tag:theconversation.com,2011:/ca/topics/tax-day-2015-16059/articlesTax Day 2015 – The Conversation2015-04-14T09:49:14Ztag:theconversation.com,2011:article/397622015-04-14T09:49:14Z2015-04-14T09:49:14ZOverlooked costs of IRS budget cuts will hit taxpayers hardest<figure><img src="https://images.theconversation.com/files/77666/original/image-20150410-2118-4n8wsv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Paper filing may soon be a thing of the past. But increased automation means humans will be more important than ever. </span> <span class="attribution"><span class="source">Crumpled 1040 via www.shutterstock.com</span></span></figcaption></figure><p>The <a href="http://www.forbes.com/sites/procedurallytaxing/2015/04/14/eight-tax-myths-lessons-for-tax-week-part-ii/">Internal Revenue Service</a> takes a lot of hits, both from those who are paid to be critics like the National Taxpayer Advocate and from those who just pile on for the fun of it – politicians, pundits and the public. </p>
<p>The nastiest hit has come from Congress in the form of relentless budget cuts for the past five years. While there has been a fair bit of commentary on the effect of these cuts, commentators have missed two important points: (1) the cuts are deeper than most people think, and (2) their effect is both more subtle and insidious. </p>
<p>As the <a href="https://theconversation.com/why-most-of-us-procrastinate-in-filing-our-taxes-and-why-it-doesnt-makes-any-sense-39766">procrastinators</a> among us prepare their <a href="http://www.forbes.com/sites/procedurallytaxing/2015/04/13/eight-tax-myths-lessons-for-tax-week/">last-minute returns</a> and suffer long waits on hold with the IRS, it’s a good time to consider each one – since they mean the waits will get longer and the potential for bad stuff to happen will increase.</p>
<h2>No. 1: buy five years, get one free</h2>
<p>As for the numbers, most articles on this fiscal year’s IRS budget have noted that the <a href="http://www.gao.gov/assets/670/664083.pdf">appropriation</a> of US$10.9 billion represents a cut of more than $1.2 billion compared with five years ago, and that is not even accounting for inflation. If one considers the decreasing value of the dollar to buy goods and services, this year’s budget <a href="http://www.maglaw.com/publications/articles/00386/_res/id=Attachments/index=0/Temkin%20NYLJ%20PDF.pdf">represents</a> an effective 18% drop from fiscal year 2010, or $2.2 billion. </p>
<p>Those numbers are true enough, but understate the hit. A more meaningful number would be $7.3 billion. </p>
<p>That is, if Congress had simply kept IRS funding stable at the FY10 level, adjusting only to keep pace with inflation, the total appropriations for the subsequent five-year period, 2011-2015, would have been about $64.6 billion. Instead, Congress has given the IRS a total of $57.3 billion from FY11 to FY15.</p>
<p>It’s almost like Congress gave itself a “buy five years, get one free” discount. Even President Barack Obama’s <a href="http://www.treasury.gov/about/budget-performance/budget-in-brief/Documents/FY16FactSheet.pdf">proposed FY16 budget</a> asking for an additional $2 billion over the current year doesn’t get back half of the five years in lost funding. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/77667/original/image-20150410-2122-127ier9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/77667/original/image-20150410-2122-127ier9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/77667/original/image-20150410-2122-127ier9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=534&fit=crop&dpr=1 600w, https://images.theconversation.com/files/77667/original/image-20150410-2122-127ier9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=534&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/77667/original/image-20150410-2122-127ier9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=534&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/77667/original/image-20150410-2122-127ier9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=671&fit=crop&dpr=1 754w, https://images.theconversation.com/files/77667/original/image-20150410-2122-127ier9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=671&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/77667/original/image-20150410-2122-127ier9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=671&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Back when IRS was fully staffed, anyway.</span>
<span class="attribution"><span class="source">IRS cartoon via www.shutterstock.com</span></span>
</figcaption>
</figure>
<p><strong>What’s our starting point</strong></p>
<p>That raises the question, should FY10 be the baseline? During a February 3 hearing, Senator Orrin Hatch <a href="http://www.finance.senate.gov/hearings/watch/?id=c1ff00a9-5056-a032-527d-d4ac3f013388">complained</a> to IRS Commissioner John Koskinen, “Your budget fluctuations look a little less dramatic when we don’t use 2010 as the baseline” (minute 42). </p>
