someone's paycheck.  As far as double taxation on dividends goes, just tweak things so dividends paid comes out of net income.  Since they're taxed the same, it's a wash, the government gets the same money anyways, and if we withhold the tax from the dividend it's even from the same entity.  Simplify the tax code down to 'You pay X percent of your pay up to this point, Y up to this, Z on anything over then this.'  Take the money right out of the paycheck, make it the same as the corporate tax and any advantage of paying CEO's in stock options or other ways of hiding money vanishes.  After all, if they're going to be considered 'people' legally, shouldn't they be taxed that way?

Push comes to shove, the more complex a system becomes, the more ways there are to exploit flaws in the design.  Ultra simplification of the tax code like I've described would limit the Government's ability to encourage certain behaviors, but frankly I rather think that's a good thing.  The reaction time of a Republic is simply too slow to be effective at driving things either market wise or socially, and that's giving the political class credit for being able to come to a correct decision, something I personally have serious doubts about. Is this a complete plan?  No, not really.  I'm sure better minds then mine would come up with other points that would need to be addressed before this could be implemented.  It is, however, a start, but sadly I doubt anything like it will even be considered before it is far too late.

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