I'd say that's the most appropriate place, really. It's a designed system, sort of. It's malleable, in that changes occur regularly. The obvious place for bug fixes is here.
I get your pessimism in the sense that the same dynamics, politics and systems that have shaped the present problem seem unlikely to have the desire/capability to fix it. OTOH, things stay the same until they don't. There have been a lot of tax systems invented over the last N thousand years. 99.N% of those tax codes are currently extinct.
Also... we're due a shift of reigning economic religion, periodically speaking. Maybe the next one will take a differing view on efficiency.
Stuff like taxes were always enigmas productivity-wise. For a mill, product-out/labour-in = labour productivity... or product-out/capital for capital efficiency. Either way, efficiency is self evident. For a tax code, legal system or whatnot, there's no way to measure output and no "economists agree" way to know the value of the output even if you could. It could be negative.
Well... This now also applies also to JPMorgan, Pfizer, Alphabet, FB and such. Just like it's not obvious that more legal procedures = more justice, measurements of most of the economy's output is increasingly ethereal and unrelated to obvious scarcities.
That don't mean nothing definite, but we are in times of change... which means don't bet on long term saminess of most things.
It's not clear to me what "the returns should be file[d] automatically" means for this group of people.
In addition, there are many non-employment based events in the US tax code that change your tax liability. Last year I received a roughly US$3k tax credit because I installed a 6.6kW solar PV array on my house. There are dozens or even hundreds of cases like this in the US tax code.
The employer files the income forms and handles withholding. If you're self-employed, that means you are responsible for that part. And of course anyone with more complex taxes (e.g. non-W2 income) would still need to file, though they could start with the pre-filled forms.
> Last year I received a roughly US$3k tax credit because I installed a 6.6kW solar PV array on my house. There are dozens or even hundreds of cases like this in the US tax code.
Yes, and all those special cases should be removed as part of the reform. If they want to hand out money as an incentive for installing a PV system (for example) then they should make that a separate application and payment, since this has nothing to do with collecting taxes. For business income you can subtract legitimate business expenses (since this is about income, not gross revenues), for capital gains you obviously subtract the cost basis, and for personal income you subtract the official poverty level for your household. (If there are multiple filers for one household then they split the deduction.) If the sum is less than zero then you simply pay no taxes—there are no refunds. That's it. No special surtaxes or exclusions. Apply a flat percentage to the total and you're done.
[0] I don't agree about the flat percentage. The USA has had a progressive tax structure in various ways since its founding, and given the concept of marginal utility, I stronly believe that this is the right way to tax income.
The system I described is still modestly "progressive" in the sense that those with more earnings pay a larger percentage than those with less, due to subtracting the poverty level. (Up to the poverty level, nothing is taxed; at 2X the poverty level, only half your total earnings are taxed; etc.) It starts at 0% and asymptotically approaches the flat rate as earnings increase. To be sure, it's not quite so heavily biased as the current tax tables, but then we also have this principle that the law is supposed to apply equally to everyone and not discriminate on the basis of wealth or status, in either direction. The current political environment targeting a small number of individuals for special taxes or punitive rates based on either their income or wealth practically amounts to a bill of attainder–which would obviously be unconstitutional, and for good reason.
To a person who earns $10k/yr, $1k is huge (whether it is extra income or owed tax). To a person who earns $1M/yr, $1k is basically pocket change. The utility of that marginal $1k varies for them both. Ergo, to treat them equally, we tax them differently.
Marginal utility says that—most of the time–the utility of one more of an item to the owner is less than or equal to the utility of each item they already possess. (The exception would be where you need multiple items to do anything useful, but this is generally treated as a different kind of good rather than another of the same.) The concept of marginal utility says nothing about the relative utility of the same amount of money to different people. Utility is subjective, and there is no coherent concept of utility which applies across multiple individuals. It makes zero sense to say that some set amount of money is worth objectively more or less to different individuals based solely on how much they already own, much less on their earnings for a single year.
> To a person who earns $[X]/yr…
And here we have another issue: the assumption that earning some amount in one year—which is all the tax rules consider—is equivalent to earning that amount every year. Receiving ten years worth of income as a lump sum of $1M up front vs. $100k each year should not affect your tax rate, but in practice it does, which has various perverse implications. The law is biased in favor of regular, even income (W-2s), and against situations where you may earn a lot in one year and very little in others (e.g. running a small business).
