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I started listing the various taxes Americans pay, but gave up rather quickly. It’s a long list and some of them are a bit obscure like hotel room taxes, taxes on phone bills, a tax on scrapped tires and such. Of course there are Social Security and Medicare taxes as well. I paid $98,080 in Medicare taxes during my working life – one of those big scary numbers. 😎
What the US doesn’t have is Value Added Tax (VAT) – national sales tax – common in many other countries at 18% to 25%. Many Americans are surprised to learn the US is one of the lowest taxed countries in the world – and near the top in accumulated debt.
Few people like taxes, but most of us – far from all – understand the need for taxes and what they provide – it too is a long list. No doubt there could be a lengthy discussion on the fairness of taxes though.
Social media posts demonstrate interesting views at times.
“Why should I pay taxes on my home value? I’m 65, why do I pay school taxes? Why is any of my Social Security taxed? I heard billionaires pay less in taxes than teachers – yeah, I don’t think so. Taxes are a ripoff. Why is my 401k taxed as ordinary income – good question? I paid for Medicare in payroll taxes, why do I have to pay a premium?”
Here is a recent favorite of mine. “Making retired folks pay taxes while lazy college grads get free money is the most un-American thing imaginable!”
To muddy the waters, current rhetoric talks about not taxing certain income like tips and taxing what is earned but only on paper, not realized. When I hear that concept I wonder what happens when the market turns upside down.
Taxes create revenue for governments to provide the things we need and want. They sometimes are designed to motivate certain behaviors, to give more disposable income to lower income citizens.
Changing our behavior is a big part of what taxes do, but there are consequences. Sometimes that behavior can go astray – like buying homes we can’t really afford or even saving tax-free for college when our priority should be retirement.
I don’t buy the idea of tax “loopholes” though. The tax code allows certain things for specific reasons. You can debate the why of it all, but taking advantage of every possible legal way to lower taxes is not using loopholes in my opinion. It’s as American as apple pie.
Is keeping income low to avoid certain taxes or investing in tax-free municipal bonds a loophole or good strategy? What about Roth conversions or using Qualified Charitable Distributions (QCDs) from an IRA? How about using HSAs, FSAs, etc.?
Many employers allow workers to pay their share of benefit plan premiums on a pre-tax basis using a Section 125 of the IRC “cafeteria plan.” If that was changed and deductions were subject to payroll taxes, about 10% of the Social Security shortfall would be closed. Loophole or consequences?
In theory, a person could invest in Roth IRAs and a Roth 401k plus municipal bonds and have a virtually income tax free retirement. Hey, it’s the law.
The whole tax paying process should be simpler. If I were king, I’d do away with it all and replace the tax code with a graduated flat tax and VAT. Not sure that would go over well with the IRS, tax preparation services, lawyers and accountants.
I am pretty sure of one thing though. As the national credit card balance keeps rising and major social programs flounder, taxes must go up – or all the stuff we want and like must go down.
One could argue that the U S. Has a spending problem not a tax problem as mentioned about it’s insurmountable debt. The IRS tax law is 6,550 pages long, of which is incomprehensible by the average and above average IQ Americans. I vote we make Richard Quinn King so April 15th each year becomes a normal day. Now that I can vote for.
Depends on what you mean by loophole. Alot of folks define a loophole in the tax code as “something I don’t like”, despite the fact that the code is doing exactly what it was designed to do. However, historically loophole describes an unintended consequence of a law.
One example I would consider a traditional loophole is doing Roth conversions before 65 to avoid IRMAA surcharges. Clearly IRMAA is a means test for Medicare, so why should the source of the means of income matter. It’s perfectly legal, and I don’t begrudge anyone doing it, but I wouldn’t be upset if that loophole got closed.
I don’t object to paying taxes. They are necessary for a civilized society, and this country would do well increase the amount raised. I do object, very strongly, to the ridiculously convoluted tax system in this country. When I filled in tax forms in the UK it took just a few minutes, as my employer had already withheld all the tax I owed on my wages, and my savings were in a building society account that was tax-free. And there was no equivalent of the state income tax.