<p>True enough, but the emphasis there must be on “a little less.” One has to dial the time machine back to 1998 to find the last year that Congress gave the IRS as <a href="http://www.irs.gov/PUP/newsroom/Written_Testimony_of_Commissioner_Koskinen_before_the_Senate_Finance_Committee_on_IRS_Budget_and_Current_Operations.pdf">little money</a> as it did for FY15. Over the same period, the number of additional taxpayers the agency must help and oversee grew by some 16 million. </p>
<p>More tellingly, however, are the numbers for “information returns,” forms like the W-2 and the 1099 that the IRS uses to match against taxpayer returns. In FY98, the service received and processed more than 1 billion information returns. Yeah. That’s a lot. But by FY2013, the IRS had to deal with double that number: almost 2.1 billion information returns. </p>
<p>So, yes, using FY98 as a baseline is “a little less” dramatic than using FY10, in the same way that skipping over the Great Recession makes stock market fluctuation “a little less” dramatic. </p>
<p>FY10 makes sense as the baseline because that was the year that Congress started <a href="http://crenshaw.house.gov/index.cfm/pressreleases?ContentRecord_id=C6853C99-E47F-40E0-A454-003B73194228v">punishing</a> the agency with budget cuts. Not only that but FY10 was also the year Congress really began piling on the acronymic workload: PPACA (the official acronym for Obamacare) and FACTA (which required the IRS to start investigating taxpayer foreign bank accounts). </p>
<p>Each of these laws contained huge implementation costs. The IRS’s job would have been hard enough if Congress had given only enough extra money to keep up with inflation. But it adds injury to insult for lawmakers to add significantly to the IRS’s workload even as it withdraws funding to pay for it. </p>
<p>Congress is not solely to blame for this state of affairs. For almost every year since 2002, the budget proposed to Congress by the White House – which is almost always cut further – is always less, and sometimes <a href="http://www.treasury.gov/IRSOB/reports/Documents/IRSOB%20FY2015%20Budget%20Report-FINAL.pdf">much less</a>, than the funds requested by the agency. </p>
<p>Former Commissioner Charles Rossetti <a href="http://hbswk.hbs.edu/archive/4674.html">has explained</a> how every year – under both Republican and Democratic Presidents – he would make the futile trek to the White House’s Office of Management and Budget to beg for resources, only to be routinely told that his request would be denied. And instead a much smaller request would be sent to Congress in that year’s budget. </p>
<h2>No. 2: rise of the machines</h2>
<p>Machines are cheap. Humans are expensive. The IRS depends upon both to administer the fiendishly complex tax code that Congress tirelessly re-scrambles every year. </p>
<p>The chronic shortage of funds has most obviously affected the human side. Since more than 75% of IRS funding goes toward personnel, commentators have naturally focused on the resulting reduction in trained employees. Currently, the IRS must <a href="http://www.cbpp.org/cms/?fa=view&id=4156">make do</a> with 10,000 fewer employees than it had FY10, while the <a href="http://www.taxpayeradvocate.irs.gov/userfiles/file/2013fullreport/employee-training-the-drastic-reduction-in-irs-employee-training-impacts-the-ability-of-the-irs-to-assist-taxpayers-and-fulfill-its-mission.pdf">training budget</a> for its workers <a href="http://www.cbsnews.com/news/nightmare-2015-tax-filing-season-predicted">is down</a> 85%. </p>
<p>The IRS Oversight Board puts it well in its FY2015 Report: “This means a current IRS employee will see five coworkers leave, some of them the most experienced and well trained, before one new employee is eventually hired to cope with a growing workload.” </p>
<p>But the true impact on tax administration from the loss of trained personnel is not just fewer and poorer quality audits or reduced help for taxpayers filling out returns – or <a href="http://www.bloomberg.com/news/features/2015-04-08/an-emotional-audit-irs-workers-are-miserable-and-overwhelmed">lower morale</a> among remaining workers – impacts that <a href="http://www.forbes.com/sites/beltway/2014/12/16/the-war-on-the-irs/">most commentators</a> have talked about. Loss of personnel does not mean stoppage of work; it means increased errors by the IRS because of unchecked automated processing of taxpayer accounts. </p>
<p><strong>Computers shoot first, humans sort it out later</strong> </p>
<p>One might think that if the IRS does not have the employees, it cannot do the work of processing returns, assessing taxes and collecting unpaid taxes. That would be wrong. </p>
<p>As I have <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1475373">elsewhere described</a> in long, boring academic detail, the IRS has resolutely automated various tax administration functions for most of the 20th century to the point now that it is reasonable to say tax administration is run by machines, not humans. </p>
