Reducing the Number of Tax Brackets Doesn't Really 'Simplify' the Tax Code

[Bomb#20]

Why? What possible justification is there for making one man work ten days a month on the king's corvee when another man only has to work five days, unless you're mercifully giving a break to the five-day man because he's so poor that taking away the time he has left to support himself and his family is a hardship to him? The idea that a person making $400k can't afford to do his whole part in keeping society going is a bit silly. So unless your reason for having the tax law discriminate against the rich is hatred for the rich rather than mercy for the poor, what's a split in the upper income tax brackets for?

Huh? Is it impossible for some people to keep statements within the context they were previously presented?

Huh? What context do you feel I've taken your statement out of? What's the difference between the meaning of "I find the idea of a person making $50 million being in the same top bracket as a person making $400k a bit silly." in context and its meaning out of context? What other possible interpretation is there than that you think it's unreasonable for them to pay the same marginal tax rate? What's wrong with inviting you to justify your position on that point? What's wrong with arguing for a contrary opinion?

 

[ksen]

Perhaps if you don't want to live in fear of making a simple arithmetic error, you could consider emigration to Australia? We have surfing and kangaroos too

Let me know when you guys get rid of all the bird eating spiders then maybe. :shudder:

 

[Jimmy Higgins]

Huh? Is it impossible for some people to keep statements within the context they were previously presented?

Huh? What context do you feel I've taken your statement out of? What's the difference between the meaning of "I find the idea of a person making $50 million being in the same top bracket as a person making $400k a bit silly." in context and its meaning out of context? What other possible interpretation is there than that you think it's unreasonable for them to pay the same marginal tax rate? What's wrong with inviting you to justify your position on that point? What's wrong with arguing for a contrary opinion?

So you think a person who has an income of $50 million doesn't have more income that should be taxed at a higher rate? A person making $400k is likely working for a living. The guy at $50 million, well, god bless the job makers.

Taxing $400k at the same rate as $50 million is stupid. I'm hardly calling for the current top bracket to be reduced, but rather adding a couple upper income brackets and jacking up the rates. Of course, a lot of the money made at those levels isn't employee income and is taxed at a discounted rate already, which needs to change. The idea that my effective tax rate is competitive with Romneys or anyone else in that income level is disturbing.

 

[Loren Pechtel]

I think the other thing that stresses people out with doing the taxes is the worry if they do it wrong. So even simple math gets hard when you you have the worry about the government pounding your door down or worried about being thrown in jail.

Shit, it must be horrible living in a totalitarian police state.

I submitted an incorrect tax return a couple of years ago, due to a simple arithmetic error that led to my underpaying by about two thousand bucks.

Fortunately, rather than pounding my door down and throwing me in jail, the ATO instead decided to write a politely worded letter, pointing out that the numbers appeared to them to be incorrect, and asking me to either explain their error, or to pay the difference between my figure and theirs. They even said that they would waive any interest charges, as long as the matter was resolved before the close of the new financial year.

I sent them the money. No jail time was served, and no doors were pounded.

Perhaps if you don't want to live in fear of making a simple arithmetic error, you could consider emigration to Australia? We have surfing and kangaroos too

That's what usually happens here, other than the interest bit. I've coughed up several hundred once, (although I was actually right but hadn't reported it correctly. It's just the income was real, what they wanted to do moved it from one year to another (although they didn't know that, the return that would have reported it wasn't filed yet)--and was actually in my favor. Why bother to fight that?) and a couple of times I've sent them smaller amounts when I transposed digits entering numbers.

I've also amended a return on my own and sent them a couple of thousand--all due to fat-fingering one number on the previous year's return. (Which also had to be amended but it didn't change the tax.)

My parents, though, had some much more hostile encounters.

Once he was plagued by an auditor for months--said auditor was determined to find a problem even though none existed. The auditor finally ended up declaring that a check had been pre-dated (written at the end of December, cashed at the start of January) without any evidence, it would have taken going to court to fight that. The deductibility wasn't disputed but moving it did cost him a decent amount of tax.

