Why do we have to go through the annual (or quarterly) pain of taxes?
After all, investing would be so much easier if the IRS wasn’t watching our every move.
Most Americans regard taxes as a kind of necessary evil.
We don’t like the government snooping in our business, but we also use some of its services.
We have to pay for them somehow.
The bigger question is whether we are getting our money’s worth. Sure, we send the IRS zillions of dollars every year. But what does Uncle Sam do with it?
The chart below has your answer, courtesy of the National Priorities Project. It breaks down each tax dollar by the way government spends it.
Social Security is missing because it is (theoretically) self-sustaining via the separate payroll taxes. The chart includes expenses that don’t have their own dedicated funding source.
Shockingly, just three categories account for more than two-thirds of government spending:
• 27.0% National Defense
• 26.5% Health
• 15.3% Interest on Federal Debt
Together, these consume 68.8 cents of every dollar in taxes we pay. Everything else is relatively minor.
This is important because the “out of control spending” we all gripe about is actually small potatoes. Foreign aid, food stamps, low-income housing, and all the rest get very small pieces of the pie. You could zero them out completely and government spending would be still be massive.
The Pentagon and Medicare are the main budget-busters. Mathematically, any serious effort to reduce the size of government would mean having to cut both of them. Yet no one in power will even try.
Until they do, we will be stuck with the IRS.
American businesses that also do international business have an advantage over most individual taxpayers. They can keep their non-U.S. profits overseas and avoid paying U.S. taxes on them.
Our largest corporations take full advantage of this loophole. Check out this chart from Statista.com.
Add up the numbers and you’ll see these 10 corporations alone have $477 billion in untaxed cash stored outside the United States. They might have paid local taxes in whatever country they earned it, but they haven’t paid the IRS anything.
I expect companies to do whatever they can legally to minimize tax expenses. The real problem is that U.S. tax policy forces them to make economically irrational decisions.
In the end, that isn’t good for anyone.
I asked above if there was some way to simplify the whole tax process. It turns out there is. Yesterday’s New York Times has an interesting idea: Let the IRS prepare your tax return for you.
The reform plan would work like this: Today, employers, banks, brokerage firms and pretty much every other financial organization in the country send the federal government detailed records about our economic activity every year. These organizations also send you, the taxpayer, a similar set of documents, which are forms with names like W2 and 1098. After you file your taxes, the government matches its two sets of documents to make sure you have filed correctly.
To Mr. Bankman, this double documentation doesn’t make much sense. If the government is already collecting financial data from employers and banks, why can’t the I.R.S. use that information to pre-calculate our tax returns for us? At the very least, why can’t tax software just connect to the government’s database to download all the information that the government has collected, saving us all that record-keeping and data entry?
“Imagine if your vehicle registration fee was done the same way,” Mr. Bankman asked in a recent interview. “Imagine if the state said, ‘Go to your car, find your VIN number and then look at this table that has different tax rates to find out how much you owe.’ If they did, people would probably need to hire an expert for that too.”
This idea has some flaws — mainly being that the IRS would still have its nose in everyone’s wallet. Still, imagine how it would stimulate the economy if everyone could put all those hours of tax preparation to more productive use.
New York Times writer, Farhad Manjoo, found that the main opposition to the idea came from Intuit (INTU), which makes the TurboTax software many taxpayers use.
Simplifying the process would hurt Intuit’s business, so the company has spent millions lobbying against such proposals.
I imagine many accountants and tax preparers would feel the same way.
What do you think? Are we stuck with this crazy tax system forever?