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A better way to do 2 would be to do away with withholding. After a year of that we’d see a radically different tax system.





Interesting in theory but in practice most Americans do not have the financial literacy to budget properly to meet taxes.

What happens when you don't have the cash to pay? Do we then see a whole new sector of predatory loans? Imprisonment? Increasing unpayable fines? None of those are good ideas, yet when things like this happen, our system has already fallen into these pitfalls. Witholding is an essential idea.

What would be nice is if we make the easy filing system but explicitly highlight the amount you paid in taxes compared to your income. Most people only judge on refund amount and rarely check the math on the exact taxes owed.


This is actually how things were done pre WW2. If people were able to budget for it then, why not now? The current system makes filing taxes and getting refunded seem like a reward, it should probably be a bit painful to do your taxes.

Without the painful transparency, it becomes too easy for the government to nearly invisibly turn up the tax rate on individuals to pay for whatever boondoggle or foreign war they see fit.


> Without the painful transparency, it becomes too easy for the government to nearly invisibly turn up the tax rate on individuals to pay for whatever boondoggle or foreign war they see fit.

This narrative is based on nothing. The overall tax rate has been basically flat bouncing between 15% and 20% since WWII[1].

[1] https://en.wikipedia.org/wiki/Income_tax_in_the_United_State...


Income taxes in the US applied to a much smaller segment of the population before WW II than they do today.

A situation worth getting back to, imo.

Which taxes (if any) would you prefer?

The point isn't so much that people are taxed. It's that they are taxed by a monolithic out-of-control bureaucracy that has grown much to large for anyone's good. To add to this, I'd be 100% ok if my tax bill was flipped such that the federal government got what my local government had gotten and my local government got what the federal government had gotten.

I’m curious as to how you think your proposed structure would be significantly different from the structure under the Articles of Confederation. It seems as though we’ve already tried having minimal revenue raising structures for the federal government, learned that such a structure does not work well at international scales (240 years ago - we’re even more globalized now) and moved onto a more productive form of taxation.

The things we are spending money on (besides arguably defense) have next to nothing to do with working at international scale. Furthermore, while I'm not advocating we return to the era of AoC, the power granted via the current Constitution does not bestow the power, size, and scope of things that the current federal government has embraced.

Well, one thing that would simplify things and reduce the number of taxpayers that have to deal with filing returns is to simply exempt people who make less than a certain threshold, perhaps $40k. People making so little money are already struggling, so why do they need to pay taxes, and worse, spend time and money filing tax returns for that?

That's already effectively the case, though the numbers are different. If you're married and make under $24k per year, you don't pay tax. (And other credits that low-income people often are eligible for can increase that number.) It is annoying because you still have to file, and if an employer withheld anything, you have to wait until April to get it back.

I meant that it would be nice if people with low (and even middle) incomes weren't saddled with having to file a tax return. It's a huge pain point for people struggling to make ends meet.

This would probably require some simplification of the tax code.


"becomes too easy for the government to nearly invisibly turn up the tax rate"

Or not.

Source. I live in a country where the vast majority have income taxes handled by their employer. It would still be front page news if income tax rates increased or decreased.

Painful transparency is just pain.


It would be front page news for a day then people would forget and you'd never hear about it again.

Do it in the US and it's front page news on the day and then it's on the second and third pages January through April the following year.


That's not my experience. The UK has automatic taxation but the current government lowered effective tax for most people this month and parties make tax-rate pledges during election campaigns.

That doesn't really disagree with what I said.

How many days is it reasonable for something to be front page news? Personally I'd prefer 365 different headlines then the same one for 4 months straight.


How much are income taxes in your country compared to the US?

Its UK, so between 20% and 45%.

It's actually a little ironic who introduced the idea of tax withholding. It was Milton Friedman and little did he know that federal tax withholding would allow the government to grow larger than ever imagined.

> If people were able to budget for it then, why not now?

A failing public education system and increasingly consumerist culture that encourages bad spending habits using psychological advertising tricks, to start. Go look at how little savings Americans have currently as well, which has been covered ad nauseam by most news outlets in the past few years.

> Without the painful transparency, it becomes too easy for the government to nearly invisibly turn up the tax rate on individuals to pay for whatever boondoggle or foreign war they see fit.

Given that it directly affects take-home pay, any significant change is pretty noticeable. Heck, even Trump's very small changes for the middle class were noticed on paychecks slightly, though there was also an unequal decrease in witholding that made people's refunds smaller.


> A failing public education system and increasingly consumerist culture that encourages bad spending habits using psychological advertising tricks, to start. Go look at how little savings Americans have currently as well, which has been covered ad nauseam by most news outlets in the past few years.

While these may play a small part in why people couldn't budget for it now, I think a bigger part of it is that income tax just did not apply to most people in as large of sums that it does today.

For example. The lowest tax bracket in 1940 was 4% and went from $0-4000. Median income at that time in the US was about $950.