I think this is nonsense. We can't put a precise worth on it for different people, sure. But I think it's indisputable that there's a curve, we know it's rough shape, and that it's a reflection of marginal utility. The lack of labels or positions on the axes doesn't make that graph useless.
> The concept of marginal utility says nothing about the relative utility of the same amount of money to different people.
Sorry, but this is just completely wrong. Here's the most relevant paragraph from: https://commons.lib.niu.edu/bitstream/handle/10843/22650/12-...
>The linchpin of The Uneasy Case is its rejection of the principle that income has diminishing marginal utility.' Diminishing marginal utility of income (DMUI) means that the greater a taxpayer's income, the less an additional dollar of income is worth to him. If DMUI holds, the government exacts a lesser sacrifice from a higher-income taxpayer, with each dollar taxed, than from a lower-income taxpayer. Moreover, any redistribution of income from a higher-income tax- payer to a lower-income taxpayer tends to increase aggregate welfare: The lower-income taxpayer derives greater utility from each dollar gained than 4 the higher-income taxpayer derives from each dollar surrendered.
Now, to be fair, there are arguments against the DMUI case for progressive taxation. For example, here's Donald Boudreaux writing for the American Institute of Economic Research:
https://www.aier.org/article/rich-man-poor-man-comparing-the...
The fact that it's a terrible argument doesn't diminish the fact that it clearly recognizes that there is a case to be made for progressive taxation based on DMUI.
Here's another one, equally bad:
https://www.econlib.org/archives/2011/04/the_uneasy_case.htm...
The key point here seems to be that even though DMUI is true, we don't know the actual numbers, and thus we should not act on it.
As for your remarks about $1M in 1yr vs $100k for 10yrs ... well, sure the tax code is necessarily imperfect. Optimize it for people with one income patterns and you've made it worse for people with a different income pattern. Such is life ... perfection is not an option here.
There is indeed a curve, and we do know its rough shape (it's nonincreasing). But that curve is for one individual. Utility is not an objective measure. Every individual has their own "unit" of utility and there is no conversion factor which would allow utility to be summed or compared across multiple individuals.
This is heresy to utilitarians, to be sure. How are you supposed to implement policies which ensure the greatest benefit for the greatest number if you can't calculate a collective utility score? That doesn't bother me, though, since I'm not a utilitarian. So far as I'm concerned the utilitarians are just implementing policies based on their own preferences and ignoring what anyone else actually wants.
> Diminishing marginal utility of income (DMUI) means that the greater a taxpayer's income, the less an additional dollar of income is worth to him.
This is a fairly standard description of the concept of marginal utility, aside from the fact that it's confusing income and wealth. (The greater one's wealth the less each additional dollar is worth. Income is irrelevant except as a poor proxy for wealth.)
Note that it only talks about one person. As I acquire more wealth I'm less and less willing to put in the same effort / pay the same cost to acquire each additional dollar. No issues there, this is not particularly controversial.
> If DMUI holds, the government exacts a lesser sacrifice from a higher-income taxpayer, with each dollar taxed, than from a lower-income taxpayer.
And here they make an extraordinary leap from talking about one individual's marginal utility to comparing the "sacrifice" (lost utility) of multiple individuals. They're making the assumption that all individuals have exactly the same utility scale, which is manifestly false. Everyone has their own utility scale, which varies over time and is in general unknowable, even to them, except as it is partially revealed through their actions. It can readily be observed, however, that a dollar of additional income does not have the same utility to two different people with the same wealth: For any given level of wealth, some pursue higher-paying work while others don't consider it worth the effort. Taking some amount of money from the first group represents a larger sacrifice than taking the same amount from the second group, even though their wealth is the same. Since you can't even say that equal wealth results in equal marginal utility, how can you claim that lower or higher wealth (much less income) necessarily implies higher or lower marginal utility? There is absolutely no reason why one person with $1M cannot get the same marginal utility out of an additional dollar—by whatever objective measure you care to name—as someone else with a net worth of $10k.
> … well, sure the tax code is necessarily imperfect.
I'm not asking for perfection. I'm just asking that the law, which is supposed to be just, not discriminate against people based on irrelevant factors such as annual income. The fact that a progressive tax system based on annual income imposes different levels of taxation on two people with the same earnings merely because one received their pay in a lump sum while the other received it in installments is a strong hint that the system is based on unsound principles.