<p>Shifting work to computers is scary for many people, and rightly so. In fact, when the IRS first started using computers to process returns in the early 1960s, it created a public relations film to calm fears. </p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/wk5zQfKWRZ8?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">The IRS teaches us not to fear the machines in “Right on the Button,” circa 1966.</span></figcaption>
</figure>
<p>I have also previously <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=997475">explained</a> that what truly abuses taxpayers is unsupervised machine processing, because that’s often where errors creep in and employees need to manually sort through the discrepancies. Historically, however, the IRS had a well-trained force of capable IRS employees to help taxpayers sort through the problems created by the computer systems’ rigidity. </p>
<p>The short of it is that most adverse actions taken against taxpayers result from automated processing of taxpayer accounts: computers shoot first, and it is up to the taxpayer to ask questions later. When the computers get it wrong, adversely affected taxpayers must find a real, actual, live human to fix the problem. But who ya gonna call when there is no one there? </p>
<h2>And the computers whir on</h2>
<p>That’s the effect of budget cuts.</p>
<p>We saw a dramatic example of this effect back in 2013, when the government shut down from October 1 to October 16. There were very, very few IRS employees working. Yet the machines kept whirring away.</p>
<p>The National Taxpayer Advocate <a href="http://www.irs.gov/pub/tas/nta_testimony_houseppprops_oversight_022614.pdf">reports</a> that during the shutdown – even with only a few employees – computers took a total of 301,807 adverse actions against taxpayers, including grabbing bank accounts, wages, Social Security benefits, filing Notices of Tax Liens, setting up deficiency assessments and more. </p>
<p>All of those actions were computer-generated. No human gave input or oversight. Let’s assume the computers got it 99% right. That still means more than 3,000 of the actions were in error, errors that could have devastating effects on taxpayers. Yet there were no humans to fix the mistakes. </p>
<p>The 2013 shutdown was just 15 days. The continual cuts to the IRS budget will have a similar effect that will last for years and years: fewer people to fix errors generated by computers. </p>
<p>This is not a rational way to run the county. But I suppose it is futile to expect collective rationality from the men and women whose bickering voices fill the halls of the current Congress.</p><img src="https://counter.theconversation.com/content/39762/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bryan Camp is affiliated with the American Bar Association, Tax Section, and is a member of the American Law Institute. </span></em></p>Congress has shortchanged the IRS by $7.3 billion over the past five years, and taxpayers will increasingly pay the price.Bryan Camp, Professor of Tax Law, Texas Tech UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/397662015-04-13T09:55:42Z2015-04-13T09:55:42ZWhy most of us procrastinate in filing our taxes – and why it doesn’t make any sense<figure><img src="https://images.theconversation.com/files/77376/original/image-20150408-18063-1em035w.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Tick tock, tick tock.</span> <span class="attribution"><span class="source">Tax day via www.shutterstock.com</span></span></figcaption></figure><p>April 15th, a day most of us dread, is fast approaching. Have you filed your taxes yet? </p>
<p>Economists believe most people are rational calculating machines, but many of us don’t behave rationally about filing our taxes. </p>
<p>Instead, most of us wait until the very last minute. Figures from the <a href="http://www.irs.gov/uac/Newsroom/Filing-Season-Statistics-for-Week-Ending-March-27-2015">end of March</a> suggest roughly 50 million – or one-third of all this year’s individual tax returns in the US – will have been filed in the final two weeks before Tax Day. </p>
<p>This is NOT a good idea for most of us.</p>
<p>I experienced this procrastination during the past weekend when I was finally able to convince one of my sons to sit down and do his income taxes. He was very happy when the final tabulation showed a good-sized refund. Walking out the door, my son said if he had known it would be a refund, he would have done his taxes much earlier.</p>
<h2>Most of us owe nothing</h2>
<p>Waiting till the last minute is strange for a number of reasons. First, the majority of people in the US either get a refund or don’t owe the federal government any money. The graph below produced from <a href="http://www.irs.gov/uac/SOI-Tax-Stats-Historical-Table-9">IRS data</a> shows the percentage of filed tax returns that are due a refund. Since the 1950s a rising number of people have overpaid. About eight out of every ten tax returns filed in 2013 got a refund.</p>
