Thursday, April 16, 2015

Compliance Costs

In 2013, The Tax Foundation reported that our current tax code consumed over 61 billion man hours of compliance costs. Things have likely gotten worse since then.

Researchers studying compliance costs tend to focus exclusively on the length of the tax code. The length of the tax code clearly contributes to compliance costs. I support efforts to reduce loopholes and lower tax rates.

That said, the main compliance costs are not due to the length of the code. The compliance costs result from the way we go about collecting and reporting taxes.

In the status quo, employers must gather tax information from their workers and submit payroll taxes with the payroll. Employers report total taxes collected through the year to the government and employees at the end of the year. Workers must file a tax return by April 15th. This complex return must include include all of the receipts and forms needed to claim deductions.

This system requires that people touch each tax related piece of information multiple times during the year.

So, lets examine something simple like the solar tax credit. To get this credit, taxpayers must fill out forms when they buy solar panels and keep all of the receipts. The solar panel provider must gather tax information buyers and submit records of sales to the government. Taxpayers must submit additional forms with their tax returns. The IRS compares the forms from the buyer to the forms from the seller. If either party made a mistake, the mistake would require a complex correction process.

The Object Tax solves this problem by creating a single point of taxation which resolves taxes in real time.

The central feature of the Object Tax is a thing called a Tax Aware Account. The Tax Aware Account contains all of the information needed to calculate a progress tax in real time. With this reform, workers would receive their entire paycheck into the account and pay taxes when they withdraw the money for spending.

The system handles tax exemptions simply by allowing the transaction without charging taxes.

When buying a solar panel, the taxpayer would receive a code from the solar panel provider that allows the transaction to proceed without paying taxes. The system would generate a unique id for the transaction trail and that would be that.

The taxpayer would experience the full impact of the tax exemption at the point of sale and would never have to touch the transaction again. The IRS would have a unique ID for reporting and auditing purposes.

This tax reform would embed the tax ramifications of a transaction into the initial transaction. This would eliminate the bulk of the compliance costs.

I happen to be a big fan of flat taxes and few loopholes. My biggest concern is that the Object Tax lowers compliance costs to such an extent that an activist Congress might use the program for even more social engineering.

There are some things that can be done in the design of the project to reduce this impulse. Unfortunately, it is impossible to eliminate the desire of the government to lord over the people. Unfortunately, every conceivable tax reform is open to abuse.

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