This is a standard, widespread concept in economics, even among people who disagree that it should be the basis of the tax code. I am unable to find any mainstream or heterodox economist who disagrees that DMUI is real. The disagreements are about what the implications for taxation (among other things) ought to be.
I agree that DMUI is real. As I've said multiple times. But in attempting to use it as a basis to argue that there is a net increase in value or utility from taking some amount of money from a wealthier individual and giving it to another, less wealthy individual, it's being misapplied.
Attempting to aggregate a subjective, ordinal concept like utility across a group of individuals is, unfortunately, not novel either, but it is incoherent. You're not going to find any political (i.e. mainstream) economists admitting to that, of course, because it undermines the logical basis for their entire profession. However, even mainstream economics these days acknowledges that value is subjective, and the fact that it depends on aggregating metrics which cannot be quantified objectively is a common objection to utilitarian philosophy.
The idea that marginal utility is specific to the individual is hardly novel either. As Herbert Davenport put it in The Economics of Enterprise[0] back in 1913:
> As the human being changes, the utility changes — may become greater or may disappear entirely. [p. 87]
> All utility is relative to the individual. — The foregoing discussion should, by implication, have made it clear that utility and marginal utility and relative marginal utility have to do solely with the particular individual as an account of the way in which he arrives at his purely personal and individual decision to become a purchaser at not more than a particular price — to enter his own demand as one among the great total of demands. Strictly speaking, there is no such thing as the comparison of the utility to one person with the utility to another. Men differ in desires and in the degree and manner in which things appeal or appear to offer service. [p. 97]
Or as Ludwig von Mises explained in The Theory of Money and Credit (1953) on the subject of "Total Value"[1]:
> Value can rightly be spoken of only with regard to specific acts of appraisal. It exists in such connexions only; there is no value outside the process of valuation. There is no such thing as abstract value. Total value can be spoken of only with reference to a particular instance of an individual or other valuing ‘subject’ having to choose between the total available quantities of certain economic goods.
[0] https://archive.org/details/economicsofenter00dave/
[1] https://mises.org/library/theory-money-and-credit/html/pp/12...
The U.S. doesn't make you do this, either. Most people don't itemize deductions. You just plug in the data from your W-2. The percentage of people itemizing was 30%, but with the Trump Tax Cut which capped state and local deductions (i.e. lowered the maximum allowable deduction, effectively increasing taxes on a large number of people) this was predicted to drop to 10%.
If you're itemizing, you're in a minority of tax payers, and in most cases a voluntary minority seeking to minimize your taxes in a way that simply wouldn't be possible elsewhere.
The U.S. also has one of the highest rates of voluntary tax compliance, and hypothetically that might have something to do with 1) ability to itemize and 2) having to sign on the dotted line every year.
This is still a lot more work than in many countries, and you still need to either fill in a paper 1040 (plus state taxes where appropriate, and some of those (cough CA) are far from simple), use tax prep software, or someone like H&R Block.
In the UK, if you're in the majority of people who have one job and straightforward finances (e.g. not renting property, no CGT, etc) you need to do nothing at all for your taxes. Your employer deducts tax from your wages and that's it. I guess technically you should verify that your "tax code" (the mechanism used to inform employers of what needs withholding) is correct but again, unless your situation is more complex that is a standard figure shared by the rest of the employed workforce.
My parents never filed a return in their entire lives.
Not in my experience. The online options the IRS provides free of charge is pretty easy, and many states have similarly simple online forms for free.
https://www.irs.gov/e-file-providers/free-file-fillable-form...
Although I do not dispute other countries do have it easier, and do it better than the US.
The IRS does a terrible job with the information it does have. One year, I had a typo in my daughter’s social security number. The IRS sent me a note that her number didn’t match the previous year’s return. I assume that they believed the previous year’s number was right, but instead of saying “we’ve amended the return by using the social security number that appeared on last year’s return,” they said “we’ve amended the return by removing that dependent and recalculating taxes; if you disagree with your higher bill, you’ll need to send us the following paperwork with the correct social security number” (of course, “correct” meant “the number we already have on file” more or less, but I had to figure out what that number was by looking at my own copy of the previous year’s return). Luckily, the previous year’s number was correct; otherwise I would have had to amend the previous return and then refile the current year’s.
