Our Stupid Tax Code

The stories of Obama appointees whose integrity had heretofore been unassailed having to file amended tax returns are now so common that I don’t find them blogworthy.  Paul Caron‘s post yesterday (via Insty) on how visiting professors on sabatical from their home institutions, though, provides yet another opportunity to examine the bewildering complexity of our tax code.

He passes along an article [PDF] whose abstract helpfully notes:

A sabbatical leave and a visiting position at another university offers professors many professional and financial advantages. Among the financial advantages are often favorable taxation of the expenses incurred and income earned at the expenses earned at the visiting university. This paper discusses the tax implications of a visiting position including the rules of eligibility for traveling deductions, rules for deducting travel and transportation expenses, implications of taking a position outside of the United States, the problems caused by the Alternative Minimum Tax and other related issues. Also covered are the recorded keeping requirements and the use of the federal per diem allowances.

Re: the AMT, he includes this suggestion:

It is really important for visiting professors to negotiate well with their institutions. Insist up front that your travel expenses (to and from) and living expenses while there (rent) are “reimbursed employee business expenses” and thus excludable under Treas. Reg. § 1.62-4(c). Do NOT negotiate for a higher salary, out of which you will pay these expenses yourself (which are deductible only the exent in excess of the 2% floor under the regular tax and are not deductible at all under the AMT).

This raises at least several obvious questions.  First, why in the hell does the U.S. tax code treat visiting professors differently than their cohorts earning the same salary and benefits down the hall?  Second, shouldn’t your average PhD be able to file his own taxes without the advice of micro-specialists in tax law? Third, isn’t forcing people to keep elaborate records solely for the purposes of filing taxes an incredible waste of productive time?

Our tax system is simply insane.

Photo by Flickr user Cayusa under Creative Commons license.

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James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Pete Burgess says:

    James, have you put any serious effort into studying the Fair Tax? Not a flat tax. The Fair Tax is the only proposal which eliminates all federal income taxes, including FICA taxes, and replaces them dollar for dollar with a national consumption tax.

  2. yetanotherjohn says:

    The problem is basic to expanded government power. You have a problem, you give the government power to fix the problem, the expanded power leads to other problems, so you write rules and regulations to eliminate those problems, the rules and regulations create more problems, so you write more rules and regulations.

    Every tax law, regulation and ruling makes perfect sense from one aspect. But then when you look at the unintended consequences (e.g. two professors who cost the university the same amount to employ, but see very different taxes based on what the pay is called), you can see that humans are just not smart enough to write a set of regulations that won't distort the market place.

    I used to advocate that instead of the federal government taking money from people and then spending it on other people, that we make the a percentage of the taxes optional in the sense they can either be spent on a charity or sent to the government to spend. Let the informed masses spend the money where it is needed most. You want universal health care, send in your contribution. But it did not take much thinking about unintended consequences to see how this would get distorted.

    The best solution to tax issues like this is to go to electing senators based on taxes paid. Every one gets as many votes as dollars of taxes that they paid (1 vote minimum). Thus the more you rob peter to pay paul, the more votes peter has to stop it. A new check and balance would be introduced into the political mix with the house of representatives feeling the current pressure to spend and the senate feeling a new pressure to not raise taxes.

  3. Pete Burgess says:

    How about taxpayers making the decision about how much and when they pay taxes? Wouldn't that be simpler and easier to monitor? If a taxpayer decides to save more and consume less, he pays less in taxes. Don't we gnash our teeth in this country about our miserable savings rate?

  4. The best solution to tax issues like this is to go to electing senators based on taxes paid. Every one gets as many votes as dollars of taxes that they paid (1 vote minimum). Thus the more you rob peter to pay paul, the more votes peter has to stop it. A new check and balance would be introduced into the political mix with the house of representatives feeling the current pressure to spend and the senate feeling a new pressure to not raise taxes.

    So, you want to establish an oligarchical system in which income is the determiner of relative citizenship? Or is this a tongue-in-cheek proposal?