Then there was the identity theft back before it was a household word. Somebody used my mother's social security number to get a job. The IRS considered it her job to contact "her" employer and get the report corrected--but wouldn't tell her where to find the employer and they couldn't find any such listing. I went off to college at that point, I don't know how it was ever resolved.

 

[bilby]

Shit, it must be horrible living in a totalitarian police state.

I submitted an incorrect tax return a couple of years ago, due to a simple arithmetic error that led to my underpaying by about two thousand bucks.

Fortunately, rather than pounding my door down and throwing me in jail, the ATO instead decided to write a politely worded letter, pointing out that the numbers appeared to them to be incorrect, and asking me to either explain their error, or to pay the difference between my figure and theirs. They even said that they would waive any interest charges, as long as the matter was resolved before the close of the new financial year.

I sent them the money. No jail time was served, and no doors were pounded.

Perhaps if you don't want to live in fear of making a simple arithmetic error, you could consider emigration to Australia? We have surfing and kangaroos too

That's what usually happens here, other than the interest bit. I've coughed up several hundred once, (although I was actually right but hadn't reported it correctly. It's just the income was real, what they wanted to do moved it from one year to another (although they didn't know that, the return that would have reported it wasn't filed yet)--and was actually in my favor. Why bother to fight that?) and a couple of times I've sent them smaller amounts when I transposed digits entering numbers.

I've also amended a return on my own and sent them a couple of thousand--all due to fat-fingering one number on the previous year's return. (Which also had to be amended but it didn't change the tax.)

My parents, though, had some much more hostile encounters.

Once he was plagued by an auditor for months--said auditor was determined to find a problem even though none existed. The auditor finally ended up declaring that a check had been pre-dated (written at the end of December, cashed at the start of January) without any evidence, it would have taken going to court to fight that. The deductibility wasn't disputed but moving it did cost him a decent amount of tax.

Then there was the identity theft back before it was a household word. Somebody used my mother's social security number to get a job. The IRS considered it her job to contact "her" employer and get the report corrected--but wouldn't tell her where to find the employer and they couldn't find any such listing. I went off to college at that point, I don't know how it was ever resolved.

So you agree that it was pointless hyperbole when coloradoatheist said "...even simple math gets hard when you you have the worry about the government pounding your door down or worried about being thrown in jail."?

There seems to be an odd dichotomy on the American right; on the one hand there is support for police officers who have killed people who were not in breach of any law; and on the other a tendency to mischaracterise a politely worded letter requesting that you pay your legally mandated share of the cost of running the country as 'violence perpetrated by the state upon the citizenry'. Very strange.

 

[Tom Sawyer]

It's not violence if it's only targeted towards the coloured folk.

 

[Loren Pechtel]

So you agree that it was pointless hyperbole when coloradoatheist said "...even simple math gets hard when you you have the worry about the government pounding your door down or worried about being thrown in jail."?

There seems to be an odd dichotomy on the American right; on the one hand there is support for police officers who have killed people who were not in breach of any law; and on the other a tendency to mischaracterise a politely worded letter requesting that you pay your legally mandated share of the cost of running the country as 'violence perpetrated by the state upon the citizenry'. Very strange.

People fear the IRS more than it actually warrants.

 

[Bomb#20]

Nope. However, there is plenty of other evidence against providing tax relief for the wealthiest USians - outside of obvious self interest.

Really? What sort of evidence? The kind where the self interest it's based on is hidden better?

(Incidentally, the law doesn't actually have to "provide" anything to people in order to stop discriminating against them. All it needs to do is stop discriminating against them.)

The very fact that one would disguise this self-interest as "tax code simplification" (when it really isn't) is dishonest and deserves to be pointed out.

The point you are making on the flip side of the argument is valid too. It is obvious that the purpose for increasing the number of brackets is to reduce the tax burden on the poorest or increase the tax burden on the wealthiest. But I don't see anyone couching that argument as 'increasing the number of tax brackets'. eg. Bernie Sanders has just come out and said that he intends to increase the tax burden on the wealthy.