People should have some "skin" in the game of taxation, if we allow the process to become seamless overtaxation becomes a real problem.
Even today people do not treat their Gross income as their income, they look at net. This is the wrong way to look at it.
I believe people should have to physically pay the government every month just like you do your water bill, your groceries, etc.
If people had to write a check, or trigger an electronic payment to their local taxing authority every month there would likely be more focus on where that money is going, and why the government things they deserve a huge chunk of my income (hint they do not)
This prevents the government from just raising taxes and hiding these increases.
We have history of this as well in the US, a prime example of this is property taxes. When a state raises the income tax rate there are a few grumbles but hardly anyone actively protests, however if property taxes go up people can be found literately in the street protesting because it causes their mortgage to go up (as most people pay property taxes via escrow with their lender)
This is direct payment of taxes monthly where the person received the money, then has to pay it out, has a vastly different psychological effect than if the money is seized before ever being received by the person
I maintain that the ONLY way the government can get way with the MASSIVE amounts of taxation everyone pays is for 2 primary reasons
1. Distributed collection 2. Automatic Collection
If either was not in place the government would have huge amounts of civil unrest because by an large most people would instantly recognized they are being fleeced by the government no different than a mugger on the street
Here in the Netherlands I don't have to plug in any data, everything is pre-filled. Income, bank accounts, mortgage, advances on deductions, etc. All you have to do is verify it (you can change things if necessary, but I've never had to do that). Takes about five minutes max.
I run a small biz, I do PAYE on a simple spreadsheet, then type the results onto an IRD web page, takes me less than 10 minutes a month.
Most people though just use a tax preparer at something like H&R block. A little searching indicates there's roughly 60k to 80k jobs like this in the US, and they earn (at least at H&R Block) about $16 per hour, and only for about 3 months a year. A small # of tax preparers with a bit more training & experience may provide other financial services in the off-season or assist small business with quaterly filings or bookkeeping.
Overall though, you're not talking about much of an industry collapse in terms of people employed. The ones that work in that area year-round will lose some extra hours. The ones that don't, having some experience in finance, might seek further training to get a higher level job of that sort (maybe become an actual accountant) I don't think it should be considered a barrier to ending regulatory capture within this area.
Apart from that, a few software products would collapse, losing most customers, retaining the ones that legitimately needed advanced guidance. And the company would probably have to charge the more for it, and possible compete with actual accountants on price in that respect.
But I don't think "industry collapse" is correct.
As for itemizing, again, you may not know if you should itemize or not until you actually go through the process and see where the numbers fall.
Meanwhile the IRS is held out as a boogey man who will ruin your life financially if you get something wrong.
For most here on HN who deal with interlocking blocks of logic, tech documentation, etc? It's fine, and probably for a plenty of other people too. For a very large number of people though, it's the common paradox that it's only easy once once you already know what you're doing. And for a few weeks/months a year the tax prep industry works hard to convince people it's not something they should try to navigate on their own, and if they do then they're a sucker throwing away refund money because of hidden secret tricks to get more refund money back.
11.4% of tax filers itemized in 2018:
https://www.irs.gov/statistics/soi-tax-stats-tax-stats-at-a-...
That is not the hold back for tax reform, any efforts to simply the tax code gets push back from every special interest that to keep their deductions, and they point to "the others" as "unfair" deductions, so it never changes.
People with kids want to keep the massive deductions for having kids, even though childless people believe that is unfair, people with homes want to keep the deductions for home ownership even though renters believe that is unfair, and so it goes down the line for 1000's and 1000's of loop holes and deductions...
Never a one shall be expunged from the code
Sadly law makers don't know how to code. If they did they would see what bloated monstrosity of complexity a few simple sounding sentences with some simple sounding exceptions produce. Perhaps a large bill and months of delay could provide enough of a clue.
> [U.S.] tax law drafting style follows default logic, a non-monotonic logic that is hard to encode in languages with first-order logic (FOL).
Edit: referring to the US
Some other countries just tell you where you stand because for the vast majority of people a standard filing is all that's required. In those circumstances, only the edge cases need to deal with complexities. In the US, everyone does.
But I am of course pessimistic on tax reform since that general populace just accepts "oh yeah filing taxes sucks" at the same time that tax service providers lobby congress who, absent a strong outcry from their voters, just follow the corporate money trail.