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<a href="https://images.theconversation.com/files/77379/original/image-20150408-18057-1230v8a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/77379/original/image-20150408-18057-1230v8a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/77379/original/image-20150408-18057-1230v8a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=370&fit=crop&dpr=1 600w, https://images.theconversation.com/files/77379/original/image-20150408-18057-1230v8a.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=370&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/77379/original/image-20150408-18057-1230v8a.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=370&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/77379/original/image-20150408-18057-1230v8a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=465&fit=crop&dpr=1 754w, https://images.theconversation.com/files/77379/original/image-20150408-18057-1230v8a.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=465&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/77379/original/image-20150408-18057-1230v8a.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=465&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The graph shows more and more tax filers are owed money.</span>
<span class="attribution"><span class="source">Author's Calculations From IRS Data</span></span>
</figcaption>
</figure>
<p>The IRS also tracks the number of returns that owe no tax. Since 1950 on average 4% of all returns filed owed no tax. Combined this means only about 15% of all filed tax returns pay the government any extra money beyond what has already been taken out of paychecks or sent in throughout the year as estimated payments. </p>
<p>In other words, if you are procrastinating, there is an 85% chance you either owe nothing or will get money back, which gives you better odds that many <a href="http://www.masslottery.com/lib/downloads/about/June2014financialYTD.pdf">state lotteries</a>.</p>
<h2>Large refunds and unlikely audits</h2>
<p>Second, if you do get a refund, typically it will be quite large. The most <a href="http://www.irs.gov/uac/SOI-Tax-Stats-Collections-and-Refunds,-by-Type-of-Tax-IRS-Data-Book-Table-1">recent data</a> for the 2012 tax year showed that among people who overpaid, the typical overpayment amount was about $3,000. Of this, the average person elected to receive $2,800 back and left $200 with the IRS to pay future taxes.</p>
<p>Third, many people procrastinate because they fear being audited. The percentage of individual returns audited in 2010 was about 1.1% and has since fallen to about 0.9%. However, these low numbers mask huge variations in the type of returns that are audited. Most of the audits happen either to millionaires or self-employed people with high income, not to the general public. </p>
<p>About 7.5% of people declaring income over a million dollars and 2.7% of self-employed people earning between $200,000 and a million dollars were audited. As for the rest of us – excluding those who declared self-employment or farm income – the chance of being audited is about 0.3%. </p>
<p>Roughly the same number of people <a href="http://www.irs.gov/uac/SOI-Tax-Stats-Examination-Coverage:-Recommended-and-Average-Recommended-Additional-Tax-After-Examination-IRS-Data-Book-Table-9a">visit emergency rooms</a> each year after slipping or falling in a bathroom as are selected among the general public for IRS audits. Moreover, among this small group chosen for auditing, one out of every five has no changes made to their return after the IRS examination.</p>
<h2>Lightning-like odds</h2>
<p>Fourth, some people are concerned they could go to jail because of making a tax mistake. The odds of this happening are in the same range as being <a href="http://www.lightningsafety.noaa.gov/odds.htm">hit by lightning</a>. In the US slightly more than 300 people are hit by lightning each year. Since 2000, fewer than 600 people a year on average <a href="http://www.irs.gov/uac/SOI-Tax-Stats-Criminal-Investigation-Program-by-Status-or-Disposition-IRS-Data-Book-Table-18">go to jail</a> for tax crimes, meaning the chance of “doing time” for tax reasons is slim indeed.</p>
<p>Fifth, those who fill out their returns on their own often find the task daunting. The language is convoluted, the rules are Byzantine, and tax filing requires collecting many papers and forms that don’t all arrive at the same time. The process makes many people feel <a href="http://www.miamiherald.com/news/local/community/miami-dade/article9534044.html">confused</a>, stupid or inadequate. </p>
<p>Lastly, a <a href="http://www.gallup.com/poll/151910/tornadoes-taxes-coincide-stressful-days-2011.aspx">Gallup Poll</a> has found Tax Day to be one of the most stressful days of the year, which is not surprising given that many people put off doing their taxes until the last moment. <a href="http://www.sciencedirect.com/science/article/pii/0092656686901273">Research</a> suggests procrastination is related to stress and that procrastinators often do not finish tasks that are highly stressful.</p>
