Column: The fabulous fib and tax day naiveté | PostIndependent.com

Column: The fabulous fib and tax day naiveté

Another national financial confession with the powers that be passed into history Monday. America cannot be a money-obsessed culture. If it were, the big hole in our wallets would not be matched by an equally big hole in our understanding of taxes.

All told, the average family pays taxes equal to new Mercedes every year. Ms. and Mr. Taxpayer should get a holiday in honor of that selfless financial feat. Or perhaps a stadium named “Taxpayer Field at Mile High” in a nod to its biggest sponsors.

The income tax is the leading ship of America’s tax fleet. Congress sails the income tax into seas of work, homeownership, investing, college, retirement savings, philanthropy and now medical insurance, too.

Its complexity overwhelms even its captain. The IRS says it answers only 50 percent of calls during tax season. When it does answer, it errs 40 percent of the time. Its own written regs say it will not stand by its oral advice.

The Service, as it amusingly refers to itself, misses 14 percent of taxes it should collect. For contrast, the retail industry loses 1.5 percent of inventory to theft and fraud.

Nonetheless, there are pluses. The fat files it owns on nearly every taxpayer allows The Service to target people narrowly.

It easily extracts higher rates of taxes from the have-mores than others, as evidenced by the 10 percent of taxpayers with the highest incomes who generated 43 percent of all income then paid 71 percent of all federal income tax collected by the IRS in 2009.

Those detailed dossiers also help the IRS to administer social programs like the Earned Income Tax Credit, a politically popular and effective anti-poverty program.

Of course, those bulging personal files invite skulduggery, too. The IRS is building a history of using its power to suppress political dissidents.

Despite its flagship status, income taxes pay for a mere 30 percent of government spending.

Payroll taxes account for another 20 percent. They are dedicated primarily to Social Security and Medicare. Unlike income taxes, payroll taxes sting the have-lesses harder than other people.

Payroll taxes are a bit deceptive, as well. Supposedly, workers pay half and employers pay half. Economists argue that workers actually pay it all, not half, because an employer’s portion is a personnel cost that would be available to workers if the government did not scrape it onto its own plate.

The corporate income tax, which yields 8 percent of government spending, is built on another curious confusion. Corporations and all other organizations are just piles of paper. Ultimately, every bill is paid by individual homo sapiens.

So taxes on businesses are passed through to flesh and blood people, who pay them through increased prices, reduced wages, and lower returns on investment. When politicians stick it to business, they are actually sticking it to unsuspecting individuals.

Sales taxes, which pay another 11 percent of government spending, have the virtue of being easy to administer. Further, they tax spending, and presumably shift money to savings … normally thought to be good thing. Critics point out that sales taxes again hit the have-lesses harder than others, because more of their incomes go to spending, especially on basics.

Sales taxes suffer from big, gaping holes. They exempt services and often out-of-state vendors. Both are hard to justify. Yet repairs are difficult because tax fiddling usually morphs into tax increases somehow. That fear arises from government budgets that now consume four times more of the economy than they did 86 years ago.

Real estate and other property taxes collect another 8 percent of government spending. Taxes on owner-occupied homes is admirably transparent; just like the invoice for a wheel alignment or new shoes.

However, real estate taxes on rental housing or other business property hide taxes just as the corporate income taxes do.

Colorado wedges that crack wider by charging businesses 3.6 times more tax on most real estate other than residential. So Carla Q. Public doesn’t see the higher tax, and pays it unknowingly.

The sour notes of these clashing tax orchestras once prompted U.S. Treasury Secretary Bill Simon to write, “The nation should have a tax system that looks like someone designed it on purpose.” It doesn’t. It wasn’t.

Take Carla. She works a middle-income job. Her car transmission fails. The repair shop quotes her $2,500. If the shop and its employees were free of taxes, the transmission replacement would run in the neighborhood of $1,750 instead of $2,500. Plus sales tax on the parts.

In addition, Carla must pay income and payroll taxes on her wages before she can buy her transmission. She has to earn $4,000 to pay $2,500 for a transmission replacement that would cost $1,750 without taxes.

The colorful Sen. Russell Long summed up the politician’s perspective succinctly: “Don’t tax you, don’t tax me, tax that person behind the tree.”

It’s a marvel, this stage of democracy, a true marvel.

Vince Emmer is a fee-only financial adviser in Gypsum who is also fascinated by public finance. His column, which debuts here, will appear on the third Wednesday of the month. Contact him at vince@forestisfinancial.com.


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