So what? That sort of "honesty" costs him nothing! Rich people are a despised minority among the choir Bernie Sanders preaches to. Likewise, in Pakistan you can come right out and say openly that non-Muslims ought to have to pay the jizya and there's no negative consequence to you; but people who argue against it would be well-advised to be very careful about how they frame their arguments.

2. The US tax system is almost perfectly optimal.

I take it you disagree? The article had links to a separate study that compared the current US system with a flat-tax-plus-transfer option and the Mirrlees system. Neither was much of an improvement.

Judgments of optimality depend on what one is optimizing for.

Any effort to optimize requires specifying a desired goal. The economists assume that Americans’ desire for redistribution is reflected in the existing U.S. income tax structure—arrived at through extensive political give-and-take over decades of U.S. history. The paper’s findings hinge on this assumption since, they emphasize, the shape of the optimal tax-and-transfer system depends on the system’s goal. An objective concerned with only the poorest members of society would be very progressive. Absent any desire to redistribute, the government wouldn’t tax at all, other than to finance roads, parks, schools, national defense and the like. “What is the taste for redistribution in the United States?” they ask. “We argue that the degree of progressivity built into the actual U.S. tax and transfer system is informative about the preferences of U.S. voters and policymakers.”

Using a model Heathcote recently developed with two other economists [see SR 496, described in “The Goldilocks tax,” September 2014 Region], they mathematically derive that redistributive “taste” from the actual degree of tax progressivity built into the U.S. tax code. “This empirically motivated social welfare function will serve as our baseline objective function,” write Heathcote and Tsujiyama. That is to say, the benchmark against which alternatives 1 and 2 will be measured.

I.e., the thing they are claiming the US tax system is almost perfectly optimal at doing is it is almost perfectly optimal at implementing the degree of redistribution that the US tax system implements. Woohoo! We're number 1!

When you argued that the US tax system is almost perfectly optimal, what did you have in mind that you think it's almost perfectly optimal at doing? And, whatever your goal is, I find it hard to believe that a system that requires me to work out my taxes twice by two different methods and pay whichever charges me more is a more "optimal" way to achieve that goal than a system that simply calculates the "optimal" amount in the first place, unless the goal of the system is to drum up business for H&R Block.

3. The tax code is complicated but for some very necessary reasons.

Necessary for whom?

Did you even read the article?

I did, yes. I'm not sure you did, since you seem unaware of their contrived criterion for "perfectly optimal". But that's beside the point. "Necessary" is a relational term, not an absolute one. When you argue that the complexity is necessary, the article does not tell us which people you are claiming it's a necessary means to achieving the goals of. Only you can tell us that.

"The tax code is thousands of pages long for a very simple reason: It is a model, in the economic sense, of all of economic activity," he said. "Most Americans don't spend a lot of time worrying about the taxation of cutting timber or of being crew on a tuna boat. But there are rules for that, and you may find the rules irrelevant to you, but the rules are complex for a reason."

But I do not need to take into account the timber rules and the tuna rules to find the rules overwhelmingly complex. The insignificant fraction that are relevant to me, plus the larger fraction that require a considerable amount of study in order to establish that they are not relevant to me, are quite sufficient for that.

The vast majority of the rules and amendments to the code were made to either incentivize a behavior (like having corporations make more eco-friendly decisions) or to avoid taxing income multiple times (like having corporations pay tax on profits and then having investors pay tax on dividend income from the corporation - paid out of profits).

Funny story about that. I spent probably a total of twelve hours dealing with the consequences of one particular subtlety in the tax law. As near as I could tell, it had no possible rational purpose unless it was to trick taxpayers into mistakenly paying the lawful tax on certain income twice. In the course of subsequent discussions, one of my co-workers realized he had actually fallen into this trap. He decided the amount they'd ripped him off was too small for him to be willing to file an amended return and get it back.

4. The vast majority of US taxpayers will never need to delve into the details of the tax code anyway.

Can we seriously stop whining about our tax code being too complicated?

Was that you volunteering to do my taxes for me?

No, see that's why people believe the tax code is complicated - because they are more concerned with what everyone else is paying in taxes. I know what my income is, what my deductions are, and what my tax rate will be. If I started worrying about everyone else's taxes - I might agree that some simplification is in order. Or I would make it a full time job to know the details.

