Imagine No Deductions

3.8 Million.  That is the number of words in our current tax code, according to Taxpayer Advocate chief Nina Olson.  Americans spend 6.1 billion hours every year preparing their tax returns.  Tax preparation requires 3 million full time professional tax preparers and 89% of Americans either use a professional or spend an average of $50 on tax software.

Do you prepare your own return?  Should you be able to prepare your own return?  I think we can all agree tax preparation is way too complicated.  Some have proposed a Fairtax, which would be like a national sales tax.  There are other proposals to fix and shrink our tax code.  Olson proposes something much more similar to what I have advocated for a few years now.

The Taxpayer Advocate Service points out that many Americans have an effective tax rate far below their actual marginal rate.  For example, an American in the 25% tax bracket may only pay an effective rate of 9% because he has more than $15,000 in income excluded through various deductions and credits.  Olson argues that we could reduce tax rates significantly by consolidating the tax code and getting rid of all those various credits and deductions.  So who is standing in the way?  She says you are.

She’s right.  Obama’s debt panel came to the same conclusion, but could not get enough votes to send their proposal to Congress.  Let’s test this theory.  What would you say if your congressman got up at a townhall meeting and told you he was going to vote to get rid of the mortgage interest deduction?  What about the child tax credit?  How about credits and deductions for education?  What about charitable giving deductions?  Chances are, the crowd would turn into an angry mob before he could even mention lower marginal tax rates.

So far that has been the case.  Americans on both sides of the aisle are unwilling to sacrifice their credits and deductions for a simpler, revenue neutral solution.  But it’s not just Americans who want to hang on to behavior based tax reduction.

Lobbyists, and by extension the government, would hate to lose the ability to increase or reduce your taxes based on your behavior.  Right now the government can reward you for going to college, buying a house, being a teacher or performing artist, saving for retirement, having kids, working and getting childcare for those kids, working even if you can’t make a lot of money, making energy efficient improvements to your home, buying health insurance, buying energy efficient vehicles, giving to charity, paying union dues, adopting kids, hiring people who can’t get jobs ever since they raised the minimum wage, and so much more.  They can penalize you for taking early retirement distributions, not buying insurance, and of course, making too much money.  The government has more control over your personal life on your annual tax return than through any other venue.

Olson proposes a zero-based budget where we start with nothing and add back only the credits and deductions that Congress considers absolutely necessary.  Then consolidate the tax rates into two brackets.  Here’s the problem, if Congress didn’t think those credits and deductions were necessary, they wouldn’t have enacted them in the first place.  No Congressman is going to proudly announce that he voted against a tax deduction for teachers who pay for supplies out of pocket, or a credit for a student who goes to college.

The constitutional solution is a tax that is fair and equal for each individual.  It is a tax that does not reward or punish individual behavior.  It is a tax that does not take into account relations, status, and is flat based on income.  If you want a simple tax system with a return that you can file yourself with a pencil and a calculator, you will have to kiss your credits and deductions goodbye.

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1 Response to “Imagine No Deductions”


  1. 1 Stephanie Sharp March 23, 2011 at 2:31 pm

    I agree with this. Let’s get rid of the lobbyists influence in the tax code. But the best solution is one where the tax should be based on consumption and not income. Let’s enact the FairTax (HR25). It gives each individual control over when and how much they pay. It moves taxation from productivity, moves it away from savings. Plus it eliminates the IRS.


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