Tuesday, April 5, 2016

A taxing proposition

If you’re like nearly every other adult American, you just paid someone money to get a portion of your own earnings back. Every year, the multi-billion dollar tax return industry cashes in on people’s fundamental desire to recoup every penny of what they earned that the government should have taken. This is an industry that capitalizes on the ever-increasing complexity of tax laws, and fleeces Americans for getting back what never should have been taken to begin with. Whether it is paying $15 for an online service as I did, or a couple hundred dollars as I know some people have done this year already, it is preposterous to think that the average American has to engage the services of a highly trained professional, or utilize highly specialized and time-consuming software, just to get back the money they earned.

For a licensed commercial or industrial entity, this may make sense. They have accountants on staff (or retainer) anyways. But why must the rest of us navigate these arcane laws under threat of audit just to recoup our hard-earned wages? Surely there is a better way that doesn’t involve me sitting in front of a laptop each February for several hours.

But let’s go a step beyond the basic. Why do we have an entire industry that is built to help us avoid taxation when it comes to retirement planning? The 401k and IRA space in financial services is booming, and it becomes harder each year for individuals to navigate the complex laws around Roth & Traditional IRAs, never mind the mountains of legislation that an employer must acquaint themselves with every time they sit down to discuss their company retirement plan. As employer after employer endures lawsuits for failing their fiduciary duty, now the government wants to make that process even more cumbersome.

But if it weren’t for the tax-qualified status of those plans, businesses would have far less to fear, far less cost involved, and far greater flexibility to offer investment options that aren’t narrowly tailored to fall into the government’s good graces. Instead, they could devote more resources to improving employee financial acumen, and providing unbiased consultative resources that won’t direct them to the investments that earn someone more commission.

Then there is the employer pre-tax deduction for health care expenses. This is not an employee benefit so much as they would have you think. Studies show that these benefits only reduce the salary that your employer otherwise would have paid you – part of why wages have stagnated the last 8 years in the wake of the recession and passage of the ACA. And even then, employers are the ones getting the tax deduction in the process. And though they may steer you towards that Flexible Spending Account or Health Savings Account, the tax benefit you may gain often doesn’t outweigh the stress of the administrative hassle of compliance. It’s just more paperwork to get back your own money. In fact, the whole system is largely designed just to hide the actual costs from consumers.

The list goes on and on, including several different social engineering deductions to personal income taxes (marriage, child-rearing, education, mortgage interest, etc.). But here’s the real killer: you can deduct state income taxes, in full or in part, from your federal income taxes. Several of the states with the highest level of government spending are also the ones with the highest income taxes. So essentially, if your state has a consumption tax (sales tax) and no income tax, you’re subsidizing those states even more that you otherwise would be, simply because your legislature chose to tax production instead of consumption.

In Montana, the personal income tax component of our taxes is reputedly the highest contributor to state revenues, bringing in $1.06b in 2014 alone, against $1.69b in total collections, 100% of which went into the general fund, meaning it can be spent for anything and everything. And right now, that fund is running at a half-billion dollar surplus. Thus it should be no surprise that each year, our Democrat governors come back to the legislature asking for budget increases exceeding 10%, and get rebuffed – only to have the legislature approve an 8.5% increase in 2015.

They are playing with house money. Your money. I’m sure we would all like to start the new year by looking at our budget and saying “I’ll spend 10% more!!”, but that isn’t how it works… unless you’re in government. There has been little to no talk of securing that budget surplus for an emergency fund, or better yet, returning it to the taxpayers, though Republican gubernatorial candidate Greg Gianforte has mentioned the idea. What all this clearly shows us is that we are paying way more in taxes than we need to, and instead of adjusting down how much they take, our state is ratcheting up how much they spend.

Of the top five states in ratio of spending to GSP, four have no income taxes. Montana’s rank on that list is 43rd. The most fiscally responsible states are the ones taxing consumption, not production. It’s a good place to start.

Our state’s constitution affords us up to a 4% sales (consumption) tax. Just applying that to our Gross State Product (GSP), we would have had $1.86b in revenues. Now, a share of that is of course necessities that should be exempted – groceries, medicine, clothing – and it may also include state spending. But an overwhelming majority of our GSP are legitimately taxable items. We could easily afford the shift, and allow businesses, not individuals, to bear the burden of figuring out their tax bills.

And even better, we could give people a legitimate lever to use against government excesses. How often have you heard “If I could choose not to pay taxes for that, I would.” A sales tax would let Montanans do just that: pay for their necessities tax free, and make consumptive choices based on how much they want to pay in taxes. And it would force our government to do what all their constituents already must: be frugal with their funds.

No comments:

Post a Comment