Using the tax brackets to measure how much we pay in taxes is incorrect. There are things like Earned Income Credit and other credits that generally relieve the tax burden completely from lower income earners.

Check out https://taxfoundation.org/summary-federal-income-tax-data-20... for an analysis on 2015 US taxes. The bottom 50% of the US paid an average of 3.59% of their income. MarketWatch claims that 44.4% of Americans pay no federal income tax at all: https://www.marketwatch.com/story/81-million-americans-wont-...


Far fewer people were subject to the income tax at the time. The average Joe who couldn't read well or do much arithmetic didn't have to worry about it. For this reason the Social Security tax was implemented as a payroll tax.

The tax was intended primarily as a tax on the wealthy or middle class, but over time by not adjusting the standard deduction/exemptions, more and more people ended up paying the tax. You could also make the argument that more and more people became middle class.


> Without the painful transparency, it becomes too easy for the government to nearly invisibly turn up the tax rate on individuals to pay for whatever boondoggle or foreign war they see fit.

Non-sequitur. Taxes are already seen on every pay stub and tax return. Even if taxes weren't explicitly state, simply having less money is painfully transparent.


If thats your argument, then you must agree to do away with witholding, there is no downside to the rational actor.

Reality is a bit more complex than that.

But if I were to design a tax system, it likely wouldn't have withholding. I'd probably mess around with some weird purely transactional/continuous tax system though.


Here in the UK we receive a letter from HMRC saying how much I'd paid (in income and NI, not counting sales tax, fuel taxes, etc), and where it goes.

https://www.gov.uk/government/news/millions-start-receiving-...


At least if you're using the tax prep software I did it offers a 'payment plan', which seems like an upfront way of asking to have wages garnished post-taxes due, instead of before (like W4?s do)

This is something the IRS does directly to encourage people to file even if they can't afford to pay right then. This helps with cases like self-employment income or capital gains where you can end up owing at the end of the year even with W4 withholding for your primary income stream.

The penalty for not paying is much lower than the penalty for not filling, if you owe.

It's possible your tax prep software does their own version as a middleman, but the IRS offers it directly through the same system that quarterly estimates are paid.


> What happens when you don't have the cash to pay?

You ask as if it would be a new concept to penalize people who don't pay their taxes...

There are clear laws on the books for tax evasion. No need to doubt about what happens.


Forcing everyone to make quarterly estimated payments would lead to riots in the streets.

Nah, no quarterly estimated payments. You just get your whole salary up front and you're completely fucked in April.

It might be more effective if we moved filing to the first week of November.

Doing that in absence of all other changes would likely have a highly positive outcome in the medium/long term (for tax reform at least).

I've always thought it would be better to replace the income tax with a national sales tax. Then, for those who earn less and have to spend a greater proportion of their income on essential expenses, the government would credit them through their employer's paycheck (essentially the opposite of what federal withholding is now). For those who earn more, they would receive less credit or won't receive any credit.

Wouldn't that make the lower class the only ones that had to file anything at all (for the tax credit), put temporary financial strain in place when waiting for credit for purchases and actually make the IRS more complicated and onerous for most Americans?

I get the attempt to sidestep the regressive counterarguments normally in play with sales tax replacement systems, but I think this system would be equally regressive.


> Wouldn't that make the lower class the only ones that had to file anything at all (for the tax credit

They shouldn't have to do anything more than file a W4 whenever they start a new job or their income statutes changes. That's certainly less burdensome than even just the 1040 form now.

> put temporary financial strain in place when waiting for credit for purchases

What I proposed would be a credit that would be applied to every paycheck, much like the withholding we currently have applied to every paycheck. So the wait for credit wouldn't be ant longer than it currently is before the next payday (assuming they're living from paycheck to paycheck).

> and actually make the IRS more complicated and onerous for most Americans?

Having this credit calculated based on the reported earnings on the W-2 form and filing a W4 is certainly less complex than just filing the 1040 form. Plus, most people wouldn't have to worry come later this month if they haven't had enough withheld from their paychecks in the last year.

> but I think this system would be equally regressive.

If people with less income are getting a credit on every paycheck and they spend less overall compared to people who earn more and get less or no credit on their paychecks, then why do you believe that the proposed system would be equally regressive?


> They shouldn't have to do anything more than file a W4 whenever they start a new job or their income statutes changes.

This works if everyone has a exactly one job at all times that is their sole source of income, but fails otherwise. Of course, if the conditions it works were always true, irreducible complexity (that is, excluding the complexity that is maintained simply because both conservative politicians and tax-prep businesses have an interest in making tax prep onerous unless you pay for an additional service) for taxpayers of the current to tax system would be significantly less.

It doesn't, even in the case it works, address the problem that a regressive tax with a flat credit is...still a regressive tax.


> This works if everyone has a exactly one job at all times that is their sole source of income, but fails otherwise.