<h2>Trouble is, no one knows the truth</h2>
<p>The question remains, why do so many people procrastinate when the odds are greatly in their favor? One reason is that almost no one knows the <a href="http://www.amazon.com/Business-Information-Zagorsky-McGraw-Hill-Paperback/dp/B00DU7GT1E/ref=sr_1_2?ie=UTF8&qid=1428342038&sr=8-2&keywords=zagorsky+information">above statistics</a>. </p>
<p>While the IRS is quick to take your money, it is slow to release data. There are a number of reasons why. Tax returns are due months after the fiscal year is over. The IRS does not get most individual tax returns for 2014 until the beginning of 2015. Then, many people and businesses ask for extensions. </p>
<p>This means it takes a long time before the IRS gets all the tax returns for a particular year. Additionally, the <a href="http://www.irs.gov/uac/SOI-Tax-Stats-Purpose-and-Function-of-Statistics-of-Income-%28SOI%29-Program">Statistics of Income</a>, which is the IRS office that produces the data, has a small budget. Most of its money and time is spent producing information for the Treasury Department’s Office of Tax Analysis and the Congressional Joint Committee on Taxation, so that the impact of congressional and presidential proposals to change the tax system can be evaluated.</p>
<p>Another reason is that the tax people owe is uncertain since Congress is constantly changing the rules, and as life’s circumstances change, different tax rules apply. </p>
<p>After each year’s returns are collected, the IRS publishes a <a href="http://www.irs.gov/uac/SOI-Tax-Stats-Individual-Income-Tax-Returns-Publication-1304-%28Complete-Report%29">large book</a> that summarizes the information found in individual tax returns. The first chapter of each book is a lengthy summary of all the recent tax law changes. Constant changes to the tax code reduce people’s ability to accurately forecast their tax liability, which makes people put off dealing with computing and filing their taxes.</p>
<h2>Facing the scary unknowns</h2>
<p>Sometimes it is rational to delay. Although most people get refunds or owe no money, about 15% of people must pay the Federal government on April 15. The typical person in this category <a href="http://www.irs.gov/uac/SOI-Tax-Stats-Historical-Table-1">owes about</a> $6,000, which is twice as large as the average refund. </p>
<p>It is rational for people who owe the IRS money to delay filing since it gives them a longer time to gather the funds and a longer time to receive interest on their money before incurring a late payment penalty</p>
<p>In general, many people procrastinate when faced with the unknown because the unknown is scary. It is very rational to anticipate the worst when facing the mysteries of the US tax code. </p>
<p>However, for many people, Tax Day is a time of needless worry because the majority of us get back a sizable refund. While gathering together the time and papers needed to complete your tax return is a pain, four out of five of all taxpayers will find a silver lining.</p><img src="https://counter.theconversation.com/content/39766/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jay L. Zagorsky does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The vast majority of us will get a refund from the federal government, while the odds of an audit or worse are akin to getting struck by lightning.Jay L. Zagorsky, Economist and Research Scientist, The Ohio State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/397472015-04-13T09:55:38Z2015-04-13T09:55:38ZWhy Americans have chosen to pay income tax<figure><img src="https://images.theconversation.com/files/77668/original/image-20150410-2097-1b9g48w.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A 1909 cartoon suggested taxes on divorces, dogs, rubber plants and more during debate over the 16th Amendment </span> <span class="attribution"><a class="source" href="http://www.shutterstock.com/gallery-2733991p1.html?cr=00&pl=edit-00">Everett Historical</a> / <a href="http://www.shutterstock.com/editorial?cr=00&pl=edit-00">Shutterstock.com</a> ">1909 Cartoon via www.shutterstock.com</a></span></figcaption></figure><p>We can be forgiven, especially this time of year, for questioning a decision our predecessors made just over a century ago. In the 1910s, Americans decided to make personal and corporate income taxes a permanent feature of the U.S. economy. </p>
<p>Why did they start us down this road? And given that the taxes they endorsed started out small in scope and size but have multiplied by a factor of eight as a share of our economy, have we gone off course?</p>
<p>After all, when an income tax was introduced in 1862 to fund the Civil War, it lasted just six years before being replaced by other taxes. It took another 50 years before the 16th Amendment, which allows Congress to levy a national income tax, was adopted in 1913. </p>