Yeah, that's what I thought. You have decided, without first looking at my tax return, that the reason I believe the tax code is complicated is because I am more concerned with what everyone else is paying in taxes. I couldn't possibly think it's complicated because I know first hand what it puts me through. No, because the tax law treats your situation in a manner that's tolerably simple for you, you assume that another person complaining about complexity means he has a lower complexity tolerance than you, instead of taking seriously the possibility that the tax law imposes far more complicated rules on the situation he's in.

Seriously, if anyone deserves to have it his full time job to know the details, it's a person who accuses another person of "whining" about tax law complexity.

4th grade children are laughing at us.

Show me a 4th grader who can do my taxes and I'll show you a future Fields Medalist.

All 4th graders can subtract and multiply. Show me how reducing the number of tax brackets will help them do that more easily.

The reason all 4th graders can subtract and multiply is because they have calculators that do the hard part of the math for them; therefore 4th grade math tests are all scored at 100% because the microprocessor is incapable of making a mistake. A 4th grader's ability to subtract and multiply will not help him figure out whether a given provision of the tax code requires him to subtract this before he multiplies by that.

It's true that the number of tax brackets does not make a significant contribution to the ridiculous amount of citizens' time and money wasted by the complexity of the tax code. But then you didn't say "Can we seriously stop whining about our tax code having too many tax brackets?", did you? If you approve of the current level of complexity then you share responsibility for the injury the IRS does to Americans other than you every year. Stop adding insult to injury.

 

[Bill Z. Bub]

I guess I'll third this. I say something similar whenever I get students asking me about the flat tax proposals that have been floating around for years now--the complex part of figuring taxes isn't in the rate structure, it's in determining your taxable income.

One reform that I've seen suggested a couple of times that might make a difference for a lot of taxpayers, in terms of simplifying the process, would be to increase the standard deduction. If you increase the standard deduction, fewer taxpayers have an incentive to try to itemize deductions, which of course is the big complicating factor for many of them.

Stupid Questions Time

Isn't a flat tax where your gross income is multiplied by a fixed percentage? How does that make it harder to determine taxable income? Wouldn't a flat tax necessarily be devoid of deductions and allowances?

 

[MarkW]

I guess I'll third this. I say something similar whenever I get students asking me about the flat tax proposals that have been floating around for years now--the complex part of figuring taxes isn't in the rate structure, it's in determining your taxable income.

One reform that I've seen suggested a couple of times that might make a difference for a lot of taxpayers, in terms of simplifying the process, would be to increase the standard deduction. If you increase the standard deduction, fewer taxpayers have an incentive to try to itemize deductions, which of course is the big complicating factor for many of them.

Stupid Questions Time

Isn't a flat tax where your gross income is multiplied by a fixed percentage? How does that make it harder to determine taxable income? Wouldn't a flat tax necessarily be devoid of deductions and allowances?

A flat tax means that every taxpayer pays the same percentage of their taxable income. My point is that the rate structure is one component of the tax system, and the determination of taxable income are separate components of the tax system, and that it's the latter, not the former, that creates complexity in the system. You could have a system of graduated tax brackets, like we have now, in conjunction with having few or no deductions. You could have a flat tax alongside a complex system of deductions and credits, as we have today.

 

[Alcoholic Actuary]

Was that you volunteering to do my taxes for me?

No, see that's why people believe the tax code is complicated - because they are more concerned with what everyone else is paying in taxes. I know what my income is, what my deductions are, and what my tax rate will be. If I started worrying about everyone else's taxes - I might agree that some simplification is in order. Or I would make it a full time job to know the details.

Yeah, that's what I thought. You have decided, without first looking at my tax return, that the reason I believe the tax code is complicated is because I am more concerned with what everyone else is paying in taxes. I couldn't possibly think it's complicated because I know first hand what it puts me through. No, because the tax law treats your situation in a manner that's tolerably simple for you, you assume that another person complaining about complexity means he has a lower complexity tolerance than you, instead of taking seriously the possibility that the tax law imposes far more complicated rules on the situation he's in.

