The Results of a Complicated Tax System

The Obama Administration loves to sing the praises of "transparency," but finding such in any aspect of our government is difficult to say the least. Recently the Internal Revenue Service started to bang the drum on the importance of reducing errors and fraud by placing pressure on tax preparation services like H & R Block. These companies are taking the blame for poorly filling out forms that really need to be simplified. Steve Malanga, editor for Real Clear Markets and a senior fellow at the Manhattan Institute believes that the end of errors could be found in the act of simplicity.

There is, of course, the old joke where we get a two line tax form. The first line asks, "How much did you make last year?" Second line, "Send a check or money order for that amount." That would be simple, but it would also not work because we would all either stop working or become liars about how much we make. However, this joke does put us in the right direction, according to Malanga.

The vast majority of the modern economies are moving rapidly towards a "flat tax" as a way of guaranteeing a predictable amount of revenue coming in, avoiding the punishment of individuals for earning more income (with a flat tax people pay more if they make more, but it is not in punitive way), and to eliminate the problems of complexity.

How complex is our tax code? According to Malanga, some 80 percent of households now use tax preparers or software to complete their tax returns. Furthermore, we spend 7.6 billion hours on tax compliance, according to the IRS Taxpayer Advocate, which in turn costs nearly $200 billion a year.Over the past decade (since 2001), Washington initiated 3,125 changes to the tax code, or more than one a day. Malanga refers to one recent study that ranked the U.S. tax code 122nd in complexity among 175 nations worldwide. This happens because political forces have decided to use our tax code for social engineering rather than for raising revenue. Any time a politician says he or she wants to promote policies that encourage home ownership or energy savings, they want to do so in the context of changing the tax code to encourage such. This only makes the tax system more complicated.

The system is complex, both for the taxpayer and those who prepare forms for them. A flat tax would be an improvement, although it is still a tax on wealth creation, which makes no sense for any country interested in promoting opportunity and growth. A sales tax would be better still, because it would be a simple tax on consumption. If our government did the things it is allowed to do in Article I, Section 8 of the Constitution, a very modest tariff, like our Founders intended, would be sufficient. But simplicity with either a flat or sales tax would move us in the right direction.

Kevin Price is a syndicated columnist whose articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media. Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.

People in New York are Voting with their Feet

Politicians keep telling us that the rich need to "suck it up" and throw in well beyond their share. They tried this in Maryland and it has resulted in a drop in revenue that is comparable in their tax rate increases. A recent study from the Empire Center for New York State Policy is showing that the state is suffering from a similar fate.

The authors of the studies -- E.J. McMahon and Wendell Cox -- point out that between the years 2000 and 2008, there was a departure of 1.5 million people, mostly from New York City, with destinations that were safer for finances. Proof that money was a major factor in the decision making is seen in the income groups that have been coming and going from the state and the impact it is having on the budget.

According to the study, the families that have been leaving have income levels that were 13 percent higher than those arriving to the Empire State. In Manhattan and the New York County area, the impact was even more profound. Those leaving the Big Apple had an average income of $93,264, which was approximately 28 percent higher than those who were arriving (which made $72,726 on average).

The real injury is not so much in people, but in revenue. According to the study, the trade off in the income groups of those arriving and those leaving translated in a lost $4.3 billion in taxpayer income. Add that to the other years in the study (2001 through 2008) and it adds up to a devastating $30 billion.

The authors of the study are some what cautious in their approach and do not attempt to single out a particular reason for the mass departure, but the Wall Street Journal places the state's and city's excessive tax rates. Citing the Tax Foundation, between the years of 1977 and 2008, New York was consistently ranked first or second for having the highest rates compared to the rest of the country. During the years covered in the Empire Center Study, New York's taxes ranged between 11 and 12 percent of income.

Taxes reach its highest level in 2004 saw a high in departures in 2005. That year, the state lost approximately 250,000 people who moved to other parts of the country. Meanwhile the state has passed another massive tax bill that likely lead to people leaving the state as they vote with their feet.

There is an old saying, "the more you tax something, the less you get of it. The more you subsidize something, the more you get of it." New York is committing economic genocide, through heavy taxation, on its most affluent residents. The result, ironically will be fewer tax dollars and a decidedly poorer state.

Kevin Price is Host of the Price of Business, the longest running show on AM 650 (M-F at 11 am) in Houston, Texas and on AOL Radio. His articles often appear in Chicago Sun Times, Reuters, USA Today, and other national media. Steve Moore of the Wall Street Journal calls Price the “best business talk show host in the country.” Find out why and visit his blog at www.BizPlusBlog.com and his show site at www.PriceofBusiness.com. You can also find Price on Strategy Room at FoxNews.com.