<h2>The justification for a national income tax</h2>
<p>One of the clearest statements of why Americans in the early 20th century were willing to tax their incomes came from President <a href="http://www.presidency.ucsb.edu/ws/?pid=15088">Franklin Delano Roosevelt</a> in the 1930s: </p>
<blockquote>
<p>With the enactment of the Income Tax Law of 1913, the Federal Government began to apply effectively the widely accepted principle that taxes should be levied in proportion to ability to pay and in proportion to the benefits received. Income was wisely chosen as the measure of benefits and of ability to pay. </p>
</blockquote>
<p>Here, FDR sounds very much like an economics professor. He identifies a principle, a “guide,” for policy that relies on abstract concepts like “ability to pay” and “benefits received.” </p>
<p>But FDR is also saying something quite simple: If people do well, it is only right that they should help to pay for the setup that made their success possible. More to FDR’s point, people who do better should pay for more of that setup. </p>
<p>FDR’s reasoning is far from obsolete; our previous president seemed to agree with him. In 2011, Barack Obama explained why he <a href="https://www.whitehouse.gov/the-press-office/2011/04/13/remarks-president-fiscal-policy">supported</a> higher taxes on higher incomes:</p>
<blockquote>
<p>“As a country that values fairness, wealthier individuals have traditionally borne a greater share of this [tax] burden than the middle class or those less fortunate… [This is] a basic reflection of our belief that those who’ve benefited most from our way of life can afford to give back a little bit more.”</p>
</blockquote>
<h2>Obama echoed Roosevelt’s sentiments</h2>
<p>Like FDR, Obama wanted us to see taxes not as a burden to be lamented but as a fair payment for benefits received. And as our society has grown more complex, the increasing size of taxes we are willing to pay reflects the greater benefits we gain from the activities of government required to support it. </p>
<p>President Obama disagreed on many policies with Mitt Romney, his opponent in the 2012 presidential election, but on this logic for taxation they are not so far apart. Lost in the press coverage of the president’s 2012 rebuttal to anti-government forces “<a href="https://www.youtube.com/watch?v=YKjPI6no5ng">You didn’t build that</a>” was Romney’s <a href="http://www.buzzfeed.com/andrewkaczynski/new-romney-video-omits-passage-apparently-agreeing">reply</a>:</p>
<blockquote>
<p>“[The President] describes people who we care very deeply about, who make a difference in our lives: our school teachers, fire fighters, people who build roads. We need those things…You really couldn’t have a business if you didn’t have those things. But, you know, we pay for those things…in fact, we pay for them and we benefit from them.”</p>
</blockquote>
<p>It turns out that Romney, like Obama and FDR, viewed taxes as our way of paying for what we want government to do for us. As U.S. Supreme Court justice Oliver <a href="http://www.biography.com/people/oliver-wendell-holmes-jr-9342405">Wendell Holmes</a> famously said: “I like to pay taxes. With them I buy civilization.” </p>
<p>Part of the appeal of this logic for taxes is that it seems fair. Each person paying for what they get reminds us of a group of friends who split the bill at dinner according to what they ordered.</p>
<p>But perhaps fairness demands something in addition, namely that we help those who are less fortunate. Some people appear to benefit very little from our economic system, earning little income and having even less to spend. Is it fair to ask them to contribute to the pool of taxes nevertheless, or should we focus on providing them with the opportunity to share the benefits most of us enjoy?</p>
<p>As President Obama <a href="https://www.whitehouse.gov/the-press-office/2013/12/04/remarks-president-economic-mobility">said</a> in 2013:</p>
<blockquote>
<p>“And the result is an economy that’s become profoundly unequal and families that are more insecure…The combined trends of increased inequality and decreasing mobility pose a fundamental threat to the American Dream, our way of life, and what we stand for around the globe.”</p>
</blockquote>
<h2>Paying ‘our fair share’</h2>