The current W4 form takes dual income/second jobs into account and adjusts the withholding based on that. Changing that withholding to a credit based on income, number of jobs, dependents, etc wouldn't be any worse than it is now, but eliminating the 1040 and other associated forms would definitely be a big benefit.

> even in the case it works, address the problem that a regressive tax with a flat credit is...still a regressive tax.

We have tax brackets now based on income level. Would basing a credit on similar income brackets be any different? Or are you claiming that out current tax system is regressive and my proposal wouldn't fix the underlying issue?


Wouldn't that be regressive, in the sense that richer people spend a lower proportion of their income?

Plus they have the means to spend their earnings abroad.

But a fixed credit could offset some of those concerns.


> Wouldn't that be Wouldn't that be regressive, in the sense that richer people spend a lower proportion of their income?

The paycheck credit I proposed should address that. Plus rich p eople definitely spend a lot more compared to others.

> Plus they have the means to spend their earnings abroad

While that's true, they certainly could be taxes on major purchases. For example, I could buy souvenirs abroad without passing tax on them, but I wouldn't be able to buy a car and not pay the tax before titling it here.


There's a couple of big problems here: 1) Rich people spend a lot of their money on real estate, so unless you're going to come up with a good way of taxing that (which we don't do now; property taxes are local), rich people aren't going to be paying much in taxes, and 2) Rich people spend a lot on foreign vacations and travel, which is untaxable domestically for obvious reasons. Sure, they still have to pay titling tax on cars, but when they're spending tons of money on foreign hotels and such, cars are a drop in the bucket.

In short, there's a reason that no other developed nation taxes this way, and they all have income taxes. And all those other nations manage to have relatively simple taxes for most taxpayers that don't require paying H&R Block to file for them.


> Rich people spend a lot of their money on real estate, so unless you're going to come up with a good way of taxing that

The same thing can apply to real estate as it does for cars. That is, a sales tax you pay when you purchase the home. And the sales tax doesn't have to be a flat amount. It could be a greater percentage of the value of the home for homes that are valued at several million dollars as opposed to those that are worth only several hundred thousand dollars.

> rich people aren't going to be paying much in taxes

Isn't that the case currently (compared to what they could be paying due to all the loopholes in the current tax code)? If we focused on taxing transactions as opposed to possessions and income, then the rich could be taxed far more. Invest in stocks? Then you can be taxed when you buy them. Invest in real estate? Then you can be taxed when you buy property, etc.

> Rich people spend a lot on foreign vacations and travel, which is untaxable domestically for obvious reasons.

That is true, but it seems that the US is one of the few nations in the world that states that you have to pay taxes on income you earn outside the country (assuming you don't pay taxes on it in the other country). That said, I think that we should focus on the majority of tax payers in terms of making how they pay taxes easier and hopefully more fair.

> there's a reason that no other developed nation taxes this way, and they all have income taxes. And all those other nations manage to have relatively simple taxes for most taxpayers that don't require paying H&R Block to file for them.

I don't pay anyone for filing taxes, but it takes days to read through all the instructions for the 1040 form and other associated forms to see what applies to me and what doesn't. Personally, if I was able to take care of my tax obligation by just buying various things throughout the year and getting my full paycheck, then I would certainly be happier and not have to essentially waste several days every year figuring my taxes.


What's the benefit compared to what we have now?

Basically, we wouldn't have to go through the process of filing taxes every year, and we wouldn't have to worry about the potential bill and penalties if we didn't have enough money withheld from our paychecks in the last year.

We would have to file to get the proper credit, though, right?

The W4 form should be sufficient (since it's used to determine the credit, if any, you receive per paycheck). You shouldn't need to file a 1040. Your employer would file the W-2 form which would allow the government to determine your income for the purposes of the amount of credit you receive per paycheck.

So any income other than as a W-2 employee doesn't count influence your credit?

This includes capital gains, rent collected from tenants, AdSense revenue.

The right way to handle this stuff is not immediately obvious to me.


Isn't that income also reported to the government via 1099 forms or similar? Do those who make less money typically also have income from sources such as collecting rent or capital gains?

I suppose that reporting does happen or at least could be made to happen under the new system.

I used to make $80k per year in salary(which is far less than most of the top decile in the USA) and in one of those years had over $10k in capital gains. In the same year I thought about buying a house to rent out. I ultimately didn't do it, but if I had, then I would have had to declare the income as part of my tax return filing process. Just as one data point.


I'd say within six months we would be back to the same tax system. People would either get a monthly bill or withholding would be reintroduced. Payroll processors would give people the option to do the withholding. As an experiment we could try to switch to withholding taxes on a quarterly basis. There would be lots of trouble as people hit that first quarter's reduced paycheck.

Sure.. Having had to pay estimated tax before, i say make everyone do it. Then we'd get rid of these taxes like no ones business



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