Seriously, if anyone deserves to have it his full time job to know the details, it's a person who accuses another person of "whining" about tax law complexity.

Challenge Accepted! Send me your tax shit for 2015. I will do your taxes free of charge, with the caveat that I get to call you a whiner for the rest of your life.

The reason all 4th graders can subtract and multiply is because they have calculators that do the hard part of the math for them; therefore 4th grade math tests are all scored at 100% because the microprocessor is incapable of making a mistake. A 4th grader's ability to subtract and multiply will not help him figure out whether a given provision of the tax code requires him to subtract this before he multiplies by that.

It's true that the number of tax brackets does not make a significant contribution to the ridiculous amount of citizens' time and money wasted by the complexity of the tax code. But then you didn't say "Can we seriously stop whining about our tax code having too many tax brackets?", did you?

Actually, I did. It's the title of the thread and the subject of the article I linked. I didn't realize I had to repeat it everywhere or risk having it taken out of context, but thanks for the entertaining derail.

If you approve of the current level of complexity then you share responsibility for the injury the IRS does to Americans other than you every year. Stop adding insult to injury.

To be clear, I don't find it 'injurious' at all that some people might miss a deduction that US tax code would have otherwise allowed. I'm not saying that's your situation but the vast majority of the complicated rules that pertain to calculating taxable income serve one purpose: reducing your taxable income. Those pining for less complexity ought to be careful what they wish for.

aa

 

[Bill Z. Bub]

Stupid Questions Time

Isn't a flat tax where your gross income is multiplied by a fixed percentage? How does that make it harder to determine taxable income? Wouldn't a flat tax necessarily be devoid of deductions and allowances?

A flat tax means that every taxpayer pays the same percentage of their taxable income. My point is that the rate structure is one component of the tax system, and the determination of taxable income are separate components of the tax system, and that it's the latter, not the former, that creates complexity in the system. You could have a system of graduated tax brackets, like we have now, in conjunction with having few or no deductions. You could have a flat tax alongside a complex system of deductions and credits, as we have today.

You could also have a single rate with no deductions. No?

 

[Bomb#20]

But then you didn't say "Can we seriously stop whining about our tax code having too many tax brackets?", did you?

Actually, I did. It's the title of the thread and the subject of the article I linked. I didn't realize I had to repeat it everywhere or risk having it taken out of context, but thanks for the entertaining derail.

Oh, I see. Of course, the actual context was you called us whiners right after you cited the article making the very profound point that "3. The tax code is complicated but for some very necessary reasons.". So you're implying that what the article meant was actually "The tax code has lots of tax brackets for a very simple reason: It is a model, in the economic sense, of all of economic activity. Most Americans don't spend a lot of time worrying about the taxation of cutting timber or of being crew on a tuna boat. But there are tax brackets for that, and you may find the tax brackets irrelevant to you, but there are lots of tax brackets for a reason." It's the subject of the article after all, so to interpret it otherwise is to take it out of context.

I will do your taxes free of charge, with the caveat that I get to call you a whiner for the rest of your life.
...
To be clear, I don't find it 'injurious' at all that some people might miss a deduction that US tax code would have otherwise allowed.

Hmm, yes, just what I need: a tax preparer who thinks it doesn't hurt me to be told to pay more tax than the law requires.

I'm not saying that's your situation but the vast majority of the complicated rules that pertain to calculating taxable income serve one purpose: reducing your taxable income. Those pining for less complexity ought to be careful what they wish for.

Well, let me tell you what I encountered. The company I worked for for decades got bought out last year and dismembered by some M&A outfit. The stock from the company's employee stock ownership plan that I acquired a little at a time over many years and should have gotten to sell a little at a time over many years after I retire instead got liquidated in one fell swoop, (pushing me into a higher tax-bracket, but that's a whole other issue). Due to arcane but longstanding IRS rules, some of the profit on stock plan stock is defined as capital gain and some of it is defined as ordinary income. The part that's ordinary income is included in the total reported to the IRS on W-2 forms. In the past, that part would not have been reported to the IRS as capital gain by the brokerage that manages the company stock plan; instead, the "cost basis" of the stock would have been adjusted by the amount of ordinary income reported.