<p>Americans have long balanced competing notions of fairness when deciding on policy toward the poor. We want everyone to pitch in, to pay their “fair share,” so we have moved away from making cash transfers to low-income households and have avoided proposals for a minimum guaranteed income. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/77674/original/image-20150410-2114-ph27ts.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/77674/original/image-20150410-2114-ph27ts.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/77674/original/image-20150410-2114-ph27ts.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=471&fit=crop&dpr=1 600w, https://images.theconversation.com/files/77674/original/image-20150410-2114-ph27ts.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=471&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/77674/original/image-20150410-2114-ph27ts.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=471&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/77674/original/image-20150410-2114-ph27ts.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=591&fit=crop&dpr=1 754w, https://images.theconversation.com/files/77674/original/image-20150410-2114-ph27ts.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=591&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/77674/original/image-20150410-2114-ph27ts.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=591&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">FDR signs the Social Security Act.</span>
<span class="attribution"><a class="source" href="http://commons.wikimedia.org/wiki/File:Signing_Of_The_Social_Security_Act.jpg">Library of Congress</a></span>
</figcaption>
</figure>
<p>At the same time, we want to support those in need, to give them a “fair shot,” so we make use of policies such as the earned income tax credit, childcare subsidies, and Medicaid to help people work their way into the broad middle class.</p>
<p>The same balance is at play in how we design policy toward the rich. We ask the highest earners among us to pay a greater share of their income than the rest of us. But, despite the well-known fact that inequality in incomes is now at levels not seen since FDR’s time, President Obama faced stiff opposition in Congress when he sought to raise the marginal tax rate (the share of the next dollar earned that is paid in taxes) at the top of the income ladder. </p>
<p>Former Speaker of the House John Boehner, for example, <a href="http://www.cbsnews.com/news/boehner-says-obama-not-serious-about-deficit/">argued</a> that those high earners already paid their fair share: “The top one percent of wage earners in the United States pay 40 percent of the income tax. The people [President Obama is] talking about taxing are the very people that we expect to reinvest in our economy and to create jobs.” </p>
<p>With political polarization at peak levels, debates over the purpose and fairness of taxation are once again front-and-center in U.S. politics. Sometimes it can seem that these debates go around in circles, with partisans from both extremes advocating reforms that even they don’t imagine becoming reality.</p>
<p>But we should celebrate these debates, for they are how we work our way toward an economic policy that reflects Americans’ nuanced, evolving sense of fairness. They are a part of what makes our economy, and our society, work. And that knowledge might even make writing that check on April 17 a bit less painful.</p><img src="https://counter.theconversation.com/content/39747/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Matthew C Weinzierl does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>As you wrestle with figuring out what you owe Uncle Sam, consider why the United States opted for an income tax back in 1913.Matthew C Weinzierl, Associate Professor of Business Administration, Harvard UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/392872015-04-10T09:47:55Z2015-04-10T09:47:55ZWant worker wages to rise? End the corporate income tax<figure><img src="https://images.theconversation.com/files/77398/original/image-20150408-18053-d5973j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The corporate tax wrecking ball may fall hardest on workers.</span> <span class="attribution"><span class="source">Tax ball via www.shutterstock.com</span></span></figcaption></figure><p>Workers’ wages have stagnated, even as the unemployment rate has plunged to a seven-year low and the economy is bounding ahead. Some people <a href="http://www.epi.org/blog/businesses-agree-time-raise-minimum-wage/">propose</a> raising the federal minimum wage and bolstering labor unions to address slow growth in wages. </p>
<p>One great way to lift pay that is not discussed often enough would be to <a href="http://www.nber.org/data-appendix/w19757/CorporateTaxPaper.pdf">end</a> the corporate income tax. Not just cut it, kill it, but not in a way that’s a sop to the rich. </p>
<p>Sound extreme? Here’s why it’s a smart and progressive idea that would raise wages, lower employment, boost investment and give the economy enough vim so that the Federal Reserve’s Janet Yellen can increase interest rates without <a href="http://www.huffingtonpost.com/ian-reifowitz/janet-yellen-gets-the-nee_b_6791036.html">restless nights</a>. And it would eliminate the incentive for companies to move their tax homes abroad (such as by doing <a href="http://www.treasury.gov/press-center/press-releases/Pages/jl2645.aspx">corporate inversions</a>) and encourage more businesses to establish their headquarters here. </p>
