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Friday, January 30, 2015 |  Madison, WI: 17.0° F  Fair
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Tax code vs. democracy
Our convoluted system creates a barrier between the citizen and the state

It's February, which for most of us means it's time once again to begin preparing tax forms. Other than perhaps a 24-hour rectal exam, there is no experience I dread more than this annual ritual.

It would be worse if I had to compute my actual tax liabilities, but my role is limited to preparing an Excel spreadsheet, compiling an enormous pile of paper, and handing the whole thing over to my accountant. After a short interval, he descends like Moses from the mountaintop with two thick tablets, one each for my individual and corporate returns (technically speaking, I am the proprietor of an S Corporation with one employee - me). Each tablet contains a labyrinth of numerical entries distributed across a series of official forms. I could take a day or two to try deciphering the mess, but I know my confusion would only be resolved by calling my accountant and thereby raising the bill for his services. Since he is a scrupulously honest individual, a better response is simply to sign where I'm told and send in the checks to the relevant authorities.

This is a horrible system. I'm not an anarchist, and I know democratically elected governments need a certain level of resources to execute their constitutionally prescribed duties. But what legislative body with a modicum of sanity would create something as convoluted, chaotic and counterproductive as the current tax code? (Anger drives me to alliteration.)

This dysfunctional system has consequences. It imposes billions of dollars in compliance costs, distorts incentives and the pattern of rewards in our economy, and almost certainly reduces economic growth. These problems can only be relieved by making taxes simpler and "flatter" (i.e., having fewer tax rates and deductions).

Equally important, but far less recognized, is that the opacity of our tax system corrodes democracy. A healthy republic depends on informed and active citizenship, both of which are undermined by the current tax code. It is impossible for anyone but a full-time professional to have a working knowledge of the thousands of pages of tax law. This ignorance breeds cynicism, since a failure to understand what you - and others - are obligated to pay the government can easily curdle into a belief that the whole system is rigged. And in fairness, it is easier to rig an opaque, complicated system than one that is transparent and easy to understand.

Knowing what individuals and business must pay in taxes should not be the task of a rarefied elite with specialized skills. Being able to understand what you are paying to the government, and for what purposes, should be a cornerstone of representative democracy. This is far more fundamental than, say, reforming campaign finance laws, where the money at stake is relatively paltry and provided on a voluntary basis, rather than extracted from your paycheck and other sources of income whether you like it or not. The byzantine complexity of our tax laws creates a barrier between the citizen and the state, and this barrier needs to be pierced so that people can better understand what they are paying to their government and what they are receiving in turn.

Toward that end, allow me to propose a few basic changes that can strengthen the contract between citizens/voters and the public sector. These suggestions do not get into the gory details of tax reform but instead enhance clarity about what people are paying into and receiving from government. And in the instances where only state jurisdiction is involved, they are something Wisconsin can take the lead in implementing.

First, eliminate the current approach to federal and state tax withholding. For convenience, funds can be automatically deducted and transferred to a dedicated account, but all taxpayers need to have the check representing their tax payments sent back to and endorsed by them before sending those checks onto the relevant government. This is similar to what is currently done with property taxes.

Second, the check to the federal government must include payments for both Social Security and federal income taxes. To do otherwise would perpetuate the illusion that Social Security is funded entirely with taxes dedicated for the program. In fact, Social Security is already drawing on general Treasury revenues to pay current beneficiaries, and the Social Security "trust fund" never held any assets other than Treasury guarantees to pay the program's costs.

At the same time that checks to be endorsed are sent to taxpayers, the government should send a flier describing the services their taxes have paid for. The flier will also direct people to user-friendly websites where they can get more details on what government programs and services they have funded.

Finally, Tax Day should be moved from April 15 to the first Tuesday of November, also known as Election Day. Voters will then go to the polls better informed of the government they just paid for. Having both the cost and nature of current government services fresh in voters' minds will be a clarifying blast of reality, particularly at the end of a campaign when partisan advertising is at its peak.

Transparent, accurate and relevant information provided to voters just as they head to the polls; who could be opposed to that?

Larry Kaufmann is an economic consultant based in Madison.

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