But a new rule from the IRS now prohibits brokers from making this basis adjustment. Now you have to do it yourself manually. (And that's assuming you can even figure out how much of your W-2 income was the part added in to account for a fraction of the stock sale.) The consequence of this new rule -- a rule communicated by the IRS not to taxpayers but to brokers, mind you -- is that anybody in this situation who isn't paying very careful attention and who simply plugs the numbers from his W-2 and brokerage statements into the tax forms or into his tax software is going to add part of the profit from his stock sale to his taxable income TWICE, and is going to pay ordinary income tax PLUS capital gain tax on it.

So, do you think this newly added level of complexity serves the purpose of reducing my taxable income?

 

[Bomb#20]

What's wrong with inviting you to justify your position on that point? What's wrong with arguing for a contrary opinion?

So you think a person who has an income of $50 million doesn't have more income that should be taxed at a higher rate? A person making $400k is likely working for a living. The guy at $50 million, well, god bless the job makers.

So that's your justification? You don't regard what $50-million-man does as work, so you don't respect it, so you think the government should tax it more heavily? How is that any different from some Muslim saying drawing Muhammad cartoons isn't real work so those cartoonists should pay a higher tax rate than everyone else, or some PETA guy saying cows do the real work in providing meat so cattle ranchers should pay a higher tax rate than everybody else? Do you think it's good public policy for the government to determine one citizen's tax rate based on whether some other citizen respects what he does to make money?

Taxing $400k at the same rate as $50 million is stupid. ... The idea that my effective tax rate is competitive with Romneys or anyone else in that income level is disturbing.

Calling the thing you object to "stupid" and "disturbing" isn't actually an argument. It's just namecalling.

Of course, a lot of the money made at those levels isn't employee income and is taxed at a discounted rate already, which needs to change.

Whether $50-million-man actually currently pays a lower tax rate than people making $400K isn't relevant to the question of whether he ought to be paying a higher rate than them.

([digression]But if you want to change the subject to what tax levels actually are, tax law is complicated. Some $50-million-men pay lower rates than $400K-men, and others pay higher rates. On average they pay higher rates. Also, assuming you're talking about the 24% rate on capital gains, keep in mind that capital gain assessments disregard inflation, which means a big chunk of the so-called gain is fictitious, an artifact of the government measuring purchase price and sales price with different-sized units. This jacks up the effective tax rate on capital gains above its nominal rate. It jacks it up a little bit for a guy like Buffett who routinely achieves 15% ROI; but it jacks it up an awful lot for an average investor making 6%. If inflation was 3% then that doubles his effective tax rate. So for a guy with average investment skill, he'll be paying 39.6% on his salary and 48% on his real stock profits.[/digression])

 

[Alcoholic Actuary]

Actually, I did. It's the title of the thread and the subject of the article I linked. I didn't realize I had to repeat it everywhere or risk having it taken out of context, but thanks for the entertaining derail.

Oh, I see. Of course, the actual context was you called us whiners right after you cited the article making the very profound point that "3. The tax code is complicated but for some very necessary reasons.". So you're implying that what the article meant was actually "The tax code has lots of tax brackets for a very simple reason: It is a model, in the economic sense, of all of economic activity. Most Americans don't spend a lot of time worrying about the taxation of cutting timber or of being crew on a tuna boat. But there are tax brackets for that, and you may find the tax brackets irrelevant to you, but there are lots of tax brackets for a reason." It's the subject of the article after all, so to interpret it otherwise is to take it out of context.

Hmm, yes, just what I need: a tax preparer who thinks it doesn't hurt me to be told to pay more tax than the law requires.

I really didn't think this would be so difficult. The primary purpose of this article and my OP was to point out that just about every republican candidate for president put forward a "solution" to the complexity of the tax code that includes reducing the number of brackets. This solution is soundly repudiated by the article and just about everyone here including yourself - admitting that such a strategy serves primarily only to reduce the tax burden on the wealthiest. The article (and also the majority of individuals here) also concede that the "complicated" part of the tax code involves calculating exactly what income receives the tax rate from the appropriate bracket.