<h2>Time is ripe</h2>
<p>First off, the timing is good. Corporate tax reform is one of the few areas where we might see some legislation <a href="http://thehill.com/policy/finance/domestic-taxes/230236-lew-ryan-bullish-on-tax-reform">supported</a> by the Republican Congress and the Democratic president. The latter may not be quite ready to go for the elimination of corporate taxes, but he should think about it. </p>
<p>Second, the US may have the <a href="http://taxfoundation.org/article/us-has-third-highest-top-marginal-corporate-income-tax-rate-world">highest marginal rates</a> of any developed country, ranging from 23% to 35% depending on who you ask. </p>
<p>The <a href="http://www.forbes.com/sites/janetnovack/2013/07/01/gao-big-companies-paid-a-12-6-federal-income-tax-rate/">actual</a> average or effective rate companies pay on their profits, however, is about 13%, because so much of it is sitting overseas and untaxed – in addition to the many loopholes and deductions that employ small armies of accountants and lawyers. In 2013, the tax produced revenue equal to only 1.8% of GDP, a pittance compared with 8.1% for personal federal income taxes.</p>
<h2>Where the corporate tax ax falls hardest</h2>
<p>One of the problems in reforming corporate taxes is that in the popular imagination it is a levy on companies and their owners. But many economists, going back to David Bradford in 1978 and including myself, have concluded that the tax may actually fall hardest on workers – not the owners of corporations, which, truth be told, includes workers via their holdings of stock in their 401(k)s. </p>
<p>That’s primarily because while workers are relatively immobile and are unlikely to travel far for a job, capital is not and is generally free to roam far and wide in search of a better home – that is, one with less regulation and with less tax. When the capital flees, workers lose their jobs, and wages decline. Ireland was a <a href="http://www.nber.org/data-appendix/w19757/CorporateTaxPaper.pdf">beneficiary</a> of this during the so-called Irish Miracle in the late 1980s when a 75% cut in its corporate tax rate led to a massive inflow of capital, the establishment of more than 1,000 corporate headquarters, and dramatic increases in workers’ wages. </p>
<h2>The same thing would happen here</h2>
<p>I’ve been working with colleagues through the <a href="http://www.fiscalanalysiscenter.org">Fiscal Analysis Center</a> to create a large-scale computer <a href="http://www.nber.org/data-appendix/w19757/CorporateTaxPaper.pdf">simulation model</a> of the United States economy to show how it interacts over time with other nations’ economies. We then used the model to see how it reacts to eliminating the US corporate income tax in conjunction with raising personal income taxes. The findings make a strong, worker-based case for reform. </p>
<p>The model shows that ending the corporate income tax creates rapid and dramatic increases in investment, GDP and real wages, which help self-finance the lost revenue. The rest of the money the US Treasury would lose could be replaced with higher personal income tax rates, leading to a huge short-run inflow of capital. US capital stock – machines and buildings – would increase 23%, output would climb 8% and wages would go up 12%. </p>
<p>Benefits also accrue if the tax is just trimmed, down to 9%, and loopholes eliminated – a revenue-neutral corporate tax base broadening. In that case, the capital stock would increase 17%, output would grow 6% and wages would rise 8%. </p>
<h2>A boon for the future</h2>
<p>Both policies, eliminating and trimming, create gains in welfare for all Americans, but especially for today’s youth and future workers. If other countries followed the US lead and cut their rates as well, the benefits would be smaller, but still significant. </p>
<p>Another way to eliminate the corporate income tax, which I’ve previously proposed, would be to force shareholders to pay income taxes on their companies’ profits as they accrue. This gives companies no tax-related reason to leave the US, while ensuring shareholders rather than workers make up for any revenue losses. </p>
<p>Either way, getting rid of the tax may be a difficult political pill to swallow. It sounds like a giveaway to corporate interests, but nothing could be further from the truth. Rather, doing so would give the economy and workers a tremendous boost, just what it needs to achieve escape velocity. </p><img src="https://counter.theconversation.com/content/39287/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Laurence J Kotlikoff is president of Economic Security Planning, Inc. and director of The Fiscal Analysis Center.
</span></em></p>It may sound ironic, but eliminating corporate income taxes is a progressive idea that would lift wages, investment and the economy.Laurence J. Kotlikoff, Professor of Economics, Boston UniversityLicensed as Creative Commons – attribution, no derivatives.