Sunday, April 15, 2012

What’s the Easiest Way to Cheat on Your Taxes?

Click here to read this NY Times Magazine article. The easiest way is:
"Run your own company. More specifically, as Greg Kyte, a Utah C.P.A., puts it, be the sole proprietor of a Schedule C business. Then you can buy stuff for yourself and probably write it off as a business expense."

Other excerpts:
"When the modern income tax was created in 1913, the code was 27 pages long. Last year, it was 5,296 pages."

"“I’ve seen people with infant children claiming that their kids are doing work,” says Howard Rosen, a St. Louis-based C.P.A. “I’m talking about a 3-year-old doing filing,” Rosen says. “He didn’t even know the alphabet.”"

"For 2006, the most recent year for which data are available, the I.R.S. collected 86 percent of what it was owed in taxes. Most of this $385 billion shortfall came from underreporting income, which is often more creative than it sounds. Gambling winnings, for example, are taxable..."

"Loop­holes will cost the gov­ern­ment rough­ly $1 tril­lion in lost rev­e­nue this year..."

"The mortgage-interest deduction, which lets people deduct the interest they pay on their mortgages, requires the government to essentially write an annual check to everyone with a mortgage. The incentive was supposed to encourage more people to buy houses, but there’s not much evidence for this..."

"It does, however, encourage people to take out even bigger mortgages. It will cost the government an estimated $84 billion this year."

"Why is the tax code so complicated? The answer, according to most accountants, is simple: “exceptions to the exceptions,” which, typically, are extremely complicated."


Anonymous said...

do you believe the tax system is up to par? Also what do you feel about the progressive taxes currently in place? Would the Buffett Rule help?

Cyril Morong said...

Thanks for reading and commenting. You might find this article interesting and informative. It will tell you about how progressive our system really is (yes it is progressive)

One thing to remember is that although capital gains are only taxed at 15%, we have a corporate profit tax rate of 35% (it is often less due to loopholes and legal deductions-last year it was only 12% due to them).

But if a corporation makes a $100 profit, it pays at least $12 in taxes (this will go up in the future as special deductions meant to help out in the recession go away). Now they send me a dividend check for $88. 15% of that is $13.20. Then 88- 13.20 is 74.80. So that is $25.20 less than $100 or a 25.2% tax rate (and this % will be higher if we use a higher corporate tax rate).

Is the system up to par? That depends on what we are trying to do. You might look up something called the Ramsey Rule for optimal taxation.

Our policy goals are low unemployment, low inflation and high GDP growth. The tax system needs to serve those goals. We are not necessarily trying to maximize tax revenue. But in the long run, we want the tax rates to be about the same year in and year out. We don't want to have them very low for awhile and then very high for awhile (this involves things like deadweight loss and social welfare that would be too complicated to explain here)

Anonymous said...

I appreciate the follow up and I will look into the article and Ramsey Rule (which is theory based i'm sure). Thanks for the clear and succinct explanation.

Cyril Morong said...

You're welcome.

Cyril Morong said...

I forgot to mention that I have read that the Buffet Rule will only raise about $5 billion a year

Anonymous said...

on your last comment of only 5 Billion. Are you saying the marginal revenue is not worth it for only taxing the rich higher? Do you perhaps think we should pay 30% or more across the board to make the MR worth it?

Cyril Morong said...

I am just saying that $5 billion dollars will not solve the problem of a $1 trillion deficit. It is hard to know if any tax is worth it. It also depends on what we spend the money on and we don't do cost/benefit analysis for all government spending. But taxes do harm economic efficiency and every 1 percentage point increase in taxes does more harm than the last one. To get an extra $1 trillion in tax revenue, we would need to take an additional 6% or so out of a GDP that is over $15 trillion. Not sure how that translates into as far as the increase in income tax rates goes. But that would ignore any lost output due to negative incentives