The Tax Burden is of Interest
by Paul McGoldrick
I've just finished doing taxes for 2001. The results were a pleasant surprise but it got me to thinking about income taxes in a general sort of way. Of all the Amendments to the Constitution of the United States the one that we should remember best is number XVI from 1913: "The Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration." The apportionment bit was the sleight of hand to get taxation past the Supreme Court, which had determined in 1895 that income tax was unconstitutional because it was not apportioned. The "from whatever source derived" is what got gangsters into jail in the next decade.
Income tax - both from individuals and corporate - exceeded $1 billion by 1918, $7 billion by 1942, $43 billion by 1945…well, you get the picture. The biggest increases in taxes came to pay for wars and, in the strange way of things, major boosts in the economy overall. Knowing that the best growth cycles we can get come when we are out killing other people is rather perverse, but it is fact.
I've lived in a number of countries and the tax burden in the United States is the worst I have experienced: The burden is not in the amount of taxes that we have to pay (which are rather less than many other places) but in the efforts we have to expound just to get the darn things done. Sure you can get a professional preparer to "do all the work for you" but that's really not how it is. By the time you have all the paperwork to hand you can load it all in a $50 application (tax deductible) and get numbers in less than 30 minutes. My CPA is only a few minutes drive away (everything in my city is only a few minutes drive away) but by the time I sat down with him and went through the papers and receipts I would already be printing the results at home. That's not much incentive to hand over $90 an hour for his services (also deductible).
In other countries the tax system is much simpler and unless you are running a business you will never have to fill out any kind of tax return in places like the UK, France, The Netherlands, etc. In some countries, of course, tax evasion is a national sport and the employment black-market in countries like Italy is immense. I have seen, for example, at electronics distributors well over half the employees coming to work after finishing their government jobs (very) early in the afternoon. The second job is totally "tax free." There is a tendency, it seems, for such activity to be more prolific the warmer a country is?
But what gets my goat about the tax system - as we know it - is the refund process. Last year the government recorded refunds (presumably mostly for year 2000 filings) to over 91 million taxpayers - that is 91 million checks, not individuals (10.5 million of those checks went to California addresses.) The average refund in 2001 was about $1900.
With tax law changes the pundits are saying that the average refund against 2001 returns will be about $2100, a number which observers hope will act as a major pump for the economy; yes, we've dropped a lot of munitions in Afghanistan but it isn't the sort of war - yet - to really benefit the economy (although I notice companies like Raytheon are expanding their professional workforce quite dramatically).
Anyway, take that $2100 and assume that the overpayments were about equal every month. Think of it as a loan to the IRS and that the average refund date is probably the end of March. (Yes, I know there are people who get their W-2 in the middle of January, do their 1040-EZ and get electronic refunds in a few days; I'm more practical and paper filings mean that when you go for a mortgage, etc. you have the data already to hand.) So do the math with an interest rate of 4.5% (APR.)
To save you the time I have already done it and it's not such a big number. It works out to $66.94 (which would be taxable) and hardly seems worth the bother. But if it was the other way around you can be sure that the IRS would certainly bother to collect at a higher interest rate [the AFR (Applicable Federal Rate) for April 2002 is 5.62%.] And look at the overall picture; if there were 91.6 million refund checks like last year - and there will be more this year because of the tax changes - that computes to a staggering $6.132 billion of refund interest, certainly enough for the budget of a small island nation somewhere.
So I want to see two lines added to the 1040 form. After line 67 "this is the amount you overpaid" I want to see line 67a "interest payable by the government" and line 67b "add lines 67 and 67a, this is amount due to you."
The IRS has come a long way in recent years in showing a much more professional
face in doing a difficult job. Taxes are a necessity we may not care for
but I don't mind paying them as long as everybody is doing their bit as
well. The burden could be shared with the agency, however, with the little
decency of paying interest on the money lent to it: That doesn't need an
Amendment to the Constitution.