  5. rnewquist says:

    Our tax code is ridiculous. It's long past time for another round of tax simplification a la Kennedy or Reagan – and I'm not even worried about lowering the top marginal rates as conservatives like to trumpet. The code's just too damn complicated, and it's time to streamline it again (preferably in a more or less revenue neutral way, as that's probably the only politically viable way to make it happen).

    Meanwhile, 2009 is yet another year when I put off my taxes until the last minute because I just can't face doing them.

  6. Pete burgess says:

    mewquist, there is a viable tax reform idea, HR25, that would do everything you desire. Check it out.

  7. Michael says:

    Pete,
    For a family making $100,000 a year to break even under the proposed Fair Tax, they would have to not spend 33% of their income. For a family making $50,000, they'd have to not spend fully %50 of their income. A family making over $1 million could actually spend their entire annual income, and pay less in taxes than they do now.

    Now, I know that there are tax credits to adjust the floor to the poverty line, but you're still going to be asking those who can least afford it to refrain from spending more of their income in order to not end up paying higher taxes.

    I haven't added the FICA numbers into my calculations yet, which will reduce the actual percentage those under $100,000 have to save in order to break even, but they will still be asked to save more of their income than the wealthy in order to avoid a tax increase.

    Also, anything those making more that $1 million do save will have to be made up for by increasing the consumption tax rate above the proposed 30%, further increasing what those in the lower income brackets must refrain from spending.

  8. No, in fact, this reform doesn't do everything *I* want. I'm not a fan of the so called "fair tax", and think it's actually anything but.

    Also, anybody who thinks it will end up simpler is naive. There's absolutely no reason that Congress can't gimmick up a sales tax to make it just as complicated as the current income tax. It merely shifts the burden from individuals to businesses, with small businesses being hardest hit by the paperwork. As someone who's owned and operated multiple *very* small businesses, I'm sensitive to this problem. The paperwork for such individuals is already insane, and I don't support anything that makes it worse.

    If we're going to have a complicated tax code (which realistically, we always will given the nature of our political system), I'd *rather* have it place the burden on individuals. It keeps us all aware of how complicated and crazy the stupid thing is and gives each individual voter an incentive to keep a check on just how complicated it gets. Take that away, and it'll get even worse than it is now because your average voter won't care.

  9. Pete Burgess says:

    Russell, I'm afraid you don't understand The Fair Tax. I am also a small businessman and I find no additional burden at all. And only businesses who transact the final sale must collect and remit the tax. Businesses all over the country do it with state sales taxes.

    Michael, could you expand on your break even comparisons? I'm not sure I follow.

  10. yetanotherjohn says:

    Steve Taylor,

    Its not a tongue in cheek proposal. We are talking about one branch (or more accurately one half of one branch) of the government. To the extent that the "rich" would dominate that part of the government, we have an immediate counter balance in the house. Look at the disproportionality of the tax system where a few pay the majority of the taxes and you will see the need for this. The current system has no way to balance out the inevitable push to vote for more "bread and circuses".

    This also goes back to the idea of stakeholders in the society. The more productive members of society who bear the greater burden of supporting the society have a greater say in one portion of the government. Avoid taxes and your influence goes down. Pay all your taxes and your influence goes up. To the extent that you want to try and "buy" an election, you do so by paying for the government (as opposed to paying for lobbyist and campaign donations).

    The system of checks and balances is a good underpinning for government. Where you don't have it is where government is most dangerous to all. What check do we have in the current system against ever increasing taxes on the minority other than economic collapse from destroying the productive part of society?

  11. Pete Burgess says:

    Why do we keep trying to fix a completely unproductive, unfair, unintelligible, unmanageable method of revenue collection? It's like trying to swim up the Snake River in May. Why not get out and walk on the land?

  12. I'm inherently suspicious of any plan that begins with "I'm afraid you don't understand…"

    I understand the plan just fine. I also understand that the tax, as proposed, will never in any reality stay as simple as the proposers make it out to be.