If it takes a flat tax to reform the system, I am in favor of a flat tax, although I would prefer a graduated version. I would also favor meaningful inheritance taxes and repeal of the step-up provision, positions I doubt will find favor here. I believe in as much equality of opportunity (note, not outcome) as possible, and inter-generational wealth produces inequality.
My concern with VAT is that it is likely to be regressive, and lead to new arguments about what purchases should be exempt. Food, fine – but does that include restaurant meals? Medicine, fine – but what about OTC items? Vitamins? School supplies, fine – but does that now include iPads?
I agree with all Kathy. One of the reasons for the large income inequality in this country is so many affluent people obtain income from investments and there are too many ways that it can be sheltered from taxes. That being said I will continue to use all legal means to pay the minimal tax possible.
How is income from investments sheltered if it’s income?
Honestly, even if it was, I don’t see how that impacts inequality as that is typically measured on wealth, not income.
Hmmm. Folks talk about income inequality all the time — in fact, I suspect they talk about income inequality more often than wealth inequality, in part because stats on income inequality are more readily available.
Spot on as always Jonathan!
They do, but from what I see on social media where that is common, is that many people don’t make a distinction between wealth and income assuming that a billionaire has an income in that range.
The step up basis of “taxable” accounts at death shields the increase in value from taxes. It may not be “income” in the true sense, but I consider it income as you can spend it.
I don’t see a VAT as regressive if we assume higher income folks spend on more expensive items beyond necessities. A lot of countries seem to have worked it out. But no worries, Americans still think tax cuts are net positive to govt income
A value-added tax (VAT), like all sales taxes, is considered regressive because those with lower incomes tend to spend a higher percentage of their income, so the sales tax ends up taking more of their income.
Can’t that be dealt with by use of tax credits and exemption of some essential items?
Tax credits on VAT? I thought we were trying to simplify things.
Thats true, but it would be automatic and you have to deal with the income levels who spend the most on necessities. I suppose there are various ways to do that, but credits is one way I found.
How would it be automatic? VAT is collected at point of purchase. In Europe it’s simply part of the purchase price, it’s not a separate line item as sales tax is here.
True, but when a person files their income taxes, based on gross income, they would receive a tax credit similar to child tax credits I suspect.
No. Flat tax, remember? No credits, no different tax rates for different types of income. Same rate whether you’re single, married, or have dependents. Simplicity!
I think flat tax needs would need to be flat to be a simplification without allowances or special deductions. Otherwise you get a bunch of problems around transitional zones.
VAT could be an entire personal tax system in and of itself. Businesses do all the collection and admin and it lands ultimately on individuals. As Jonathan correctly identifies though it is considered regressive because someone spending 100% of their income likely pays a lot more as a % than someone putting 50%+ of their income into savings or retirement accounts, even if essential goods like basic foodstuffs and kids’ clothes are zero rated ( not exempt which is an important admin point for businesses).
The other point with a heavy VAT based tax system would be evasion through ” off the books” or barter transactions and geo arbitrage for big ticket items.
Oh I took advantage of every loophole…. I mean deduction….. Not to is like volunteering to pay more in taxes. Still, being self-employed gave me advantages over employees and retirees that doesn’t seem entirely fair. For example, I got to deduct the cost of my health insurance without having to itemize. The Qualified Business Income (QBI) Deduction allowed me to only pay tax on 80% of my net income, (try declaring only 80% of your W2 or 1099R income). On Ohio state taxes, self-employed get a total pass on the first $250,000 of net income. Add to all that the fact that the self-employed are, as a group, the most likely to cheat on their taxes.
As you should. Just because you don’t agree with a particular part of the tax code does not mean you shouldn’t take advantage of it. To not do that would place you at a disadvantage and you have no obligation to do that.
According to the IRS, most tax cheats in terms of unreported income are cash based small businesses and tip income servers.
Richard, what does a graduated flat tax look like?
Who knows the right numbers, but say 10%, 20% and 30% at three income levels, might be possible lower. The point being a simple tax on gross income.
It’s just that I’ve not heard the two words used together. It makes more sense than a non-graduated flat tax, which could end up costing low and moderate income taxpayers more in taxes than they pay currently.
Both a flat income tax and a VAT would have provisions to consider low income and in the case of a VAT exempt certain items of necessity.