15.4.05

I DELIBERATELY OVERPAID MY TAXES. Illinois excludes from its reckoning of taxable income the interest on Federal obligations, as well as its own tax refunds, which are potentially taxable income on Federal returns.

So here I am, earlier this week. Figure the Illinois tax refund. Now work out the interest income, both of which Illinois calls "Subtractions." Ask myself: is it worth preparing the little exhibit and photocopying all the statements as the instructions require? Net reduction in tax bill: $1. Fuhgeddaboudit.

And thus a parable to offer an explanation for Drake at Tufte's Classes.
The first question is when are these people getting their tax returns completed? If these people are spending time and money to get there [c.q.] complex tax return prepared are they working or waiting in line at the local tax service. The second question I pose is, why does tax preparation take so long and why does it have to be so complex and complicated? The tax system in our country needs to be overhauled. It is getting really out of hand and I believe it is costing the country more to tax its people than it actually benefits from tax revenue.
Let's walk this cat backwards. First, there is an optimal level of enforcement, and at least one commentator (via Constrained Vision) has characterized the effect of lax enforcement as "do-it-yourself tax cuts." Second, my brother earns his modest living operating the local tax service, and he always has interesting stories about his clients. Third, an introductory economics class probably doesn't get into adjustments, exemptions, deductions, and credits. Adjustments, exemptions and deductions have the effect of reducing taxable income: the exemption makes some amount of income, irrespective of source, not taxable; the adjustment deems some types of income not subject to tax; and the deduction reduces income by the sum of allowable expenditures. Credits reduce the tax on taxable income. Each of these carries with it a different set of incentives and a different effect on allocative efficiency. The incentives are set up by legislators who would like to encourage some kinds of behavior, and there are economists who like targeted tax credits or carefully designed exemptions to get people to Do The Right Thing, and there are economists who like simple tax codes.

Each of the policies has in common with a grocery store coupon some difficulty in using it. (What would be the point, for instance, of a targeted tax credit if anyone could claim it, purchase of electric automobile or not, to use one example from the current list of credits.) Thus the tax code and the tax form become an exercise in balancing ease of use against correct identification of beneficiaries, and sometimes it becomes expensive for a beneficiary to identify himself. That, however, might be optimal, just as all grocery coupons are not clipped and redeemed.

SECOND SECTION: The political economy of tax policy is a good place to observe opportunities to be logical giving way to temptations to make polemical points. I recall reading a commentary from a libertarian think piece objecting to adjustments, deductions, and credits as treating citizens like so many gerbils. But convoluted air-fare plans are simply freedom of choice in action, although the proper key in the proper branch of the maze yields a reward. What institutions most efficiently enable people to make optimal choices, and will that institution sometimes be the government?

CALL AN EXTRA. Constrained Vision:
Americans are willing to give up some deductions to achieve a simpler tax code.

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