However,

It is also true that this "complicated" part of the tax code exists to incorporate all of the 'economic activity' that exists for which the government would like to offer (mostly) reductions in taxable income for the purpose of incentivizing particular behaviors or avoiding double taxation. Personal anecdotal evidence aside, the easiest way to 'simplify' this part of the tax code is to eliminate all of the deductions. Do you have any other proposed solution you would prefer to put forward that would address your individual specific situation and would also simplify the taxable income calculation for the rest of the 300m USians?

Well, let me tell you what I encountered. The company I worked for for decades got bought out last year and dismembered by some M&A outfit. The stock from the company's employee stock ownership plan that I acquired a little at a time over many years and should have gotten to sell a little at a time over many years after I retire instead got liquidated in one fell swoop, (pushing me into a higher tax-bracket, but that's a whole other issue). Due to arcane but longstanding IRS rules, some of the profit on stock plan stock is defined as capital gain and some of it is defined as ordinary income. The part that's ordinary income is included in the total reported to the IRS on W-2 forms. In the past, that part would not have been reported to the IRS as capital gain by the brokerage that manages the company stock plan; instead, the "cost basis" of the stock would have been adjusted by the amount of ordinary income reported.

But a new rule from the IRS now prohibits brokers from making this basis adjustment. Now you have to do it yourself manually. (And that's assuming you can even figure out how much of your W-2 income was the part added in to account for a fraction of the stock sale.) The consequence of this new rule -- a rule communicated by the IRS not to taxpayers but to brokers, mind you -- is that anybody in this situation who isn't paying very careful attention and who simply plugs the numbers from his W-2 and brokerage statements into the tax forms or into his tax software is going to add part of the profit from his stock sale to his taxable income TWICE, and is going to pay ordinary income tax PLUS capital gain tax on it.


So, do you think this newly added level of complexity serves the purpose of reducing my taxable income?

Are You Talking About This?

If so, the answer is most certainly YES!! The IRS doesn't want you to report the cost basis stock option as ordinary income and instead wants you to report it as a capital gain (which is taxed at a lower rate). You're Welcome!

The problem really seems to be 2-fold:

1) The IRS changed the reporting rules prior to the brokerage houses and HR departments ability to adjust for the 2014 tax year. I doubt you will have a problem going forward.

2) You seem to be very stuck on your personal experience. What should the IRS have done differently in this circumstance that would have prevented this terrible injustice to you personally but not have negatively impacted the rest of the US.

Finally, I would say the accountants and finance professionals in your company were delinquent in considering the appropriate tax penalties on each individual stock participant when negotiating the sale of the company. (Or maybe they fully considered it and just screwed the participants over, either way they are certainly more culpable in your predicament than the IRS).

aa

 

[MarkW]

A flat tax means that every taxpayer pays the same percentage of their taxable income. My point is that the rate structure is one component of the tax system, and the determination of taxable income are separate components of the tax system, and that it's the latter, not the former, that creates complexity in the system. You could have a system of graduated tax brackets, like we have now, in conjunction with having few or no deductions. You could have a flat tax alongside a complex system of deductions and credits, as we have today.

You could also have a single rate with no deductions. No?

Of course.

 

[bilby]

You could also have a single rate with no deductions. No?

Of course.

Indeed. And such a taxation system makes a good imaginary starting point for a thought experiment.

Lets tax every single transaction at a flat rate. No deductions, no brackets. Dead simple.

First problem - define 'transaction'. If I take $200 out of my savings account, is that transaction to be taxed?What if I move $20 from my wallet to my back pocket? Do we tax that? What If I then give $10 of that to my 14 year old son as pocket money - taxed? What if that $10 is a payment for mowing the lawn, rather than a gift? What if it's not my son, but a neighbour? What if it's not a neighbour, but a self-employed guy who mows lawns all over town? What if it's a multinational corporation with a lawn service as one of its many subsidiaries?

The answer to some of these may appear to be 'of course not'; but unless we define a transaction as any transfer of money from one place to another, we need to define what transfers don't qualify as 'transactions' for tax purposes. Already our beautifully simple tax system contains some complicating factor - an arbitrary government decision about what is or is not exempt.