Only Barack Obama Could Pull this Off and it Would Cure Economic Woes

Every week we here of increasingly higher jobless numbers and policy makers are dumbfounded as to what to do about it. Approximately one year ago we had virtually full employment at around 5 percent unemployment. At current trends, it will likely be ten percent or higher by the end of the year, unless something miraculous happens.

However, we are not hearing about any stroke of genius, but rather traditional government "solutions" to economic problems. We are hearing about "make work" programs and "bailouts" that have government at the center of the solution. It is interesting that Barack Obama, who was marketed as an agent of change, would find his solutions in the waste bin of government created work, for answers. He needs to go deeper, he needs to pursue an entire paradigm shift.

Obama campaigned as a candidate who supported transparent government, but there is nothing more deceptive than our current tax system that discourages wealth creation and places businesses in the role as tax collector. Remember, businesses don't pay taxes, they are merely tax collectors. Taxes are a fixed cost of doing business. If taxes on businesses were eliminated, consumers would enjoy the savings over night because businesses couldn't afford to be reluctant to transfer the savings due to competition. These taxes on businesses are the single force undermining job creation today. They force businesses to find countries that are cheaper for doing business, be it in labor, taxes, or other factors. Currently, the US has the second highest tax rate of any industrialized country in the world and we do not even want to compete with cheap salaries (nor can we). Eliminating dishonest business taxes would restore some transparency to government and create many more jobs. It is as simple as that.

But those taxes would have to be replaced with others and the only honest place to raise those revenues are directly on the people and on their consumption (rather than income), however challenging to pursue. This is contrary to Obama and the Democrats class conflict philosophy, but it is the most honest, efficient, and the least damaging on all job creation (in fact, it would generate more jobs). Obama could make history with these realities.

No one, but an anti-Communist like Richard Nixon, could open relations with the Chinese. If any President who had a history of being "soft" on Communists open these doors, they would have been denounced and dismissed. Nixon brought an element of surprise that made the move possible. So, too, was the case with Bill Clinton who truly did end "welfare as we know it." It took a progressive Democrat to break the cycle of poverty that was holding the poor hostage. If a Republican President had proposed such a policy he would have been dismissed as being "cruel" and "heartless." To change our tax code towards a consumption system would require a similar element of surprise and would need to be done by someone who has promoted himself as a champion of the poor. That describes Obama very well.

With such a policy, the only serious challenge he would face is among his fellow Democrats in Congress. However, if he continues to pursue policies that destroy jobs, he will likely have a Republican Congress in 2011. This is a similar situation that Bill Clinton had in the 1990s in which a Republican Congress played a role in getting his reform passed. Clinton's welfare reform is one of the greatest policy achievements of the second half of the 20th century. A change in the way we collect taxes by Obama could be one of the greatest policy achievements of the 21st century and it is one many would love for him to seriously consider. Especially those facing unemployment.

Kevin Price is a syndicated columnist whose articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media. Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.

April 15: Countdown to T-Day

It is that time of the year again when business owners acquire ulcers, CPAs go underground, and all of us largely lose our cool. The reason for it is April 15th, which is tax day! The day that all our procrastination and failure to plan come back to haunt us. I have friends that I don't even talk to between now and around a week after the big day. They are either too miserable to deal with or are completely detached with what is going on around them. I'll wait until after the tax season for them to check back in.

Wouldn't it be great if April 15th was just another day? That is the exact objective of an organization called Americans for Fair Taxation, which wants to replace our current income tax system with a sales tax. Take note, the word is replace, not supplement. This is an idea that I have supported for quite some time and commented on it often in this blog. The advantages to it are numerous and significant:

* It would dramatically reduce the cost of doing business, making the US a magnet to attract companies from around the world that is comparable (or greater) than the affect that cheap labor has had on the world economy.

* It would greatly reduce tax fraud and would force criminals and illegal immigrants to contribute to our tax system through their purchases.

* It would get more Americans participating in the tax system than the current system that is punitive on those who are the most productive. However, it also has mechanisms to protect those who are truly poor.

* It curtails the abusive powers of the IRS.

* It would lead to enormous economic growth in virtually every area, including for those many believe would suffer if the income tax system was eliminated. Home building would explode and CPAs would be needed to plan business growth and expansion instead of mere defensive measures.

The time to change the system is now. The reasons to do so are really unlimited.