    Also, yes, small businesses all over the country already do it with state sales taxes. This is already a pain in many localities, and adding a layer of federal taxes on top of it won't make it any easier, as I discuss in greater depth at my own blog, here:

    http://philosophers-stone.typepad.com/my_weblog/2

  13. Because we live in the real world and have to deal with what's achievable.

  14. jwest says:

    Russell’s objections to the Fair Tax plan are typical of what you find among people who can’t find anything wrong with it.

    It’s not the plan he has problems with, it’s what he thinks the plan will morph into. If the new standard for evaluating plans is how well it holds up under attack by an army of straw men, we are all in trouble.

  15. Pete Burgess says:

    Russell, I will respond on your blog.

  16. Michael says:

    What makes you think that the people who pay the most taxes are the most productive members of society? Do you think that the executive at AIG and GM should have more representation on the bailout legislation than you and I?

  17. Pete Burgess says:

    Russell, I am not savvy enough to understand how to sign on to your weblog. Help me out and I will attempt to clarify your objections.

  18. Michael says:

    Pete,
    Without taking into consideration FICA, the "prebates", or other tax credits, a married HoH making $100,000 annually pays $19,852.50 in income taxes. Under a 30% "Fair Tax" on consumption, in order to pay at or below that amount in taxes, he couldn't spend more than $66,000 of that. A HoH making $50,000 couldn't spend more than $24,000 of his income without paying more in taxes. Someone making $500,000 annually and spending all of it would pay $149,000 under the current tax system, and $150,000 under the Fair Tax. Someone making $1 million would actually pay about $24,000 less in taxes, even if they spent every last time of it on taxed goods.

  19. Pete Burgess says:

    Michael, since the explanation of this particular issue can get lengthy, please go to this site and review the research: http://www.fairtax.org/site/PageServer?pagename=a

  20. sam says:

    What makes you think that the people who pay the most taxes are the most productive members of society?

    What Michael said (asked). Before anyone gives assent to the propostion that those who pay the most taxes are the most productive, he should understand that he owes us a definition of "productive". (And do note that many of those who assert that taxes paid are directly proportional to degree of productivity–on any definition–would place high-paid actors, musicians, artists, and other leftist tending purveyors of the frivolous outside the circle of the annointed.)

  21. sam says:

    I fear it's a deadly serious proposal (very badly thought out, but deadly serious).

  22. This also goes back to the idea of stakeholders in the society. The more productive members of society who bear the greater burden of supporting the society have a greater say in one portion of the government.

    I understand the basic notion, and have some very real sympathy to the stake in society notion. However, the notion that the best/only measure of one's stake in society is one's income is flawed. Does the investment banker actually have a greater stake in our society thank does the fireman, policeman or enlisted soldier?

    And that is just one simple objection to your proposal.

  23. Indeed, that underscores that under yetanotherjohn's proposal, Terrell Owens, Sean Penn, and Micahel Moore (to name but three) would have more of a vote than any us (I assume, anyway) engaged in this discussion.

  24. sam says:

    To end this:

    Does the investment banker actually have a greater stake in our society thank does the fireman, policeman or enlisted soldier?

    What value (=some measure of productivity) would John put on an enlisted soldier who's lost a limb, or multiple limbs, in the service of his or her country? Between the investment banker and this soldier, which has made a greater sacrifice for the country, which has borne the greater burden of supporting the society?

  25. It's an open weblog, no sign-in is required.

    <a href=”http://philosophers-stone.typepad.com/my_weblog/” target=”_blank”>http://philosophers-stone.typepad.com/my_weblog/

    Edit 5 seconds after I posted this, I realized that you meant signing on for comments, and now I feel like a jerk. If you follow through the "comments" link at the bottom of each post, there's a "sign in" link at the bottom of each page. Commenting requires a Typepad account (it used to be open, but like every other blogger I had ridiculous problems with comment spam).