Taxes

I've been thinking about taxes lately, as have a lot of us, I'm sure. Nobody really likes taxes, everybody (it seems) complains about them, but nobody really does anything about them. (I know what some of you are thinking, "What can I possibly do?" Well, for starters, you can talk to your elected representatives, and use their responses [and their votes] in your decision as to whether you're going to vote for them the next time.)

I came up with 2 ideas. To be honest, I don't think either is a workable plan. But they are, maybe, a start - something I can communicate to my representatives as perhaps a starting point for a conversation about what we might do.

First idea - Get rid of the "pay as you go" system. Prior to 1942, income tax was not withheld from paychecks in the U.S. That meant that you were responsible to pay your total tax due by the filing deadline, but it also meant that you had and held (not spent, if you were smart) that money over the course of the year, and you earned interest on it. It wouldn't be that difficult to set aside 15%, 25%, 28%, whatever is necessary, of your income into an interest-bearing account, and then to cut Uncle Sam a check once a year. (Actually, due to deductions and the progressive nature of our tax structure, if you're in, for example, the 28% tax bracket, you wouldn't pay... and wouldn't have to set aside... 28% of your income, as your actual tax burden would be noticeably less than that, but that level of detail isn't necessary for this discussion.)

As strange as this sounds, I think a lot of people lose track of how much money they pay in income tax every year. It shows up on your paycheck stub every 2 weeks (or however often you get paid.) It's right there on your W-2, and you have to write it on the 1040. But it's somehow not "real" money. You never see it, and when you're dealing with it at tax time, they already have it. It almost looks good, because it means either that you have to pay less, or you're going to get some back. They're giving me money!!! (Yeah, whose money?) I think it would be a much different story if we had to take that money out of our figurative pockets and hand it over to the government. I think people would be more mindful of how much they actually pay. And maybe (pipe dream alert!), just maybe, they would be a bit more inclined to hold those in Washington to account for how much is taken from us, and how it's used.

For anyone who gets a refund, the government is basically getting an interest-free loan from you. They have use of, or earn interest on, money that is rightfully yours, and then return it to you. When we do that, it's called a loan, and we pay interest for the privilege. That leads me to my...

Second idea - Pay interest on all refunds. They could make the formula as simple or as complicated as they wanted. I came up with a pretty simple one for our purposes here. Let's say they pay a 6% annual (or, 0.5% per month) interest rate. Let's say you're getting a $2,400 refund, meaning the IRS over-withheld $200 per month. For January's $200, they had it the whole year, so you get the full 6% - $12. For February's $200, you'd get 5.5% interest - $11. It would continue like that - $200 at 5%, $200 at 4.5%, etc. Overall, you'd get $78 interest, so your $2,400 refund would turn into a payment of $2,478.

The end result I'm going for is for the IRS to be, and/or allow us to be, smarter and more precise about how much of our income is withheld. The ultimate goal would be for everyone to be as close as possible to even on their 1040's - nothing due to the IRS, no refund due to the taxpayer. When I lived in Pennsylvania, it always worked that way for my state income tax. There was a flat 2.8% (I think) tax rate, and I had no deductions. They withheld 2.8% of every paycheck, so when I filed my return it was always even. I never paid to or received from the Commonwealth of Pennsylvania so much as $1 in conjunction with filing my tax return. What had been withheld always equalled my tax burden. I don't think it's possible to be quite that precise with our federal taxes, because there are so many variables, but I think... or maybe I just hope... it could be better than it is now.

Again, I'm not under any delusion that these ideas are usable in my simplistic form. But I think they could be the base upon which some workable ideas could be built.