Perhaps we don't want a simple tax system; perhaps we want a simple income tax system. But then we need to define income - are gifts income? Is my son's pocket money income? Do I have to record and declare as income the 5c coin I found in the gutter yesterday?

Simplicity leads to problems. It leads to taxes on stuff we don't want to tax; we need exemptions to make the system even vaguely workable. The question then becomes where do we draw the line; 'No exemptions, ever' doesn't work. So just how 'simple' does the system have to be to make people happy?

 

[SimpleDon]

Excellent article on NPR:

lots-of-candidates-want-to-simplify-the-tax-code-heres-what-they-get-wrong



and

"The number of brackets has an almost imperceptible effect on the complexity of tax law as it is lived by the individual taxpayer," Kleinbard said. "Taxpayers are not, left to their own devices, engaged in high-level mathematics."

There is multiplication involved so there is plenty of fodder for the math-haters. Of course the real motive for such a maneuver is obvious:

"The call for fewer tax brackets in every case has as its real motive lowering the tax burden on the highest-income Americans, not making life simpler for the middle class," Kleinbard argued. Consider Bush's tax proposal as an example. While it limits deductions, it also would overwhelmingly benefit the highest earners (and grow the national debt — unless there is unprecedented growth in the economy)."

(link to an analysis of Bush's proposed tax plan)

The article concludes with some very profound points:

1. There is no 'correct' number of tax brackets.
2. The US tax system is almost perfectly optimal.
3. The tax code is complicated but for some very necessary reasons.
4. The vast majority of US taxpayers will never need to delve into the details of the tax code anyway.

Can we seriously stop whining about our tax code being too complicated? 4th grade children are laughing at us.

aa

The problem with the US tax system seems to boil down to what people believe that it is, overly complicated, as opposed to what it actually is, only complicated for those who want to take advantage of the complexity. For most people it is pretty simple. They can go to the IRS web site and do their taxes in about thirty minutes.

I don't remember exactly how many tax returns I file. Including state returns it is more than a dozen. I use to pay accountants to do them, about $3,000 worth. Now I just buy Turbo Tax individual and business for a little over two hundred dollars and spend another hundred or so on extra electronic internet filing fees and postage for the forms that still can't be filed electronically, which is fewer every year. All of them together take me about six hours to do and file.

Along with record keeping, maybe top twenty hours a year including quarterly payments, which can now be sent electronically.

Not an unreasonable burden for me. I take advantage of the complexity of the tax laws. I have trusts and businesses to reduce my tax burden.

 

[Loren Pechtel]

Of course.

Indeed. And such a taxation system makes a good imaginary starting point for a thought experiment.

Lets tax every single transaction at a flat rate. No deductions, no brackets. Dead simple.

First problem - define 'transaction'. If I take $200 out of my savings account, is that transaction to be taxed?What if I move $20 from my wallet to my back pocket? Do we tax that? What If I then give $10 of that to my 14 year old son as pocket money - taxed? What if that $10 is a payment for mowing the lawn, rather than a gift? What if it's not my son, but a neighbour? What if it's not a neighbour, but a self-employed guy who mows lawns all over town? What if it's a multinational corporation with a lawn service as one of its many subsidiaries?

Or I buy something with a rebate. Is that rebate income???

Or I buy something and find it's defective and return it. Income?

 

[Loren Pechtel]

The problem with the US tax system seems to boil down to what people believe that it is, overly complicated, as opposed to what it actually is, only complicated for those who want to take advantage of the complexity. For most people it is pretty simple. They can go to the IRS web site and do their taxes in about thirty minutes.

Most people can. The tax code is pretty simple so long as your financial matters are the more common things. Get into the less well trod areas and things get painful. The tax programs aren't too much help figuring out what to do with the odd items off a K-1 (limited partnership.) They're also not much use with the foreign account reporting. And how about the fact that you have to report nearly identical information about foreign accounts to both the IRS and the Treasury? Compare the Treasury version to the IRS version, the IRS comes off looking like a dinosaur.