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Thursday, April 15, 2010

Signs of Tax System Problems - Serious Ones!

Today - tax day - among the emails I received are two that I think are good illustrations of how troubled our federal tax system has become. The system needs to be improved and updated to reflect 21st century ways of living and doing business today. Unfortunately, I see very little proposed by lawmakers that will make any of this happen.

Here are the 2 emails:

1. The Treasury Inspector General for Tax Administration (TIGTA) released a report, Interim Results of the 2010 Filing Season (4/14/10). Highlighted in the email:

"TIGTA auditors analyzed 2010 filing season results as of the first week of March, 2010. As of that time, the IRS had paid some $24.2 million in erroneous Making Work Pay and Government Retiree Credits and improperly awarded some $4.7 million in erroneous Plug-in Vehicle Credits. The IRS estimates that 50 percent of the individuals claiming the First-Time Homebuyer Credit will not attach the required documentation this year." ...

"As of March 5, 2010, the IRS had identified 119,484 tax returns with $733 million in fraudulent refunds and prevented the issuance of some 98 percent ($721 million) of those refunds."

The problem as I see it: too many law changes including ones that involve millions of taxpayers and thus lots of IRS time. And these are temporary provisions which seem to cause extra confusion and the time spend figuring them out is lost when the item expires. A tax rate decrease for low bracket taxpayers and an increase in the Earned Income Tax Credit would probably have been adequate stimulus techniques.

2. An email from Congresswoman Lofgren stating "As we mark the passage of another Tax Day, we should recap tax cuts enacted by this Congress. All totaled, more than $800 billion in tax cuts." She is my representative and I admire her work. I don't agree with the message she is sending, but I think it just illustrates that the majority of politicians and the public have come to think that the job of elected officials is to cut taxes when in fact it is to oversee budgets with appropriate spending and revenues. I don't think anyone should be bragging about $800 billion in tax cuts when our deficit is ballooning into the trillions of dollars.

The email has a link to more details from Speaker Pelosi which also brags about the tax cuts - here. Who is going to talk about the growing, staggering deficits and the increased interest expense they are causing us to pay?

AND - who is going to talk about the intersection of these two email messages? The tax cuts were not well designed and there were too many for the public and the IRS to handle which has led to an increase in the tax gap.

A better approach?
(1) Ask - do we really need tax cuts?
(2) If yes, how can they most simply and effectively be drafted? Typically, a rate decrease would be the answer or an increase in the standard deduction. Use tax rules that already exist and that people understand rather than create new complex rules that require guidance from the IRS and new tax forms.
(3) Talk more about our staggering debt and deficits. There are many tax preferences that make no sense and should be phased out as a start (such as interest expense on a second home and on up to $1.1 million of debt). Also, we should not stand by quietly while Congress and the Administration talk about re-instating the 2001/2003 tax cuts. Some lawmakers say these cuts helped create the deficits (or eliminated the budget surpluses that existed for a very short time). Why would they now want to keep some of them rather than let them expire at the end of 2010.

What do you think?

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